Buffett And The Mortgage Lenders Try To Stop The Inevitable Stock Market Correction; It Is Crap Like That That Will Ensure A Longer Bear Market

Stocks started off the day in a very bullish manner as all the indexes climbed early on, looking like they were on their way to putting in a follow-through day. However, proving that you should never get too crazy with intraday trends, the stock market reversed off the highs around 3pm and sold off into the closing bell before a minor bounce saved the day from being a total train wreck.

The reversal has to be taken as a bearish event, since volume picked up and the Nasdaq took a 1.3% gain and turned it into a small loss. In bullish tapes, stock indexes do not give up the early gains this easily this often. Yet since this bounce has started, besides a couple of days, stocks have continue to close weak closing up the day. This is happening after two straight up days on lower volume which clearly shows that mutual funds have no interest in heavily accumulating shares in this tough market. Therefore, this is still nothing more than a bounce, UNTIL THE MARKET PROVES THAT IT IS SOMETHING MORE. Don’t hold your breath.

The leading stocks of the past five years in the big-cap tech sector and in the chemical sector showed some bearish action at key resistance on the charts. The reversal at or on the 50 and 200 day moving averages by so many leading stocks should act as very tough resistance in the stock market as the leading stocks should start to weigh down the index, now that the other big caps like MSFT INTC are selling off on higher volume too. When you have the leading stocks based on % gains and the biggest stocks breaking down, rallying on lower volume since the bounce started on 1/22, and now failing near key resistance on higher volume, you do not have a healthy market. You have a very sick market where few stocks can survive.

Luckily, a lot of the stocks that are surviving, we are also going long. So it has been good on the intermediate short time frame and the very short term time frame it has been very bullish and has helped keep the portfolio strong while our leading shorts rally on lower volume. But that might be changing with so many of those stocks reversing at those key lines and the market getting overbought with this low volume rally.

I heard again, today, once again, from the bottom callers who are for sure that the Buffett 800 billion insurance policy will firm up the market that I just had to sit back and laugh. I mean the stocks that benefit the most (ABK, MBI) both took the news poorly and look like they both want to rollover and shoot for new 52-week lows. If that is the case, then I would like to think that the market would have a tough time holding up and therefore lower prices in the indexes should be realized.

Obviously, like I keep saying, if the market continues to rally, I will continue to enjoy and reap the gains of the longs that show up and are doing well. However, until more stock chart patterns show up that look like the ones in the ‘past big winners’ there is just no way I can trust any bounce. Even if that bounce is sending stocks that should be breaking to pieces up for a few points, it is not worth trying to be superman by trading in and out of these issues. Instead it is best, for those that are experienced, to be patient and short the low volume rallies. There will always be some longs that do well (we are long quite a few of them) on these bounces but most longs will fail and will slowly chop at most peoples portfolios during this time frame.

If you go back and study the past bull markets and study the top stocks like those in 2003 you will quickly understand how important it is to be around at the start and not the middle or worse (when 80% of newbies show up over the past 5 yrs) the end. When you let the bearish or choppy tape, like this one, get to you because you are either making small gains, no gains, or some losses, you start to lose the long war. You can lose MANY battles but you must never lose the war. Those that give up during bear markets, without giving themselves at least a few years to test themselves, are sad individuals. You never had a chance, if you do this.

The best traders know that it takes at least one to three years to FULLY grasp the idea of buying correctly and then selling on the way up to lock in most of those gains. So if you are new to the market and you have not made a career of making big gains in longs during bull markets, you need to think twice before letting go with the shorts. If you can not handle a stock running against you at least 7-10% a lot of times before finally getting it right and nailing that 50-99% gain, then you definitely should not be shorting.

Right now, the chemical stocks are not cooperating (what is new, by looking at TNH the past year when it tried to top) as they looked like they were going to print lower highs on lower volume that would have led to a rollover breakdown. However, the stock is drifting higher but it did print a very bearish reversal today on an increase in volume. So if the shooting star is confirmed by a breakdown on volume then you can be pretty sure the top is in. It is just amazing they are still holding up considering how much distribution hit them in early 2008. That along with the market clearly under selling pressure, should have had the stocks cracking by now. However, they are not. But they are still below the highs in January for POT AGU MON MOS TRA so they are still printing lower highs and the volume on this move higher is not as powerful as the selloff. So obviously the funds buying here are not buying as much as the other funds were selling in January. This should eventually lead to these stocks rolling over and breaking down as the leading stocks are always the last stocks to crack. But since they rally the most, they fall the hardest.

Now, there is something really great right now. I have heard/seen from a couple of people that think these chemical stocks are breaking out so they are buying a lot on the breakout. I want to let all of you newbies know that I was long TNH for an over 300% gain and I was long MOS for an over 400% gain. So I got these HUGE winners in 2006 but I made one mistake that I will never make again. Even back then both stocks were the top two in the sector and the sector was in the top 10 of the IBD 197 industry groups. Why I did not load up on them, I will never understand, but in hindsight I made poor choices not loading up on this leading sector. It was an even bigger mistake because the charts were hot!

But my point with this is that if I was long TNH for a 300% gain and MOS for a 400% gain, why would I be wrong here? You don’t think I can’t tell when a stock is topping? Well…maybe I can’t. It is always possible these stocks will run some more but do you notice how EVERYONE is talking about these stocks? Don’t you think, if you are one of those “believers,” that you might be a little late with these stocks up over five years in a row with TNH producing a total 3000% gain and MOS producing a total 1100% gain. If you are brand new to these stocks, ask yourself this: If I noticed these back in 2006 and went long them near the end of 2006 and after racking up big gains then sold them all near the highs and am now looking to get short, maybe and just maybe I could still be right even though we are suffering some pain (around 8%–is that really that bad???? NO).

And let’s look at this market in some perspective. Has anyone looked at the commodity charts recently? If you have not, take a look at some commodity prices. You will see what looks like short-term reversal on many different softs and hards. To go along with those reversals, we see all the past leading sectors falling (besides chemical) on very strong volume. So I am not sure why some think that after the huge gains that we have had in these stocks that they are just going to keep on going and everything else is going to go down. Unless you live in an institution, there is no reason to think that one group that was the leader during a big bull market will continue to lead during a bad bear market and then possibly keep going. Is TNH Cisco? I don’t think so. It too has to come to earth. Just like CSCO did. And I will ask you ONE MORE TIME, how are the “bag-holders” of INTC CSCO ORCL MSFT JDSU and QCOM doing after all their “value” buying in 2000, 2001, and 2002? There sure are a lot of rhetorical questions tonight, aren’t there? OK, now I am going to far. LOL.

I will say this again, the best stocks are always NEW FRESH faces that NO ONE has talked about before their breakout. Where was all the talk about FSLR before FSLR’s big gains or TNH or MOS? I know I didn’t see a whole lot of chest pounding and table thumping on any of these big winners until AFTER the fact. The truth of it all is that those that think GOOG BIDU RIMM AAPL are bargains here are the EXACT same people telling you to buy MSFT INTC CSCO and DELL as they came in back in 2000. Yes, it is different now to then in the sense of a bubble. But it is NOT different in the sense that this bull market has topped and is entering a bear. So what if stocks did not run up to 1000. They ran up to 500!!! Good enough. Yes companies without earnings didn’t run but that didn’t happen in any of the other bear markets from 1929 to 2000. You can have VICIOUS bear markets without a bubble and those pros that keep doing me a favor (said with a huge hint of sarcasm) and reminding me that it is different forget that it is never different.

It is pretty sad folks, I read a lot of people that say we can’t possibly be near a top since we are not in a bubble, without realizing that every single sector that rallied for the past five years is selling off and every single sector that rallies in a bear market is moving up the list of new highs now. If we are going to see a fresh bull market, it is going to be a month to six months before we can even think of seeing any NEW FRESH leaders with perfect charts that are not coming from stocks that came from previous large runs. It take a while to flush out the old leaders and then setup bases for a new round of innovative entrepreneurial exciting companies that are breaking out of perfect chart patterns.

Until then, I am going to keep repeating the same lines over-and-over. And that is to keep all your longs/shorts small, maintain a very high level of cash, do not make any purchase unless you know exactly where you are going to sell, and NEVER hold a stock that moves against you and your cut loss area. Get rid of the stocks that do not work immediately. By doing that you can never carry large losses and you can constantly move your money into stocks that are working.

There is always a bull market somewhere in a bullish sector in a bear market. They are very hard to find but if we are patient we can get some of them while at the same time the professionals can short the lights out of this market. And then a new bull market will come and will setup the exact same charts that you are seeing me post in the ‘past big winners’ section of the website. Just study EPIC in 2003 and LMLP in 1999 to keep your spirits up when the market has you down. And if that doesn’t do it, do yourself a favor and go listen to the William J. O’Neil interview done today on Tiger Financial News Network. It was a fantastic interview and confirmed that he sees the market EXACTLY THE SAME WAY I SEE IT! Now I know we are on the same page. And guess what? He KNOWS there will be another bull market. How? Because there always is another bull market. If we came back from 1929, we can come back from almost anything.

I want to remind readers, that do not know me, that I have the disease Multiple Sclerosis and therefore sometimes (usually once every one to two weeks) I have to go see my doctor during market hours. Tomorrow I have an appointment scheduled for 9am HST but I might hold it off until later as long as he does mind. Combine that with the fact I wake up at 630am HST and you can see I will not be logged on very much. But if you come in anyways I am sure something will be going on as there were over 15 people in the room at once despite the hacker attack of the chatblazer system that kept a few regulars out that are normally in. So if I am gone, there is bound to be someone in there that can help those that need help. One thing is for sure, it is impossible not to learn in there. Finally, we are starting to see some real diversified fields of talent and for that I want to thank everyone. This is MUCH better than making a lot of money alone. No matter what those on Wall Street say, it isn’t fun or fulfilling. It is quite empty.

ALOHA and I will see you in the chat room for a few hours before I have to go see my neurologist for my MS. Be careful out there and keep that cash high.

Comments

4 Comments »

Comment by sc99

2008-02-13 08:06:38

Hey Josh. Once again I’m totally blown away by your amazing commentary. Everyday I wonder if you’re going to top your last one and sure enough you do! I won’t be expressing it here everyday, but please know that I greatly appreciate each and every one of your education packed commentaries.

On a much more important note, I’m sorry to hear of your MS. I know you’ll be battling this with the same unwavering passion and drive that you show here everyday. My thoughts and prayers are with you.

Comment by MauiTrader

2008-02-13 11:06:20

Thank you so much sc99. it is words like that will guarantee i give my all for you.

People like you make this very special. if everyone was like some of the people that don’t do their Due Diligence before they come in here, I sure wouldn’t be feeling to great. lolol.

However, you have been an excellent motivator for me. sc99, you are the reason why i work so hard.

and yes I will fight this stupid thing hard. My only problem…i hate needles so this is going to be rough. I dont like sticking needles in me every day.

Comment by MauiTrader

2008-02-13 11:27:54

Very strong rally. Once again, we are being led higher by Oil&Gas, Metals, and Steel-Producers. These were bull market leaders back in 2004, 2005, and 2006. I should know as I had these (that I can remember off the top of my head, use my mauitrader.blogspot to research what else I was long):

IST (MT): 350%

ERS: 550%

BOOM: 500%

ZEUS: 80%

STLD: 40%

These are all personal returns from my steel holdings back in the day. There is NOTHING fresh and new about this.

This is just another April 2000 to August 2000 kind of bounce. Or for a better look at how this market is acting check out 1937.

Comment by MauiTrader

2008-02-13 11:36:07

There was a 2 1/2 month rally and back then EVERYONE was for sure market bottomed. Next thing you know the DJIA loses 40% in a little over two months.

1937 was a very bad year. Going into March 1938 from the 1937 highs the DJIA dropped 50%