Very Volatile Week Ends With A Very Bearish Reversal On Lower Volume; Stocks Close Out The Week Mixed, With Big-Caps Higher And Tech Lower

January 26, 2008

A very bullish open, that I believed was going to send stocks to their follow-through day, was immediately sold and was sold the whole day, without the bulls ever getting a chance to mount a rally. Well, I guess they did near the end of the day but was anyone falling for that? By the close the 2% gain in the Nasdaq turned into a 1.5% loss as the big cap leaders and many other stocks hit resistance.

There was some good news in today’s trading and that was with the IBD 100 index which managed a .5% gain. But that is more due to the fact that this index is now getting heavier into industry groups that are moving up the industry charts while the market remains in these soon-to-be past-bull-market-winners duds. So while the indexes get trashed we will start to see the IBD 100 outperform. But as long as the charts look the way they do in that index, it doesn’t mean that it is worth buying.

Right now the chart landscape is littered with charts that are full of heavy distribution and light accumulation with very volatile price action. That is not the kind of environment where you want to be loading up on stocks that you think are bargains. If the pullback would have come on lighter volume and the volume was a tad heavier now on the rally, then I might say something different. But the problem is that there is simply no good looking charts minus a few very small-caps. But when stocks like LSR are the best of the breed, then you seriously have a market that you need to stay away from, especially if you are new to the market. Even though you might not understand it, you have to realize I can see things in the charts in a similar way a doctor can see something in an xray you would just stare blankly at. There is no difference.

The gameplan, for me, as it stands right now, is to focus on about 11 stocks that I want to get short and to keep a very large supply of cash on hand for the rallies that come. In these rallies there will be good stocks to trade for a short period of time as the best charts will definitely stick out when they appear in this rough market. Just like LSR is the only one that is round in this one. It is the nicest one I feel, right now, but the problem is is that it is too thin to even THINK about getting a large position rolling. However, some subscribers are curious to how I am still long 48 stocks. Well it is easy to explain: they are still moving up and are ALL above the 200 day moving average. If my final cut loss is that line, as long as I have a profit, then obviously the trade is still valid and the bear market is not ravaging the stocks like it is other stocks.

At the same time a lot of people are wondering why I am not keeping up with some subscribers who are profiting around 25-35% this month solely on my picks. The answer to that is that I am just starting to get my shorts going in bulk in the stock I wanted to get short in bulk. AAPL and GRMN have both already given me 20% gains on the short side which has helped turned my account from a -4% loss earlier this month to a current 7% gain. Just at the start of the week I was down 1%. So the big-cap past big winners are definitely starting to show their power of providing big gains. The best part is is that their selloffs appear to be just starting. So some very large gains should be around the corner–it could be next week to six months (NOBODY KNOWS!!)–but nothing is for sure and we do have our game plan to cut our losses, should it not be time.

Right now, I am short 80 stocks but only 7 are going to be of any size come Monday’s closing bell. Besides that I have 73 stocks that make up around .5% of my port each. If I can get short the 11 stocks I want to be short my optimum portfolio balance should be 65% short, 25% cash, and 10% long. That is if the market stays very bearish. With that portfolio arrangement in the shorts the 11 stocks would represent 90% of my short positions and the other 73 shorts would be 10% of my shorts. AAPL and MOS get $10k to $25k and ING (for example) got $800. So even though some of you think that holding 150 stocks is a lot for me, it is like holding 15 for you. If you held 30 stocks, that is like me holding 300 stocks. That doesn’t mean all 300 are all the same size. It normally means 290 are 15% of the port and 10 are 85% of the port. So when I focus, I focus. But instead of holding on to cash, when you get the returns I consistently do with ALL my stock selections, I would much rather be in shorts or longs.

But at this particular moment with the market moving around 3-5% intraday on the Nasdaq almost on an every-other-day basis starts happening, many traders seem to believe it means that we are hammering out a bottom. In fact, that is the opposite of what history has told us happens with this kind of action. For our most recent example we only have to go back to the year 2000. If you study the top in 2000, you will see that after the initial selloff stocks got extreme volatile, the charts were destroyed, and many perma bulls got their behinds handed to them. The reason: it was way too early to go long. To even catch the swings, is only for the best of the best, as they know how to sell into rallies and buy the dips correctly. Few new traders can do that so the fact that I hear some interested in this trading methodology has me worried. Well not really worried for me, but worried for the bulls as this is just another sign of the market topping. Too many newbies, especially from China, are in the game that shouldn’t be.

All indexes have sold off hard world wide and the fact that mom and pop all over the world see the market as something that is just volatile and that will come back if we are patient is not how mom and pop sounds at a bottom. When a real market bottom occurs mom and pop finally have given up on their financial statements that they see in the mail as they can not continue to take the losses. Sometimes they lose faith quickly and most of the time they lose faith very slowly. The fact that most people have their “hopes” up (when they should be fearing) that a change in office will make things all better is another worrying factor for this market. But the bottom line behind all of this is that the retail crowd still is very hopeful and have faith that stocks will come back. They are right, however, the real question is how long will it take for this market to come back? Most of the people I talk to think this is a dip to buy. So I just don’t see the fear, much less the HOT green charts setting up in perfect bases ready to break out on huge volume.

The lack of fear can be clearly seen in the contrarian indicators that I love to look at. I know we are going over these a lot but you have to understand that as the market sells off there are going to be a lot of false rallies like the current one that has quite a few calling it a bottom here. By watching these fear indicators, along with the indexes for follow-through days, and stocks for a whole new set of fresh groups full of stocks breaking out of sound bases, you can help spot the bottom.

And speaking of helping spot a bottom, my weekend piece for RealMoney will be on the stock market indexes and how they looked like when they bottomed in 2003 and in 2005 (when NOBODY believed the market would rally) and what they look like now. I will be able to show you that by reviewing the old index charts of the Nassy and SP 500 what to look for when you get a real bottom or a cyclical bull market bottom. Then we will look at our recent lows and I will tell you why it is all wrong for now but why the rally attempt is still alive (we are above the lows in January)

Back to the subject of fear in this market, the first obvious problem we have is that the put/call ratio FELL on Monday when the Nasdaq gapped lower by I believe about 5% and closed 2% lower. On that day, the put/call ratio should have shot to the moon, if fear was massive. Instead the put/call ratio fell to under 1.2 from a 1.33 reading , defying all sorts of logic and proving that right there in the face of some very scary selling, possibly brought on by Societe General. This along with the put/call below 1 now at .91 indicates to me the huge amount of fear that needs to be in this market is not.

Then we have the VIX. Where do I start with the VIX. You can probably do a search of “hate, VIX” and come up with 100 entries. If the stock market does bottom here (would be a miracle) and stocks rise we can say that at least the VIX made higher highs above the August highs and did confirm the lower lows in the market. However, once again, just like what happened in November, the VIX immediately makes a new high and reverses. It opened over 35 and went to 37 very quickly but within a few hours was back below 35 on toward a 31 close. And now here we are on Friday with the VIX still below 30 at 29.08. I am sure it is possible for us to have bottomed here as I am ready for ANYTHING. But if we do bottom here with the charts, it is still going to take weeks to months to fix the mess out there, and if that happens the VIX will be back below 20 before we know it and big gains will be impossible to come by when the VIX is so low. We need those premiums and 20 is not a premium. Call me when we hit 40 to 70 before I will even consider us at a possible bottom.

Just for reference, before the stock market follow through on 3/17/03, the VIX, after dipping initially off the 2002 lows, rose back to a high of 41.16 on 3/12/03. That move over 40 came just three market sessions before the market took off to never look back. This goes to show you that we must keep our eye out on this market if the VIX does hit 40. The day the market hit its bottom of the bear market in 2002 on 10/10/02 (I told a CPA a few days before this date that the market was NEVER coming back–oops), the VIX made an intraday high of 50.48, proving again how important these numbers are when looking for a bottom. 50 is the best but at 40 you know you need to start looking for a bottom some time in the future. In the meantime stocks can continue to selloff, but you must be aware of a bottom or bounce while this is happening.

In 1998 another important bottom I remember pretty well (I was still partying hard then) the VIX also hit over 50 (53.43 on 9/1/1998). And finally the highest reading I have ever seen which would be a miracle if we ever get this along with a follow through day was on 10/20/1987 when the VIX hit an amazing 172.79–a mark that will probably never be seen again. During this time, the VIX went from 21 to 172 to 55 in a little under one month. What an amazing right. What is the point of this? To show you that we are not at a bottom!

And the final contrarian indicator that I follow, the investors intelligence survey, shows that the professional newsletter writers are still bullish. Just like they have been the past two years. The bulls sit at 41% and the bears sit at 31% which is very close to a cross but not quite there yet, showing that the newsletter writers are no where near giving up yet. The even more clear sign that they are not ready to give up yet is that back in August, when the Nasdaq was almost 9% higher, the bulls were at 40% while the bears were at 38%. There is no doubt that back in August they were much more scared and afraid of the market selling off. Now even as the market continues to swoon, they are less bearish than they once were.

The last time the bulls and bears crossed was back during the October 2005 pullback. What was odd about this cross is the fact that the Nasdaq and SP 600 were well above their April and May ‘05 lows. However, the bears showed up higher than the bulls. During this time the crowd was very bearish and there was a fund manager trying to get me to Chicago to run his money because he was for sure the market had topped and that we were entering a long bear market. During this time he was going to teach me how to take over his fund. Well if someone like that thinks the market is “done for good” and could not see the nice charts during that time like the one I told him to load up on (CVO) then he was not going to be someone I was going to work for. I am still VERY happy I said no. Chicago or Maui???? Tough choice! LOL.

Going over everything that has been posted here should make it clear that the market is not offering us what it needs to offer us to make a real great low. Instead it is holding the recent lows thus putting us in an official rally attempt. Monday will be day four of the rally attempt for the SP 500, 600, NYSE, DJIA, and the Nasdaq. Therefore, if we get a rally on gains of at least 1.5% on higher volume than the day before then it will be time to start looking for stocks with great fundamentals setting up and breaking out of well formed bases. If we get that, then we have to stop being so darn bearish and we will have to reevaluate our short positions and enjoy the few longs that will be doing well.

If we all of a sudden have brand new groups start to move up on massive volume and the market starts making big gains with low volume pullbacks then obviously I will get more bullish on a longer term time frame. However, you normally do not see big gains and the best stocks make their biggest runs in a bear market rally. So until the indexes start trending up there isn’t going to be much to do other than get short the past leaders that gained at least 1000% druing the run-up and build a nice cash position for when the real bull does start. For now, it will not be starting when the Fed is just starting a rate cutting cycle and while the market is selling off on huge distribution.

With new lows killing new highs, Medical groups compromising 10 of the top 20 top industry groups out of 197 groups, and the major market indexes, including the IBD 100-New America-85/85 indexes, all having D- to E ratings for Acc/Dis ratings it is doubtful that any bottom is to be had any time soon. I obviously could be very wrong. But the stock market, the gains I am accumulating, and the huge gains my subscribers are building up so far are telling me I am still right.

I will have the RealMoney article up by the EOD tomorrow showing you the difference between our recent lows in this market compared to some important stock market bottom follow-through days from 2003 and 2005. I might even throw 1998 in there but I might not have enough space. The editors only want so many words so I do not have a choice in this decision. Until Monday, have a great weekend–I am going ziplining in Hana–and ALOHA!!

By the way, I did an interview with Traderinterviews.com, on Thursday, and that can be found here.

top holdings (shorts) up today: PTEC 91% MCF 104% (SGMS 43% SHOO 41% BEN 20% ATI 33% MI 25% MSTR 25% ASF 21% COH 27% CLP 25% RNT 25% LVS 28% MSM 20% AAPL 27% GRMN 31% FAF 21% SGP 22% ING 26%)

Last 5 posts in Bronze Commentary

Posted by Joshua Hayes | Filed Under Bronze Commentary, Free Commentary 

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6 Comments »

Comment by brian
2008-01-26 21:59:56

I was eating dinner with some friends tonight and one of them “informed” me that the market went way down on Tuesday. She was upset, though, that it had rebounded so soon before she could get money to her broker to buy while it was low. I guess she didn’t see Friday’s numbers.

Anyway, I told her that there would likely be many more chances to buy at lower prices in the near future. Probably the understatement of the year.

I’ll let you know a few months down the road when she can’t take the pain anymore and wants to sell out.

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Comment by Pete in Imperial Beach
2008-01-27 01:12:39

Joshua,

Every O’Neill CAN-SLIM book I have read says you shouldn’t have more than 6-8 stocks in your portfolio. Why don’t you pick the “best of the best” of your 100’s of positions that are working and get even better gains?

I enjoyed your interview on traderinterviews

Pete

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Comment by MauiTrader
2008-01-27 18:25:07

It is as simple as this:

because i can.

I keep saying over and over, I make more money by trading these stocks than by keeping it in cash.

Just go over my top holdings the past three years in my blog and tell me if I should have just focused on 6-8 with the rest in cash when there were A TON of stocks making big gains.

Like I said above: instead of keeping the 10to 20% that I normally would have in cash, I put in the stocks that are moving. I get rid of what don’t work and i keep what does.

THERE ARE SO MANY HUGE!!!!!!!!!!!!!!!!!!! WINNERS LIKE IHS MA BOOM ERS that I NEVER!!!!!!!!!!!!!!!!!!!!! WOULD HAVE OWNED HAD I DID WHAT IBD TOLD ME TO DO.

I am always going to have 10-20% cash, no matter what. Instead of keeping it in cash, why not make a higher return?

I think my record speaks for itself. I can’t stand missing ANY big winner and I have the money that allows me to continue to invest that way. Do you know how I made that money? By investing this way!! So I think I will keep doing it the way I am doing it.

If you read closely I will have 10-20 in 90% of my account and then have 200-300 in 10% of the account. Instead of earning 3.5% on that cash, I earn 30% plus. And one more time: 300 stocks to me is like 30 to a more experienced trader and 3 to a newbie.

If you are still not quite sure why I trade like this…then there isn’t much else I can say on this subject.

What works for me might not work for you and if you think I thnk newbies should trade like this, LOL, you are dead wrong. THEY should still to 6-8. I can load up on 20 and take 10% of my account and gamble on 200 small caps keeping the big winners and weeding out the losers. When I started I was taking 10 or more stocks already. I simply don’t believe in being that concentrated when your luck sucks.

And if you are not familiar with my life story, my life has been very rough. How do you get from St. Louis, MO to Lahaina, HI…not by luck! by a TON of very very unlucky events that eventually turn into a blessing. And even then God makes you meet a gf who is going to take you away from where you love to live. Life is a bitch, for me…I don’t think I will EVER be focusing on 6-8 stocks. Maybe 20 but never 8. My luck sucks and there is no way God would EVER let me have only 8 stocks and then have them all be the best stocks in the stock market.

Trust me, when all stars line up like LMLP in 99, GNSS in 01, TASR FMDAY in 03, IST in 04, DSTI in 05, HRZ in 06, and AFSI in 07, then I obviously go long at LEAST 5% of my account. But unless the setups are perfect, there is no way. Even stocks like APPY which was the last “near-perfect” setup does not get a huge position when better stocks like SNDA and NNDS fail right off the bat.

It is all from my twelves years experience. Obviously, I have learned that holding 150 stocks (like now) where only 7 are of any size (I repeat 11 would rep. 85% and 300000 could rep 15% for all I care) works for me.

It might not work for you and if you are a newbie IT DEFINITELY WILL NOT WORK.

btw, if you can help me figure out which one is going to be that “best of the best” or if you can tell me how much the best are going to move up the next time we get them…………you can have my website! :)

Thank you very much Pete. I appreciate the very kind words!!! I hope that I have cleared it up as well as possible. I just let my thoughts dictate what I wrote so I hope it makes a little sense at least.

ALOHA!

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Comment by jeff Subscribed to comments via email
2008-01-27 19:40:03

josh,
Checking in to read your take on the market’s action. Always insightful and enjoyable.

I’ve been reading your stuff for 18 months or so, give or take, so I know that you are a superior trader. Your record by my memory is outstanding.
My question is, If I am a subscriber –what is a 6-10 position trader such as myself supposed to do when you have a hundred positions going at once?

I mean you always offered up a ton of longs at mauiblogspot, often too many to sort through. With your rationale as explained to Pete, I do understand that you have the ability to focus, but how would a smaller , modestly capitalized, trader benefit from being a subscriber when you have SO Many shorts/longs to offer at a time? Do you break them down into categories, or is it up to the subscriber to pick from what you have to offer? What do you think is the best service to choose from for a guy that likes to put on 10 positions?
thanks for the read, and off to checkout the RM link. Best, jeff

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Comment by Pete in Imperial Beach
2008-01-27 20:51:56

I am definitely a newbie and now am 100% cash…..I have been devouring the CAN SLIM Books and going to their seminars, but wanted to get your perspective on what Bill O’Neil says about the number of stocks to own since you follow CAN SLIM principles.

I want to learn from the pros like you and am always interested to hear the rationale behind a successful approach

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Comment by MauiTrader
2008-01-28 00:09:33

it is up to you. You will know when i like one a lot.

that is why i have archives.

all of my subscribers know that all of this is a mute point.

they know when i like something. i am not going to explain it. i will let the archives do the talking.

All i can say is…my subscribers know which ones i love the most.

if you have been reading me FOR FREE for 18 months…dont you offer it me to subscribe and see for yourself?

also are you looking at my past big winners in my long section. I am clearly telling you which one of those i loaded up on LMLP in 99 GNSS in 01 TASR FMDAY in 03 IST in 04 TZOO…HRZ in 06 AFSI in 07. Just go read about AFSI.

Bottom line is you will know. heck do you know which seven stocks i am loading up and am going heavy to shrot????? I hope so I have only said GOOG GRMN FSLR AMZN BIDU AAPL RIMM so many times that if you don’t know I love these for shorts you are not paying attention. Also the 25% gain in AAPL, 31% gain in GRMN, 18% gain in FSLR, and 15% gain in GOOG are just the start.

now why do you think you will not know which longs i love????

I guess I am not used to newbie questions but do you guys really think I am just going to dump 500 stocks out and not tell you which ones I love better than the others?

Isn’t it a miracle that I give you 500 going up? You guys are asking for which one? when i am giving you so many going up? who else can do that? IBD gives you over 200 in most list…do you think they only buy 8 stocks? Trust me they buy more than that.

I COULD MAKE 8 STOCKS 90% OF MY PORT AND 3000000 STOCKS 10% BECAUSE I CAN DO THAT. YOU SHOULD NOT!!!

And obviously if you are paying more than $4.50 per trade, YOU ARE PAYING TOO MUCH AND CAN NOT DO THIS. and if you trade with anything under $100,000, YOU CAN NOT DO THIS.

I am not God. Read the Bible to learn more on that.

please remember a gunshot to my head kills me too.–what makes anyone think I can find the single greatest 8 stocks each year every year….I can’t do that. :)

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