Another Above Average Volume Selloff Hits The Market Hard; It Feels Great Being Right, Following The Trend Of The Market
November 12, 2007
First off, I hope everyone had a great Veterans Day on Sunday. I want to thank EVERY single reader that reads this commentary that served in the military, first off, for making this country the greatest country in the world. Thank you! Second off, isn’t it fantastic watching this market sell off, knowing that we saw this coming and acted appropriately. Some think I must be feeling pain by still being 50% long. You have to realize I was over 150% long not to long ago. So actually I have avoided a TON of pain by being out of so many of my longs. The remaining longs that I am holding are also stronger than the ones gone so it isn’t that bad. However, after today, there are a lot more sells. I will be probably down to 40-45% long and my short position will rise from 30% to 35% more than likely.
I noticed that I heard a LOT of people calling for a bottom and that many institutional scam artist are recommending investors buy this pullback. What is funny about all of this is that this is the first time I can remember hearing so many people call this particular pullback a “buying opportunity” compared with the other pullbacks. In February and August, almost everyone thought it was over (not all, but most). Now come this pullback and I hear that RIMM GRMN BIDU AAPL and GOOG are all bargains. I hate to tell people this but when every single leader!! sells off on heavy volume it is NOT a buying opportunity. If all these leaders were selling off on very low volume and then we also saw some current leaders taking off and breaking out to new highs then I would agree that a pullback is a buying opportunity. But as the famous saying goes, “they are throwing the baby out with the bath water.”
Some of the very bearish scenarios that I see out there now, after today’s selling is that the NYSE has broken its 200 day moving average and the Nasdaq is now right on it. The SP 600 and SP 500 have followed through on the selling below the 50 and 200 day moving average by selling off today and the SP 600 is in a very bearish condition with the 50 day moving average about ready to cross the 200 day moving average to the downside. The 200 day moving average is starting to rollover so this “death cross” is made that much more bearish with the 200 dma beginning to trend down. The very weak RS line of the SP 600 indicates that all of these bearish developments are going to continue to show.
Some other bearish developments were visible early on when the indexes were rallying early on low volume. As the selling started volume picked up and as the swoon started in the last hour volume really picked up. This low volume rally followed by heavy volume selling intraday just confirms the ugly daily charts that are out there. As you can see on your Nasdaq chart the selling has been very intense the past month with 12 sessions of above-average volume selling. The past three days volume has been heavier than any other day of trading going back to the selling in August. Folks, that is a big deal. The past three days of selling was each on heavier volume than ANY day during the uptrend at all. This is a very big deal and just shows the amount of true distribution taking place now.
Th distribution can clearly be seen in the wonderful IBD tool called Accumulation/Distribution. The ratings on all the indexes, except the Nasdaq, are a horrible D-. What is the Nasdaq? It is the worst you can get; E. I am not sure if any of you remember, but this is the first time the Nasdaq has had an E rating that I can remember since 2002. I could be wrong but I really don’t know. What I do know is that before the market began its real rally in March 2003, many indexes sported an A to a B rating. The Nasdaq even had an A+ after the follow-through day in March of 2003. If the real bottom was placed with Acc/Dis diverging bullishly from price and ending up with an A+ rating, then the E rating currently in the Acc/Dis with the index still above the 200 day moving average and the index less than 10% off its highs might indicate a true top. Just something to consider because we have another very interesting sentiment situation tonight that can confirm that there is no bottom coming.
The put/call ratio has recently acted in a very odd way starting last week. Last week on Wednesday when the market sold off the put/call went from .96 to .90, then on Thursday the ratio spiked up to 1.10. But then on Friday with the Nasdaq falling 2.5% and the IBD 100 falling 3.2% the put/call ratio actually fell from 1.10 to 1.03!! It is simply stunning that an index can selloff 2.5% and the options players bet against the trend and buy the dips since that is what they have been used to since October 2002. Here we are and once again we have the exact same thing! The put/call ratio fell from 1.03 on Friday to .76 today! This makes the huge decline on Friday and the drop in the put/call seem tame as I have never seen a market sell off almost 2% yet see the put/call DIVE! The put/call ratio dropping three of four down days this week despite the selloff is the most clear indication that there is no fear out there in actual market players. So no matter how much fear the talking heads say there is out there, trust me, they are full of it. There is NO fear out there at all.
And just like this weekend when we look at the VIX we can see that it did indeed close above the 30 level and closed at its HOD slightly over 31. However, I am not sure how people can say that there is fear in this market with the VIX at this level. I guess you can say on a five-year relative basis we are at a “fear” level. But history shows that real fear does not enter the market until the VIX hits 50. The VIX has not seen that number since August 2002. Oddly enough, that was right before the market bottom in November 2002. So until we see 50, there is no way you will see me say that there is any REAL HARDCORE fear in this market. If some people think the VIX is high because we are at the same levels as in August they need to learn how to read charts. If you look at August 16 you can see that the VIX’s candlestick bar put in a very bearish reversal after a long uptrend. Since the VIX made a higher low in October, it has yet to move as much as it did the last uptrend. So this rally is relatively fresh as the VIX is not extended and the market just started selling off last week.
I do not plan on embracing the bull side any time soon as almost all my charts are broken. I only see green charts in medical and drug stocks. I will be more than happy to go long those stocks. But there is no way they will produce the same gains that bearish stock chart patterns will in this environment. Even though shorts can never make as much money as longs since longs can go up over 100% and shorts can not. But shorts fall faster and harder than longs normally rally. So if the market is real bad, there will be a lot of rallies that will trap bottom fishers and allow us multiple times to enter the past leaders and reap some wonderful rewards. Just look at my recent TNH short. Five days ago I initiated a short position and today it is now down 23%. Very few longs went up 25% in five days during the last bull run from the August lows. The few that did were major winners. But in a bear market many of our old leaders are going to move down 25% in five days. In five days BIDU is down 28%. So while we will never get an IHS in a bear market we will get many chances to make good and fast money.
What if we bottom tomorrow? That would be great! I don’t care which way the market goes. The only problem with that scenario is that if the market bottoms now, there are absolutely no pretty/hot charts out there. It would take weeks to months to create them and with them being created during a bullish follow-through their RS lines would be weak and the market’s volatility would be low. A big deep bear that last months to (yes I know you will hate to hear this) years will setup up big and long perfect bases for the select few winners to breakout of and run. Those stocks will produce huge gains because if the bear last a long time the VIX should be over 50 or, hopefully, over 45.
Aloha and I will see you in the chat room. This has been a great market as we got the top, have sold off most of our hot longs and have sold all of our laggards. Now we are short and reaping the rewards, while still holding on to our strong stocks that are showing no signs of selling. When this market bottoms, if some of our longs hold the 200 dma, they could return some huge gains with the pleasurable addition of long-term capital gains taxes.
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Why is the NASDAQ BOP not Max Red in a situation like this? ( or at least a little red)
How can you play the short side in an IRA account? I heard something about using ETFs….what is your thinking on this?
Thanks…(Btw your call last week saved me a bunch)
Index BOP goes green and red way too late. It is just like waiting for the sell by a close below the 200 dma. If you wait for that signal, it is too late.
BOP is pretty much USELESS with anything that trades over 500k a day. It has always been way more useful with small cap stocks. As for indexes, Don Worden has mentioned that it is not a good tool for going long or short. In all my years of market analysis I will say this is very true. Ignore it and don’t worry about it. KISS.
As for going long the ultra-short ETF’s, I think it is a good idea, as long as you keep it small. History shows you will NOT get rich shorting the ETF stocks. You will get rich by being long the leaders in a bull market and being short the weakest stocks and the old, former leaders in a bear market. TNH down 23% in five days. No ETF will do that for you.
Here is a list of the ETF’s you need: EWV FXP SDP REW SDD SSG SDS SJL SDK SJH SKK TWM SJF SFK SRS QID DUG MZZ EEV EFU SIJ RXD SKF DXD SCC SZK SMN
You are very welcome. This is what I love to hear. I am very happy that I made/saved you money. It makes me feel very happy to know that I have helped you beat the wall street scam artist.
THANK YOU!