Another Day Of Strong Gains For The Nassy, SP 600, And Leading IBD Indexes Comes On Lower Volume As A Possible Disturbing Trend Emerges
March 25, 2008
It was another strong day of gains with the Nassy leading the way higher with a .6% gain. However, the best index of the day was the IBD 100. For the second day in-a-row, the IBD 100 outperformed the general market indexes. Today it was a solid 1.9% gain which was much better than the rest of the indexes and yesterday it was a 3.1% gain which was .1% better than the Nassy. So everything looks pretty good with leading stocks leading the way right? Well, yes and no.
Right now things do look good in some stocks. There is no doubt that I am starting to find a lot more charts that have a lot of strong accumulation, green BOP, and strong price action on them. However, the tight and sound base patterns are still not there. If this market has bottomed and it is going to start a big bull market, it is going to be a while before it gets moving, simply because the patterns are a little sloppy. Some are tight but a lot are not.
There are multiple reasons for this. Some include a volatile VIX, some include the fact that the market has sold off a ton and then had a snap back rally in many financial issues, this all has left the market jittery and very hard to make money in. It does appear that that is changing as I had an EXCELLENT day today, thanks to one stock, and I still have around 65% cash. Seeing gains that are pretty good in a market that you are loaded up with cash can make you feel pretty good. However, some still think that you have to be all-in here to receive all the spoils that this market wants to give us.
I will repeat one more time, that you do not have to buy the bottom to get major gains. The greatest stocks of a real bull market show up up to 13 weeks after a follow-through day. Not only that you can find a few stocks that will make 200% to 600% gains in one to a few months, even when it is 10 to 13 months AFTER the bottom. The best bull markets will give you plenty of time to get long, so there is nothing to worry about getting the bottom.
I will tell you right now the most AMATEUR email I can receive is an email that tells me that they “feel that they have missed the bottom” and that their chance to make a TON of money has passed. I do not know what can make you think that way but I am sure it HAS TO BE due to the fact that they have ZERO knowledge of the past history of the stock market. To think that by not nailing the exact low that you then miss out on all the best buying opportunities is the BIGGEST fantasy out there in the stock market world.
The greatest traders do NOT try to buy the bottom or short the top. They just try to ride the meaty portion of trending markets. Right now, it should be obvious that the greatest traders of all time would not be going long stocks all-in on margin here. Most, I am sure, like I am now, would be heavily in cash, waiting for that “moment” when it is clearly time to go VERY LONG. When that moment comes TRUST ME I WILL KNOW and when it comes there is no doubt that all breakouts must be taken and that the “perfect” setups need to be loaded up on. If they don’t workout immediately, we get rid of them. If they work out, OH BOY, it is going to be fun.
However, if we are in a bull market here, I am not sure if we would EVER be able to get a 2000% winner with the VIX at 25 and with it only hitting 35 at its high. That simply is not bearish enough for a real bottom. HISTORY PROVES and shows that the best bottoms happen when the VIX hits AT LEAST 40. The last time that happened was in 2003 before launching the greatest bull market I have ever seen (yes, it was better than 1999 because it was more broad–however, 1999 had to have been easier for those knowing what they were doing as ONLY the HOTTEST were setting up and working. There were not nearly as many stocks to pick from.
Right now, we have the same similar situation. No matter how long this rally last I will go along for the ride in my HOT charts. There may not be a lot but some are there and I guess I have to hitch my wagon to these horses. But if more and more and more show up and all of a sudden we get the market up 2% or more on volume much higher. Well then, I will obviously go from being a cautious bull to a bull. When that happens, all hot charts will be in my portfolio as soon as they breakout or bounce off the 50 DMA.
The October 2002 bottom started off with a few nice stocks (kind of like now) but by March 2003 you could see the same setups everywhere. Here we have a similar situation and if in a few months we have a bunch of proper bases out there in stocks with great fundamentals then I will be a happy long. But if it is just a continuation for a few months of a low volume rally then I will be very worried.
And that is what I am really worried about. Now, while I am more than happy to be long for now and play the long sde with some of these very pretty charts, there still are not any long-term quiet and sound bases being formed. Not only that if volume never comes back in on the long side in the next few weeks, I am sure that this market will continue its selloff, eventually hitting resistance.
This can be seen in our past big-cap leaders which I have covered around 80-90% of. They are rallying back to resistance on lower volume; all of them. GRMN, GOOG, AAPL, and BIDU all have rallied back to near key resistance areas on very low volume. If they end up failing on high volume, I will be more than happy to add back to my short position with my profits from the longs that I am currently taking.
Another reason why I think it might not be a great long bull market is that not only does volume not exist on the upside for the indexes but there are still blowups in the market also. ABPI blew up today and was a stock that was just on my watchlist for a possible future long. The fact strong stocks that are being accumulated can still be destroyed, even though it is usual for a biotech, is kind of depressing. It should make you a bit cautious in loading up. This is just yet one more problem the market is having.
Not only that, it is knocking me out of some of my best longs. FCN, DAR, RICK, CLR, XEC, and a few others are all longs that had one very ugly day, that NORMALLY leads to many more, but have all come back and moved higher. This is not normal and while it happens sometimes to see it happen to so many quality longs is very upsetting. The next one that I had a lot of that is starting to comeback is GTU. If GTU comesback to new highs, I will know that I am right by being in cash and will do my best not to flip out.
While the leadership in this market lacks anything of “oomph,” there are some sectors that are flying and if we are going to get long some of these areas might be of interest:
Oil&gas-US exploration production has gone from #72 to #1 in the IBD 197 industry group ranking for six-month price performance. The building-residential/commercial group has gone from #197 (last) to #3, the transportation-railroad has gone from #92 to #6, the oil&gas-US royalty from #114 to #7, the Transportation-truck from #154 to #10, tobacco from #129 to #20, and the Leisure-toys/games/hobby group from #195 to #24. So these are some great industries but for those that think this is the exciting NEW and FRESH sectors that are going to launch a powerful bull market, please for the love of God and my sanity go and study every market bottom and what the new leaders from each period was. You will see it did not involve these.
But at the same time, transportation stocks are great to see at the start of a bull. That and those small regional banks and household-housewares are typical bear market leaders but the banks eventually help start a bull. Have you seen the yield curve lately? No wonder the small regional banks are flying up the industry groups based on six-month price performance. The best stocks in this group look great. Hopefully, they can lead to a real bull market with leadership but for now I will just take what I can get.
And hopefully we can get a lot more, especially with the investors intelligence showing more bears than bulls (we will see what the recent rally has done to the numbers in the morning), the put/call is back up to .94 after a 1.9% rally in the IBD 100, and with the VIX at 25 (is this really high???? 
). If this can happen I would love to get more BRKR stocks showing up in my scans. I just ask for two things to happen…well three. I want the base to be about three to five weeks longer (current one was too short which increased its chance of failing), the BOP to stay max green or go from green to max green (not max green to green), and the RS line to lead the stock into new highs ground. If that can happen, I will be looking forward to loading up on my first stock, THAT WORKS, since April 2007 with AFSI.
Some other quick hits I want to go over before passing out is that the Consumer Confidence numbers came in at their lowest in five years. I am still not sure if this bearishness so fast is either the start of something really bad or if it is the signal of the end but no matter what it is, people are not feeling good and that is usually good for stocks. But without volume in the market and perfect charts, that still is not being confirmed.
Then the SP/Shiller home prices index came out showing the biggest drop EVER as it fell 11.4% in January. This kind of numbers to me being RECORDS indicates that the situation is really bad at their in the housing market and if everyones money is tied up in their mortgage payments I don’t see how that is good for stocks.
Maybe that is why there were still 72 new 52-week lows to only 46 new 52-week highs. Someone told me that new highs never beat new lows at major turns. That is PURE BULL CRAP. The fact is that new highs were beating new lows in March when the market turned for good. The few new highs that we do have are coming mainly from four groups: chemical, energy, medical, and small banks. These are not the groups that get me stoked on the stock market. Where are the innovative technology NEW leaders? They are not here yet. I will play what we have to play with now but until I see REAL leaders there is no way I will load up on margin in this market. Especially with the market SO EXPENSIVE. You think after a 20% decline that stocks are cheap?
Take a look at the DJIA which sports a 67 P/E ratio on Bloomberg and a 61.9 P/E ratio in IBD. Since an extreme low is usually 15 and cheap is considered 20, I find it funny that the value guys that are calling a bottom because stocks are just “too oversold” are completely overlooking a key measure that they ALWAYS use before making an investment. Funny how this is being ignored but it appears to me the market is extremely expensive and unless earnings get a LOT better this quarter or the DJIA explodes higher there is no way a DJIA with a 65 (average of the two) P/E is going to be drawing the funds of value guys. And if you can’t get their money and you combine that with all of these leading growth funds that have anywhere between 5 and 25% cash you have a market that sure has a lot of people that have NO interest in buying. This is why we have no volume on this rally.
Eventually, one day, they will have to put all that money to work in the leaders. But right now they are not. When they do, TRUST ME, I am joining them in making a LOT of money by riding on the backs of the big fat elephants.
Aloha and I will see you in the chat room!!!
Comments
8 Comments »
The Dow is actually on a P/E of about 13x 2008, 12x 2009 if you believe the estimates. The highest P/Es in the Dow are Coke and P&G at about 20x CY. AIG is the lowest at about 8x, again if you believe the estimates. I’m not sure how you get a 67x PE, but I doubt the Dow achieved that even in the Spring of 2000, much less now. The S&P 500 is at about 15x CY and 14x NY, so again, well below the Dow numbers you cited above. From simple math, for the Dow to have an average P/E of 65, at least one member must have a higher P/E ratio, and this isn’t the case.
So if the estimates are correct (a biggish “if,” if we get a deep recession), then the market is not expensive, especially in light of current low interest rates.
That said, I’d agree with the rest of your commentary. There doesn’t seem to be much buying interest, and there’s plenty of fear out there that things could get worse. And in fact, they easily could get worse. This bank/mortgage/liquidity crisis is far from over. It has just quieted down a smidgen, but it’s still there and will flare up again and again for the next year at least. The persistent and accelerating decline in real estate values is going to put more and more pressure on homeowners, and by extension, banks. And if unemployment ticks up as it has in every other recession known to man, then mortgage delinquency rates will rise further, prompting another round of write-downs at the banks, and further financial chaos.
February existing home sales, by the way, did not rise. Rather, they declined by less than they declined in January. In the funhouse-mirror world of professional economists, that counts as “growth.” No sane person would look at it that way.
Thanks for your site. It’s very interesting, and I enjoy your unfettered comments.
Regards,
Kim G
Boston, MA
That is why watching for P/Es should only be referenced from a history standpoint. Forward P/Es are just predictions and we know they are mostly wrong. What we actually know, the Dow P/E is in the 60s and historically it tends to be around 12.
Glad to see another Bostonian in here! cash is king…and all the greats would be on vacation!
the homes sales junk is semantics….technically it rose sequentially from Jan but down yr/yr(“Existing-home sales climbed for the first time in seven months during February as buyers appeared to take advantage of sharply falling prices. Home resales rose to a 5.03 million annual rate, a 2.9% increase from January’s unrevised 4.89 million annual pace, the National Association of Realtors said. Year over year, sales were down 24% from February 2007. The median home price was $195,900 in February, down 8.2% from $213,500 in February 2007. The 8.2% drop was the largest on record, the NAR said.
regarding DJIA p/e, i have seen on some websites that 65x fwd # with data source listed as bloomberg but looking at the index source Dow Jones website it does saw 14x trailing and 12.6x forward
http://www.djindexes.com/mdsidx/index.cfm?event=showavgstats#fund
I actually downloaded the Dow stocks and their earnings from my Bloomberg and calculated the P/E myself. I can guarantee anyone that the P/E is nowhere near 65x, neither on a trailing (actually reported) basis nor forward (estimated earnings) basis. Absolutely, positively not. If it were, in this environment, I’d be heavily margined and short the entire index. And while I’m not going to look it up, I’d be very surprised if the Dow was EVER at a 65x PE, even in Spring ‘99, given that it’s filled with “old-economy” stocks. (By design, I might add).
As for housing, economists take the actual number of homes sold each month, and then “seasonally adjust” it, which typically involves multiplying it by a factor. This factor is designed to give you an annual rate that would typically hold if the sales pace in any given month was representative of the entire year. In my view, this takes a straightforward number (actual number of houses sold) and mucks it up, thereby making it much harder to analyze.
As you might suspect, the number of home sales varies by month due to the patterns in peoples’ lives. More people want to buy homes at the end of the school year so their kids can start at a new school in the fall, rather than mid-year. Likewise, most people don’t want to go through the hassle of buying a new home around Christmas, etc. In the colder, northern part of the country, it’s a hassle to tromp through open houses in January, etc. So economists try to seasonalize these numbers, which they do by applying complicated mathematics.
In contrast, I look at the numbers on a year-over-year basis. This also involves some distortions, but they are minor. For example, this year Easter happened in March vs LY in April. That makes the March and April’s Y-O-Y comparison somewhat inexact. Still, I think that looking at housing turnover this way presents a much more accurate picture of the housing market than a SAAR. And so, on this basis, housing declined less (units sold down 18.5% vs Feb 07) in February than in January (units sold down 22.1% vs Jan 07. But any way you paint it, the housing market is in deep distress, and not showing much sign of stabilization.
The accelerating price declines also suggest, in my view, that the bank writeoff problem has only just begun.
Regards,
Kim G
Boston MA
quite a write-up. i simply meant statistics can be viewed however one wants especially if you listen to enough different economists. you must be a broker/financial industry or a very avid investor to study a statistic in that much detail…..in the end it’s all just statistics that can be influenced by endless inputs/variables(just like when people talk about retail same store sales comps, where there are all kinds of caveats like # of weekends y/y or weather patterns,etc…..) than can distort and these national stat’s are general #’s that aren’t a proven accurate predictor and not one i could make an invest decision off of. i’m not smarter than the market and all this minutiae causes info overload to me so i just play it stupid like IBD…having worked on institutional sellside and being around all the constant barage of data and now working professional in real estate, i can conclude that everyone has opinions and if you listen to enough of them you get analysis paralysis. especially as the market has shown that when news is always the worst when it is the right time to buy, not that i’m saying the worst is done by any means.
This guy is a little too interested in the P/E.
You are focusing on something that has PROVEN TO NEVER Matter to a stock on its way to becoming a MONSTER STOCK.
To be honest. FUCK P/E ratios! Who cares!! You are focused on a moot point.
Listen IBD RIGHT IN ITS PAPER SAYS THE P/E RATIO ON THE DJIA IS 61.9. IT IS AT A CURRENT 5-YEAR HIGH. A PAPER THAT HAS ITS KIND OF REPUTATION IS NOT WRONG. YOU BETTER BELIEVE THE DJIA IS AT A FIVE-YEAR HIGH OF A 61 P/E…AND YOU BETTER BELIEVE THAT I REALLY DONT CARE. IT IS JUST STUPID THAT PEOPLE SAY THIS MARKET IS CHEAP. THIS MARKET IS EXPENSIVE!!!
CANSLIM….where is the P for P/E ratio in that???
You will never find it because all of history’s greatest winners had high P/E ratios BEFORE they took off on their fastest, most calm, and biggest runs.
CSCO had a P/E over 70 BEFORE it took off on its 80,000% run. This is normal and this market is expensive.
All that matters is price and volume.
As of today’s close…Bloomberg Terminal states the Dow Jones Industrial Average’s p/e at 66.49.
Per Bloomberg Terminal: the last high was 3/15/02 when the DJIA p/e was 30.38.