DJIA Hits A New Six-Year Closing Low; Why Do More People Try To Be Cute And GUESS Bottoms Than Follow The Trend To Make More Money With A Smart Cut Loss Strategy?

February 19, 2009

Stocks were slightly down across the board, besides the DJIA which was up a tiny 0.04%, and the move lower came with higher volume on the NYSE and lower volume on the Nasdaq. The higher volume and near 1% drop for the NYSE and SP 500 were distribution days that only add to the pressure this market has recently come under in the short-term.

The losses while not huge was still enough to tell me that the market is not looking at the recent selloff as a capitulation move and is instead looking at it as a regular move in a steady long-term downtrend. If we would have had a major rally I would say that the market might be trying to hammer out a low. But with the DJIA closing at a new six-year low with the other indexes close to new lows it appears that the safe side is the short side as very few stocks are moving higher.

More proof of that comes with my own long holdings. While my two Gold longs are doing well (biggest long positions in my portfolios), the rest of my tiny longs are not, unless it is a pasta company or an education company. Five of my eight longs could be full cuts if they have just one more down day over 1%. That shows you have hard to impossible it is to be long this market. Unless it is gold or VERY SELECT medical or pasta company, your chances of making money on the long side are still very small.

Even though some crazy bottom “pickers, guessers, wishers” believe it is smart to buy on the way low, everyone that held or bought ENE, FNM, FRE, WCOM, BAC, C, BSC, MER, AIG, or LEH on the way down can tell you it is the most ignorant thing you can do. Why? You have absolutely NO REFERENCE POINT FOR A CUT LOSS…until you go broke! Nice job. Waiting for a bullish trend to develop with beautiful and CANSLIM chart patterns and stocks setting up is the only smart way to go about handling any kind of market environment.

As long as the trend is lower on the long term, the intermediate term, the sub-intermediate term, and the short term, it is foolish to fight the trend by buying stocks. The only smart thing to do when the trends are down on all four time frames is to be short.

Now if there were industry groups with leading stocks moving higher in a bear market, you are OK going long those. However, since the October 2007 top, there was only one period (March to May 2008) where the leading industry group with leading stocks actually gave great returns that could make you wealthy. The rest of the way down, the few groups that have rotated to the top have been so late in their runs that soon they are breaking down too.

When you see new leaders breaking down instead of taking a market higher, over-and-over, you know there is something wrong with the market. When the Medical stocks took leadership, the market should have based out some before breaking down if those stocks were going to have a prayer. The same came with Security stocks and Education stocks. As soon as they took the top of the list another selloff in the market was soon knocking them off the list.

Finally, this time, a group has made the top of the list and the stocks in that group continue to setup in what are actually good (NOT “great”) patterns with a few stocks showing very nice patterns that have made me some good money. All it took were two good longs and a couple of strong weeks in that sector to turn my account from having a mediocre month into a great month. This is what is supposed to happen in normal bear markets. You are supposed to still have a few groups that can produce winning stocks that hold up when the market falls. However, this market, is NOT normal. NOT EVEN CLOSE. This is one ugly market.

The great news about that though is that if you are a trend follower and realize that there are ZERO “hot, max green BOP, huge accumulation, excellent price action filled” charts right now, that it would be smart to instead focus on the short side. Well, that is exactly what we have been doing since the March to May rally attempt failed. Since then it has been nothing but ugly, besides some gold stocks, a pasta stock, a medical stock, and an education stock. As you will see below the clear winners are the shorts.

top shorts with their total returns since my first purchase MAKING ME MONEY THIS WEEK: AAPL 43% CETV 92% CEDC 81% SDA 78% CYT 66% AMX 49% GGB 60% OKE 42% POT 51% MOS 54% TITN 52% RIMM 57% IPHS 43% AMSG 21% RDK 29% PRGO 23% MCY 27% BOH 21% SPG 58% ARB 72% PLCE 27% CASY 28% CEO 33% PG 21% K 19% LLL 19% APD 44% CPRT 21%(this is just 28 of our 43 shorts–the rest are new and WILL return what these have returned)

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