Early Morning Rally Turns Into Ugly Reversal By Mid-Day But A Final Hour Bid Helps Stocks Close In The Green; Where Is The Volume?

February 27, 2008

Well, today sure was a bit odd. Stocks started off the day weak but ended up blasting off higher until about 11am EST and after that it made a little more headway but then rolled over giving up almost all of the gains before rallying one last time until the last 30 minutes when it calmed down a bit. So it was a little wild but not that wild. Overall, what it really was was just another confusing market session in a short-term uptrend and intermediate-term downtrend market.

When the closing bell rang, stock market indexes ended the day mixed with the Nassy rallying and the Spoos falling. But volume was lower and it was almost an inside day which is always meaningless.

But with today’s lame action in the indexes came a little bit of excitement from the usual bullish suspects. Once again, commodity stocks outperformed the stock market by a wide margin, with one of my best stocks on the day being DROOY with a 9% gain. Other metal related stocks did very well also, including my favorite AUY. But all of this bullishness in these sectors have left a lot of other stocks out of buying ranges and before I can even think of getting long more steel, oil, metal ore, or food related stocks, I am going to have to get a low volume pullback in a lot of these issues.

What makes this difficult now is that so many are so far up that if they would set up in a base it would need to last at least five to seven weeks long, simply because they are up too much now and a short base will not be safe. CMP, for example, is a current holding that is simply up to much to add here. Even a one week pullback doesn’t make it safe. It needs more time. This goes for so many commodity related stocks I have my eyes on that I am beginning to understand that patience is going to need to take over as I am not going to get my entry points any time soon. Stocks like GG, GGB, XEC, ATLS, SWC, PAAS, SLW, FDP, and FCSX need to move sideways or drift slowly lower for five to seven weeks to be perfect longs. They also need to be created on yellow to green BOP with no red in the bases to keep their top spots on my watchlist.

This pullback or consolidation I am looking for in these stocks might not happen, though. By looking at some of my current holdings and looking at ETFs like DBA and DBS it appears some stocks are about ready to take off into an exponential rise which usually leads to a parabolic run. If that is the case you can kiss a proper buy point for a lot of longs in commodity stocks I want goodbye. Instead, I will go back to doing what I did with the leaders earlier this year and short them when they top.

But I will have to be careful for RIMM and FSLR type of stocks that bounce back after breaking down. And then you have POT and MOS getting completely funky on us by creating what CLEARLY!!! appeared to be a “potential” topping pattern. Well, I guess it wasn’t that clear after all and the “potential” for failing came quickly. It hurt because I put a good amount of money in them but had I passed on the trades and the stocks would have fell 25% I would have been very upset. So I did the right thing. But this should go to prove that it is much easier to go long than it is to go short.

That was then proven by HLEX as my most recent short built a similar, but not as bearish, chart pattern that TSRA did the day before. Well, after watching TSRA fall 34% (over 40% intraday), naturally, I assume the same thing would happen–not a 40% drop but a move down, none-the-less. As you can see today the stock did the exact opposite of TSRA proving that shorting is not easy and that this market is nuts. LOL.

One of the ways this market is nuts is the way people are interpreting it. OK, so I see a lot of people talking about how bearish everyone is so therefore we are going to rally. But then my problem, as I see it then, is that this now makes everyone bullish. But then when you look at the AAII survey it shows that there are more bears than bulls. But the Realmoney.com poll this weekend said people were more bullish for the first time in three weeks. But nothing discussed before is as good as the investors intelligence survey. That survey shows more bulls than bears by a 42% to 36% margin. Now while this is a high number of bears, the total number of bears is still not higher than bulls which is the most important. That has not happened since 2005. We came very close two weeks ago at 36% to 35% but we still didn’t cross. So technically we have not yet built in enough pessimism in this market to bottom.

Now, on top of this, I just read a RM columnist who mentioned that the VIX was still “relatively” high at 22. What!? Is he nuts! Did he just start investing in the market. Sure it is high when compared from 2003 to now. But if you have any common sense at all you would use the VIX since the dawn of time because the VIX HAS!! acted like this before back in 1992 to 1995. Was 22 high then? No. A high and fearful VIX hits 50. We are no where near 50, much less 40. So to say the market is full of fear is a load of BS. There is absolutely NO WAY the crowd is bearish enough to have a real bottom here. Everywhere I turn on RM someone is talking about how “everyone is bearish” and therefore they are bullish. Well if so many are thinking like that and that is how they are looking at the market, I know I am in for some choppy and directionless trading.

That kind of choppy trading can be seen in a lot of leading stocks. What is funny is that I read the ‘big picture’ in IBD before writing this tonight and was a bit surprised at the tone IBD had in the paper. Sure we know we are in a short-term uptrend and that we have leaders in all the commodity sectors. But IBD made mention of some stocks like NFLX, LKQX, GFA, and HXM having nice charts. To that I have to say: hold up!

NFLX is OK I will admit. But look at an arithmetic chart and you can see it is not that great as the second round base in January undercut the first one in November giving it a nasty look. Not only that it did it on heavy distribution. Then after a low volume rally it pops today on huge volume way way beyond a reasonable buy point. Only a pullback with BOP staying green and quiet volume, to the 50 DMA, would make this a nice long. If you look at HXM, GFA, and LKQX and can not tell that those are very choppy, when compared to my ‘past big winners,’ I will say a prayer for you tonight.

The fact is that those charts are lame. Don’t get me wrong, they are very strong, and lame may be too strong as I could see GFA, NFLX, and LKQX all work–HXM needs a lot mor time. But these do not look like the charts that you see in RAGING bull markets. The 1999 and 2003 bull markets were loaded with charts like of those you see in my ‘past big winners’ but right now we do not have any of these. Like I have said before at the start of a bull market you have a ton of hot stocks that can possibly run 2000% in a year or less. As each year passes, less and less stocks will show up. Since this started at the end of 2002 and with it being early 2008, we have had over five years of a bull market. So it should be obvious that we have used up all of our “HOT HOT HOT” charts.

But that doesn’t mean you still can not go long some of the best like AUY CALM CMP CMED NEU TKC DAR URBN but with NONE of them looking like LMLP 99, GNSS 01, AIRM 02, TASR 03, FMDAY 03, EPIC 03, IST (MT) 04, AAPL 04, ERS 05, DSTI 05, KNOL 06, VCGH (PTT) 06, AFSI 07, and TESO 07, I simply do not want to be loading up on anything just yet. But there is nothing wrong with putting a lot into a hot stock that is #1 or #2 in its industry group that is flying up the list of IBD industry groups based on six-month price performance.

I guess what I am trying to get at is that the leaders we have right now are indeed very bullish for our stock picks since we are picking the best of the best in the best industry groups in the stock market. However, the market is not facing positive headwinds as three major macro events are going against it. Therefore, I believe these are leaders in a bear market; the market is rallying since they are all moving higher, and thus lifting all boats. But I would assume, eventually, the rest of the market will stop rising, but the leaders will instead continue to rally and will outperform the market by a good margin.

Those two macro events I am referring to are the GDP, interest rates, and so far the PPI. The GDP is now trending lower from the 2003-early 2007 readings; and in case you did not know it is also the best predictor of the stock market in the fact that as the trend of GDP goes so goes the market. Once we notice two quarters of trending GDP growth then maybe I will be more excited on the market.

Also interest rates are being lowered and Ben has hinted at more cuts. Since the early 1990’s (that is when my study starts so I am not sure about before 1990) the pattern has been the same as the market moves in the direction of the interest rate cuts. When the Fed is lowering the rates that is there way of saying “OK, we have a problem here and we need to spur investments to get people spending money again.” That means the economy is weak and lowering of interest rates are like the Fed head saying “uh oh.” When they are raising the rates, they are basically saying that this economy is on fire and they do not want to leave too many people behind therefore they raise rates to cool off the economy thus saving ourselves from ourselves. Oy.

Then what is even worse, commodity prices are flying and the PPI for January came in at a YOY 7% jump which was the highest since 1981. UGH! With the Fed lowering the rates admitting that the economy is very weak and thus needing to spur borrowing by individuals, the GDP trending lower with our market, and inflation about to go out of control (have you seen wheat, corn, or sugar lately??) you can bet that this market is going to have a heck of a time finding any footing here.

But, hey, don’t get me wrong. I love being bullish!!!! I want to be bullish!!!!! But study my ‘past big winners’ on my site and those listed today that are not on the site backtest them on telechart2007/tcnet and stare at them. Then go over my personal TCNet watchlist that I have on a file in the Gold Forums and tell me if you see anything in this market that looks like those. GREAT LUCK!

My last point of the night is a good one (I am giving myself credit already???) and one I don’t seem to see a lot of people talking about. Where is the volume? For the last thirteen days the NYSE has had volume well below average and out of those last 13 days on the Nasdaq only two were average. None were above average. So obviously this should tell us that institutional investors are COMPLETELY absent from this rally. Besides the very start that was, more than likely, started by the same institutions that will be looking to sell on the retail and short-covering crowd later, the big boys have just been absent.

There is no other way to slice it. The facts are the facts and those show a market that is rallying on very low volume that is bringing the market close to overbought conditions on a lot of different oscillators. I have not read Harry Schiller’s column yet but I will be after this. But he makes a point that the rally is overbought and that there are more reason to sell this time than the last time it was in December. It seems the overbought readings are leading to some nice selling now.

Despite the lack of volume, as long as these markets are trending higher, we should have no problem going long the leading stocks that are breaking out of good patterns and are in leading industry groups that are near the top of IBD’s 197 industry group page. As long as these leaders are moving up, don’t be shy to nibble and make a little bit of money but, once again, I am going to stress that RIGHT HERE RIGHT NOW, with the market acting crazy, you should be at least 50% cash. The cash should be tucked away ready to use on the next chart patterns that setup and look like any of the stocks mentioned in the run down of great stocks or like the stocks do on my ‘past big winners’ page. Once you see those patterns you can pounce, not only that but stocks breaking out with EPS and RS ratings over 90 should never be passed (like AUY CMED MTL etc..). Always make sure you take at least a little bit. And for those that missed AUY, shame on you. IF!! the stock can pullback on low volume, I would do your best to get long with the entire sector FLYING up the charts and now resting in the #1 spot overtaking the chemicals-fertilizer group. CONGRATS METAL ORE-GOLD/SILVER!

I hope you are all doing well in this market. If you have any GOOD questions, feel free to leave them in the comments. If you want to be rude or mean, please don’t bother. Aloha, from Maui, 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
DJIA Leads The Way As BSC Rocks The Stock Market On Mixed Volume; How Can This Be A Bottom Without A HUGE Surge In Volume On the Nasdaq And NYSE? It Can't Be! - March 17th, 2008
BSC Blowup Proves A Chronic Emailer Wrong And, Once Again, Proves The Power Of CANSLIM; Stock Market Indexes Selloff On Mixed Volume But Hold Recent Lows - March 14th, 2008

Posted by Joshua Hayes | Filed Under Bronze Commentary

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6 Comments »

Comment by Michael Paul

2008-02-28 04:22:47

Good Morning: AM with your stock articles and coffee is spot on. Only issue is now I need to get up at 5:30AM. My wife is wondering what the hell is going on. I have studied and read them all â€“ joined you about 3 weeks ago â€“ couldnâ€™t be more satisfied.

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Comment by MauiTrader

2008-02-28 10:33:57

ROFLMAO.

I LOVE IT! I will do my best to make sure every AM spent with your coffee is an enjoyable one!

Watch out for that wife…I have the same problem with my gf. “I am on the computer too much.” LOL. Do you like eating food?

Aloha Mike. I am very glad you are happy with the service. I only apologize I did not have this going in 2003!!

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Comment by James Lawless Subscribed to comments via email

2008-02-28 11:03:34

Hey Josh,

Do you think the economy we’re witnessing right now is more “economic stagnation”…?

or flat out stagflation

either way it’s tough to make money in this volatility

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Comment by MauiTrader

2008-02-28 13:25:28

I don’t care what Ben says…it might not be ALL-OUT stagflation, but when you have little to no wage growth, unemployment is rising, interest rates are being forced lower helping to kill the dollar, hours worked is falling, the PPI is coming in at 7% YOY, and our GDP is falling to a lowly .6% gain, you have a problem.

I think if commodities continue to rise we are going to see some real stagflation soon. I know where I live it is becoming ridiculous and is starting to weigh on me.

I don’t care how much money I make, where I live, I might not ever become a multi-millionaire. Prices are simply rising TOO FAST compared to wages and income earned. That along with a weak market is going to make this a very rough period for many people, including yours truly.

I think with all of our tech leaders falling and all our commodity stocks running you have no further proof that things are bad.

Also notice that after the huge volume selloff in January we are bouncing back on very low volume. That is not good and this is going to slowly work its way through the economy.

No matter if it is stagnation or stagflation it is going to be bad and we have the most messed up political stage ever. We are raping land for corn that is producing twice us much greenhouse emissions after the total production. Food prices are exploding, poor people are dying, and we are getting less efficient fuel that is making things “worse.” Typical loony left policies that will hold this country back for a long time.

NOT GOOD!!!! Look at all the macro data coming out. It is ALL HORRIBLE!!! And it is just starting.

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Comment by MarketSpeculator

2008-02-28 13:30:13

we are in for inflation with a contracting economy…what will save us…rising interest rates, and letting banks fail who were DUMB enough to loan so much $$ at subprime levels.

going to be a rough few years.

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Comment by MauiTrader

2008-02-28 17:10:27

Not looking forward to the next four years myself, no matter who is elected.

Very sad state of affairs we have.

RIP Ronald Reagan

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