A Strong Intraday Session Turns Into A Stinker As Bids Disappear; Caution Continues To Be The Way To Play This Market

January 3, 2008

I think most people came into today expecting a further selloff off of yesterday’s weak price action. But instead we saw a rally that got some bulls excited early on. However, like most rallies recently, as soon as the buying stopped, the bids disappeared. As the market broke to the red, many saw a possible EOD selloff. But, once again, confounding most myopic short-term analyst, the market instead reversed higher into the close.

Now the action today basically left the SP 500 flat at unchanged with th DJIA also basically flat with a .1% gain. But the more speculative indexes didn’t enjoy that kind of green/flat action. Instead the SP 600 fell 1.1% and the Nasdaq fell .3%, showing that the more speculative areas of stocks did not enjoy the same action the big-caps received.

Unlike, the speculative stocks, leading stocks actually did quite well today leading all indexes with a .6% gain. Not bad at all and a possible hint that we could rally from here. Am I sure of this rally? No. But does the market do the opposite of what I want it to do recently after I make large trades? Yes. Am I bitter? Maybe.

But with the IBD 100 putting in higher lows and with me having more stocks as long candidates than short candidates today, it is apparent that a rally is very possible here. My only concern would be that the stocks in my scans are not the highest of quality in fresh names but are still the same old leaders from the long-term bull. MOS is still MOS. TNH is still TNH. Until new leaders show up it is just going to be real hard for me to get excited here.

Right now, like I mentioned yesterday, my charts in all my scans are ugly both in my long and short scans. I am just missing a lot of stocks that look like HOKU. HOKU is what I would consider an amazing near-perfect 9-out-of-10 kind of stock. If it had BOP like DSTI, it would be a 10-out-of-10. So if I could find a lot of stocks like HOKU, which my scans would pick up in the BOP scans, maybe I would be more trusting of a rally here to play out over a long-term time frame. But without CANSLIM quality longs looking like HOKU, there is no way I, or possibly any one else who looks at charts daily, to trust this market here. That means that most of us are looking to sell/short the rallies that we get.

And by looking at the anticipation of another rally and the new investors intelligence survey showing that bulls only fell a little to 52.2% and that bears barely increased to 24.5%. This is despite some weak bullish action and a “fearful” session yesterday. Maybe yesterday is not in the numbers. I don’t know because I have not taken the time to look at when the final tallies come in. But I assume it takes a while. The point is that the crowd is still very bullish and that there is no fear. And if you measure fear by VIX then we are downright complacent with VIX still at 22. Until this thing takes out the August or November highs, there is no way I can entertain any rally lasting longer than a few sessions. I continue to believe, until more FRESH and NEW top quality CANSLIM longs show up, that any rally will be sold

And yes, I do know that there are a lot of great earnings out there. But I want to keep reminding those that are forgetting that the best numbers come at the top. The impressive gains you are seeing are wonderful but history has shown us time and time again that stocks top ahead of the EPS and sales numbers. Earnings top after. They always have and always will. Remember that.

I think that there are a lot of people out there that believe that the Fed is going to bail us out. I would not be surprised if they try to inject more liquidity into the system. People, that is as clear as they can get at telling you that SOMETHING IS WRONG. I know that some like to think that this along with lower rates is bullish but history, once again, says that conventional wisdom is wrong. Falling rates and liquidity injections is the most loud and vocal way the Fed can tell us “something is wrong.” Take their signal and heed their misguided liquidity injections, until the charts turn around.

Please, continue to heed my advice on this market and keep yourself in a lot of cash and I would continue to take at least some of my shorts that I am listing on an almost daily basis. Especially some of those that I add to. The shorts that have been working and giving me other short signals have been very good for me this winter and I would continue to focus on stuff like FRT and LCAPA. Your reward/risk ratios are so good with some of these setups that it is foolish to pass them up. It is better to take the loss and get used to losing a little bit of money than just sitting on your butt.

If your account is only $5,000, what is stopping you from going short $250 of FRT and $300 of LCAPA. Let’s say FRT fails and you lose 3% but LCAPA gains 15%. If I am not mistaken that would be a gain of 12% which is better than a gain of 0% which is what you get in cash right now. Now, when I say to do this, make sure you know how to at least go long first. If you have NEVER made a dime going long using my method, I am not one that promotes shorting instead. I believe you should prove to yourself that you can make money on the long side first before shorting stocks. However, if there is a 15 point potential gain to only a 1 point cut loss, maybe you should take that.

The bottom line is: please be careful out there. This is not a clean and safe market to be investing in. It is very hard for even me to gain an edge. The only ones I know who are doing well are those that are focusing only on the top CANSLIM stocks in the solar area (once again, big props to axman; the guy is one of the best CANSLIM traders I have personally seen [though I rarely get to talk to them]) or are trading futures (David). And when it comes to futures, I am not too sure that a lot of us can handle the risk involved.

My best bet is to just heed my advice and keep it small with a slightly short bias. Until my charts clean up, there is no way I am going back to the bull camp. You know the camp I was a part of from October 2002 to November 2007. I have already been hinted at as a “perma-bear.” Hilarious is all I can say. Aloha and I will see you in the chat room.

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