Dangerous Market For Trend Followers
July 22, 2008
Those that practice what they preach are usually pretty happy whenever they see that everything they have been warning about is being practiced by so many. Raising cash during this troublesome market has proven to be very intelligent and despite the 20% from the top in November by the Nasdaq this market still has not rewarded trend following short-sellers like it has in the past. This is making it a very difficult market for anyone who has a time frame over one day or for someone who does not actively invest and trades off the monthly charts instead.
My personal favorite system/methodology is the CANSLIM system and those that have been following it have remained in cash avoiding the many investing pitfalls that many will, sadly, have to learn the hard way on their own. Me, lol, I have seen this before. Never in such quality stocks. But heck if we are turning into a global world then a global economy is what we are probably in store for. So don’t get too depressed, this too shall pass. The grass is greener on the other side of the fence until it isn’t. Right now, I have to continue to press hard that those that love to invest in the market to score the big hits in a nice relaxed amount of time continue to wait for better moments. The best bottoms are built with a rising VIX, a rising put/call, and a falling stock market on lower volume. Not like the big volume we are seeing now. No, it rarely is that simple. This is more complex than we know. I just pray that this is not a Japan 1989 with the Nasdaq in 2000. Hopefully, it is not, but still there is plenty of room to grow.
Be careful out there, keep that cash high, and remember do not go back in until we are given clear “buy” or “sell” signals. For now, everything is muddy. Keep out of the water. Crocodiles and sharks flourish in this environment. And I am not talking about the good sharks either. The great white man-killers of all great promise that cost too much commission and too little in invested capital. Pray for a better market. It will come.
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“When the U.S. is in real trouble, you tend to get corrections of 30% to 50% in the Dow Industrials. That happened in 1937 (a Depression year), 1940-42 (start of World War II), 1966, 1969-70, 1973-74 and 1977 (years of Vietnam, gold flowing out of the country, OPEC oil price increases, Soviet Union expansionism, rampant inflation and 20% interest rates during the Carter era).
“When basic conditions in America are not as bad, like in 1948-49, 1953, 1957, 1960, 1980, 1982, 1990, 1998, you get smaller market declines of around 17% to 27% off the peak.
“Strangely, many of these declines end in the fourth quarter of the year…So, never let yourself get discouraged or lose your confidence; otherwise, you’ll miss the next bull market.”
-William J. O’Neil
Thank you Author on that short history lesson. People need to realize the market will come back. This is not the end of the world. There is plenty of time to wait this out, make a little money on select longs, shorts if you are swift, and then have ourselves fully ready for the next bullish phase of the market.
A bottom will be made after a low vol rally fails to send the stock indexes lower and after a selloff on lower volume a bounce on higher volume will follow…this is your moment to look to get long again. As long as we are selling off on lower volume then the chances are low we will get a tradeable rally unless volume came in higher at the end of the selloff. Bottom line, we need to see selloffs on lower volume followed by much heavier volume rallies with more than just medical leading, like now.