The Quiet Low Volume Rally Before The Fed Storm; SP 600 Rallies 2.1% On A Very Boring Day

January 28, 2008

It was an odd day today, for me, as it seemed very boring, but yet there was the SP 600 putting in a 2.1% gain and the SP 500 rallied 1.75%. So it was a very good day. But there was no volume to today’s trading and worse yet volume was below the 50 day volume average on the Nasdaq for the first time in eight days and only the second time in fifteen days. So the low volume on top of today’s gains in a market that is still very much in a downtrend leading up to an FOMC meeting is a very dangerous market to be long.

That is probably why, despite the gains today, I found only two new longs that were both Medical stocks. The fact that the new longs continue to be almost exclusively related to the Medical field while the best trading opportunities continue to show up on the short side is a clear indication that this rally is still nothing more than a bear market bounce. I don’t care if it last only until the FOMC announcement, for one week, or a month, I just don’t think we are going to see this market hitting new highs any time in the near future. This market has some real ugly charts and the past leaders are definitely losing their ability to lead.

This ugly action is also reflected in the index charts as they have been a mess intraday recently, chopping around all over the place. Today the market was very V-shaped on its rallies and as the last hour started it appeared the market was going to give up all of its gains. But of course the volatile market was having none of that and threw it right back near the top which actually makes the market more bearish than a lower close. A low volume pullback would have been seen as bearish ahead of the meeting, unlike a lower volume rally which shows that institutions did not have any meaningful part of bidding stocks up. And it is in following these elephants that the big money is made. That big money has been in shorts. Not longs.

There are some groups that looked to have bottomed on the short term like some retail (PIR), insurance (FAF), and homebuilder (LEN) stocks. But that is not how I like to go long stocks. I like to buy strong stocks in strong sectors in strong markets. Even though some stocks look like they have bottomed and have very nice green-BOP filled charts does not mean that they are going to move higher in a straight line. These stocks run a much higher chance of running into resistance than stocks like PPDI and HWAY. Those stocks barely have any resistance overhead trying to stop them from moving higher. PIR, FAF, and LEN’s groups have a ton of resistance they must get through before they become a stock worth investing in.

And, if you decide to buy stocks that look like PIR, LEN, and FAF in fresh brand-new bull markets instead of stocks that look like FMDAY or TASR in 2003, you are going to be making a LOT less money than I am. In fact no matter what kind of bull or bear market it is, if you buy “bargains” like this all the time, you are always going to miss the biggest winners. In bear markets like we have now bargain hunting will not only leave you bruised most of the time but it will also be tying up your money in poor longs while great shorts go on without you.

It is fine to trade these right now, if you are so inclined in a small portion of your account. But I still believe the majority of it should be used for big strong bets in high quality trades that have a potential for huge payoffs. Besides that if you are going to trade on such a short time frame why not make the switch to futures where you can get more bang for your buck. I have said it before and I will say it again if you are trading stocks you should be looking to be more of an active investor looking to hold on for the entire uptrend while it last. Not trading in and out. It is simply NOT how the greatest traders made their fortunes. Investing for the long haul is dangerous and daytrading is stupid. A nice medium comes with active investing and using either the CANSLIM method or a form similar to it. This have proven, via AAII records, to be the best way to build consistent long-term wealth while minimizing risk. If you want to trade, trade futures.

And if you are trading the long side in the futures market, I would make sure a break to new 52-week lows would be my FINAL cut loss area. I would not hold a long below that point. You have to make that the final line in the sand, I truly believe, especially with a Fed meeting approaching.

That meeting culminates with an announcement on Wednesday where last time I checked the Fed funds futures were predicting with an 85% chance that the Fed was going to cut .50 and a 15% chance of only .25. Now, I know I may be some stupid professional stock investor that doesn’t know what he is talking about in regards to the Fed but I know that there sure are some lofty expectations out there. I sure hope they come through. It seems to me, almost, that if the Fed doesn’t surprise the market even more–like 75 bp–that stocks are going to be in for a bumpy ride.

The fact that we rallied today on lower volume than on Friday’s selloff is a clue that there is no conviction by institutional quality investors ahead of the Fed. And who can blame them? Would you? Of course not and that is why it is silly to be buying longs in bulk here and why I believe it is just too foolish to be invested to heavily here one way or the other. Cash is king, in this volatile market, and the Fed announcement is only going to exacerbate this situation.

It seems to me that if they come out with what the market expected that the news might not be surprisingly bullish enough for investors to unload the gun as they may expect that there are no more cuts in the works. The same can be said for only a 25 bp cut. That would convince players that the Fed is done already and that there is not going to be any relief. So unless we 75 bp, I don’t see how the news is going to be bullish enough to keep stocks moving higher after such a selloff on such strong volume. This was not a low volume pullback.

What if I am wrong? What if the market rallies no matter what happens tomorrow? Well, if that is the case then I think that would be EVEN MORE bearish (of course, right, I am a bear, so I am only feeding my argument). This is due to the fact that if investors think that rate cuts are good and that the Fed is giving out free money they may get too long too fast. If they buy all of these “great bargains” now and they reverse I am afraid most people will just continue to think they just need to be patient and things will work out. Too bad this is a credit bubble and a lot of highflyers were bid up with that credit. Everything must suffer and if investors believe the Fed is accommodating things then they may believe the selloff was a bargain. Instead they should realize that WHEN THE FED CUTS RATES IT IS TELLING YOU THAT THE ECONOMY IS IN TROUBLE AND THAT THEY NEED TO SPUR INVESTMENTS. WHEN THE FED IS RAISING RATES THEY ARE TELLING YOU THE ECONOMY IS ON FIRE AND THAT THEY NEED TO COOL IT OFF.

If the trend is your friend, why do so many people fight it? What was the trend of our GDP, stock market, and interest rates from 2002-2007? THEY ALL STARTED TO MOVE UP in 2003 and stopped in 2007. What is the direction now? THEY ARE ALL STARTING TO MOVE DOWN. Keep it simple guys! Simple is beautiful and there is nothing simple about the current market environment. If simple is beautiful then this market is very complicated! Aloha and I will see you in the chat room!!

Last 5 posts in Bronze Commentary

Comments Are From Now On Closed Forever; They Will NEVER Be Open Again - October 24th, 2008
FAQ - March 27th, 2008
There Sure Is A Lot Bullishness Out There After Today's Huge Lame Bounce; Real Bottoms Come With Volume, Unlike What Cramer Tells You (How Often Is He Wrong?) - March 18th, 2008
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Posted by Joshua Hayes | Filed Under Bronze Commentary

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Comment by MauiTrader

2008-01-29 00:50:01

btw, I saw some guy I work with at RealMoney.com today post that it is TOO BEARISH and sentiment is at extremes with too many bears on marketvane and AAII.

Ugh, those two darn surveys are TOO SHORT TERM!!!!!! and anyways on RM it was 38% bears 37% bulls. Come on!

The VIX fell to 27.78, the put/call ratio fell to .85, and the bulls still lead the bears on the Investors Intellgience 41.5% to 31.5%.

—my friend is right on the very short term. but in the MUCH MORE IMPORTANT intermediate time frame….no way we have bottomed.

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