A Bullish Intraday Reversal Send Stocks From Their Lows To A Close Near The HOD On Higher Volume; Oversold Market Has A Hint Of Fear About It

December 18, 2007

The stock market produced a bit of different action today that has been the opposite of the norm the past couple of weeks. Since December 6th we have had a market where we have basically opened higher and then spent most of the day selling off. However, today we had a bit of a change with the market opening higher, selling off–like usual–but, instead, this time, the market found a solid bottom, across the board, around noon EST and rallied the rest of the day, almost closing at the HOD but pulling back a bit at the end.

Not only did the market have a nice day intraday, it also put in the solid gains on higher volume. This was very nice action and was the first time since December 5th that stocks put in a strong rally, closing near the HOD, on higher volume. Most gains have either had weaker closes when the volume was higher or the stock had a weak intraday rally (usually after gapping down like 12/3 on the Nasdaq) with lower volume. Today’s action had a slightly different feel to it which makes it possible that we could see a short-term rally here.

My thesis on that is that I had only one full sell, only three stocks that I had to cut some of my loss or take some of the gains, the Russell 2000 and SP 600 outperformed the market with a 2% and 1.6% gains respectively, I had four CANSLIM quality stocks give buy signals and two CANSLIM longs I am currently long do so also, the put/call ratio has been over 1.00 for three straight days, the market is moving toward oversold areas on many oscillators, and the Nasdaq is bouncing right off its 50 day moving average.

If you see the quality of the longs today in the CANSLIM portfolio and see how great the reward to risk ratio is, you simply have to be somewhat bullish here for the very short-term. But why only the short-term? Because there is no doubt that despite the few hot charts that look like TRUE on my tc2007 the charting landscape is a mess. And you simply can not fly when there are so many holes in the market. If you go through almost any sector and take a look at the leading stocks you will notice that things are not going that well.

The reasons why I am bullish have been listed. But why am I bearish on the longer-term picture? There are so many of them to list. First off the put/call ratio though over 1.00 the past three days still has not seen the recently new fearful level of 1.20 to 1.30 and the VIX completely refused to cooperate with the last down trend and essentially “based” going nowhere sticking around the 20-25 level. Both of these numbers are clearly telling us that the market saw no REAL fear since the top in late October. Therefore, there is no way we have put in a bottom. Real bottoms that launch strong rallies come with a high VIX, preferably over 40 and a put/call NOW over 1.20. Until we see these numbers there is no bottom because all bottoms show this amount of desperation. The market will either crash them out or wear them out.

You have to remember, to most investors March 2000-October 2002 felt like an eternity to those who could not short. So if you are not shorting the market now, the chances of us having a rally where we are loaded up with charts that look like TRUE, AGX, and RICK but have fundamentals of GOOG, RIMM, MSFT, ORCL, CSCO, BIDU, AMZN, GRMN, and AAPL are not good. This bear possibly could take a long time to work itself out.

The other reasons that I believe this bear market is going to continue is because new lows are still killing new highs and today it was 41 new lows to 576 new highs, there are multiple red BOP filled charts EVERYWHERE in EVERY scan, even stocks that I go long with great charts are still failing, then those same stocks after failing are making V-shape moves higher in some cases making it very hard to make money (AGX long breaking down then flying back up; CCU producing one of the best looking charts to short and gapping up higher), top rated stocks are putting in negative divergences in multiple technical indicators (you name the technical indicator you can see the divergence), top rated stocks are attacking new highs but this time on much lower volume (hence all the poor technical indicators), my current shorts had none that needed to be cut today in today’s rally, and there were only 6 of 60 that needed to be trimmed (sadly one was my largest short; my luck has been crap the past two months), the RUT, NYSE, and SML is still below the down trending 50 and 200 day moving average and the Nasdaq is below the down trending 50 but still above the 200, and the final reason is that there is no fear out there. No matter what they say I can SEE IT WITH MY OWN EYES THAT THERE IS NO FEAR.

The bottom line with this market is that on the very short term with the pretty charts with CANSLIM qualities I have to be bullish. Today’s reversal didn’t have the feel of the August reversal but it did slightly have a feeling that people felt a lot of despair in the middle of the day before we reversed. I would say before we reversed, many bears got very bearish in the free chat rooms that I monitor and on CNBC a lot of people were saying how many on the NYSE had a feeling of “darn it, there isn’t going to be a Christmas rally.”

Of course that always leads to a rally when people feel that way. However, the public definitely doesn’t feel that way and if you don’t believe me just turn on ‘mad money’ on CNBC. Everyone, and I mean everyone, on that show during the lightning round ask about going long “because it is a bargain,” or they want to know when there stock GRT will start to move back up because they bought it earlier this year. This is all I hear. I don’t hear anyone asking for shorts on Cramer’s show. Everyone seems to be wishfully bullish. If they are all bullish who is left to buy? Not me.

This market is the most depressing market I have been a part of in a long time as stocks just don’t work here. Even if it is a perfect long setup (which is getting extremely rare; but IT WILL COME BACK) or a perfect short setup, the stock simply does not usually go the right way. And like I mentioned earlier, the ones that look perfect I obviously load up in as I have been doing that since 1996 but for the first time that I can ever remember stocks in perfect set ups are not working. Even back in 2000-2002 there were a ton of shorts (IWOV ENGA CLRS MANH CSCO ORCL MANU etc) that broke down from perfect set ups and continued lower. Then when you got a rally in the market and a near-perfect to a perfect chart showed up (EXTR PCCC FLIR ITRI PDGI ATVI SPTN and others) they worked. Since the AFSI long in April which was perfect we have simply had NOTHING of quality. We did have APPY on 9/21 but that was a sub $10 stock that averaged only 80,000 shares a day that had horrible fundamentals. That is not the kind of stock I like to put hundreds of thousands of dollars in much less a million.

So we do have a new one tonight that is not perfect but is near perfect. We will see how that long acts. If this long fails, I would be ready for one ugly market because if a strong stock like this would reverse this pattern with all the leaders showing signs of cracks in their near once-invincible armor this could get real ugly. And it could even get more ugly if wall street urges mom and pop to buy the bargains. Bad advice will hurt these folks the worse as they definitely, more than likely, do not follow a cut loss strategy.

And right now, there is nothing more important than cutting your losses in this market environment. If you go short a stock and it rallies on higher volume, cut some immediately. Don’t wait for a moving average to sell some, but to sell it all off you MUST wait for a breach of the 50 dma. If you go long make sure that you not only keep it smaller until we get another follow-through day (I consider the confirmed rally basically dead from the 11/28 lows due to the poor index price action. There have been 2 to 3 distribution days that have convinced me this rally possibly will not stick. But if it does I am properly positioned for some nice gains in some longs and will quickly kill off the shorts that don’t work.

But that is the thing: the shorts are still holding almost like they are waiting to be smashed like my lovely CLP was. Too bad my best performers will more than likely be the ones that I have the least amount of money invested. That is why it is probably smart to just stay cash heavy. If you are a newbie there is ABSOLUTELY NO WAY THAT YOU SHOULD BE USING MORE THAN 50% OF YOUR ACCOUNT. AND IF YOU GET 4 TO 1 MARGIN FROM IB (most are 2 to 1), YOU MUST KEEP IT TO 25% OF YOUR ACCOUNT OR LESS. TRUST ME CUTTING YOUR LOSSES IS GREAT AND WILL MAKE YOU A TON OF MONEY ONCE YOU HIT THOSE BIG WINNERS THAT COMPLETELY MAKE UP FOR IT AND THEN SOME WHEN YOU ARE WRONG.

If the market starts a new uptrend there will be plenty of time to get long. However, I simply do not see all the beautiful charts that I need to see to believe that any rally here can be a meaningful and lasting rally. I remain mainly in my bear suit but will enjoy the bull if it decides to take me.

My mantra that I am sticking by is that ANYTHING CAN AND WILL HAPPEN in this market. My longs are semi-working and my shorts are semi-working. That is much better than everything failing. Aloha and I will see you in the chat room, where hopefully we can get back on track of everyone showing up during market hours to discuss stocks. It is wonderful when you guys come in so late and everyone has fun but it is 11pm and I am still working….time sure flies when you are having fun. We sure have a lot of fun in there!! ALOHA!!!

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