Do You Have That Feeling That We Might Not Have Put In The Ultimate Bottom?

April 22, 2008

Today was not that bad, overall, minus a few stocks that were completely earnings related. However, the fact that volume did in fact pick up is still none-the-less technically a distribution day. Still with volume well below the 50 day volume average, it sure is hard to get too bearish over a day like this. But at the exact same time, it sure is hard to get really bullish here when I see so many potential nice charts start to setup only to not make it.

The higher volume selling that hit the market today was the second below-average volume distribution day in a couple of weeks. While long-term this is nothing serious, on the short-term a few more days of this could put a monkey-wrench into this rally. Right now, as it stands, though, I would not be too worried about these two days since the put/call raises to such high levels on these kind of days. If the crowd was getting more complacent, I might be a little worried that the selling might pick up.

But the fact volume remains low and the fact that almost zero stocks have shown up the past two weeks as strong short candidates is a clear tell that this isn’t a market you necessarily want to be short…or long really.

The worst index today was the SP 600 which fell 1.7%. That is not good as it continues the trend of small caps underperforming big caps. The IBD 85-85 also fell 1.4% which was large but considering the Nassy fell 1.3%, it is a victory that the 85-85 index did not fall 2% or more. Overall a solid showing by leading stocks.

Remember, just because you have some distribution days does not mean that the rally is over. A few distribution days are common in a bull market. Why? Because you need these scary days to flip the daytraders out. There are traders out there that jump at the slightest sign of selling and instead of selling maybe only 20% will sell 100% after the slightest hickups. But single day selloffs are normal and are good for a bull run, if you want them to last a while. You must shake out the weak holders and move their money into strong hands.

The other great thing about today’s selling is that the chunk given back was still orderly and not nearly as powerful as the recent gains that we have seen in two of the past three sessions. Those gains came on heavier volume and we had more powerful gains than we did on the selloff in between those days and today. Still it would be nice to see volume actually get over the 50 day volume average. I believe that this rally will have to volume show up at some point in the future or else I just don’t see how a low volume rally can not end up real bad. The last low volume rally from August to November led to the selling recently and the last low volume rally from late 2006 to early 2007 ended up pretty ugly in February when a China selloff started a global mini-crash.

Stocks are completely giving mixed messages as after starting to get a few nice charts to near-perfect charts, I am starting to see more and more not act right. BRKR is the most recent disaster pattern. It was recently a near-perfect chart and after our first buy was doing excellent. But since that 4/11 day where all of us sold anywhere from 25% to 100% has been a different story. And today the chapter of that book finally closed with a gap below the 50 DMA on big volume.

The bigger problem was how BRKR acted intraday after gapping down. This happened recently in ISRG and also happened in NFLX,,,and blah blah blah. This tells me that if something you own gaps down in the AM off a bad earnings call, go ahead and sell it. I gave BRKR a chance to retake the 50 DMA and instead it went lower proving a new subscriber Ian right in his assumption that stocks will not hold. Lysis also mentioned this and this is correct. Great job guys, you guys felt it a day before me. I like to give a stock the benefit of the doubt and since I already sold 25% it seemed like the right thing to do since the obvious play was to panic sell. Too bad that obvious play was the right play.

So I wouldn’t wait around if your stock gaps down off bad earnings. Instead I would get out. And if you are nervous with your stock ahead of earnings, go ahead and sell some down. In this market it is OK to be cautious. More stocks are failing than are working. we just focus on the stocks that fly that we miss or have sold and have ran away from us. Hindsight is always perfect and that is why I try to avoid it.

What I will not avoid is what I will be focusing on come tomorrow. If I am to remain bullish on this market I will need one of two things tomorrow. I will either like to see a pullback on low volume or a rally on higher volume to show that everything is OK with the market for now. After last week’s strong gains of 4.9% or greater, today’s loss seems relatively minor. But like I just said, if we shake it off and continue to slowly drift higher here, everything should be great for our longs. If my longs start reversing lower below the 50 DMA and oil hits $120, I might reconsider the thoughts I have of being slightly bullish and switch.

Besides the horrible luck with BRKR, other leading stocks also had a strong day and if they continue with their uptrend it really isn’t going to matter if volume comes in or not any time soon as stocks can drift higher on low volume. That is why the old saying “never short a dull market” is so true. It just is not a good idea. If you say “what about BRKR? It fell.” Well, to that I have to say, “that wasn’t very dull. Was it?” There was a lot of volume there. This is one of the reason I have not been going short stocks also. Very few to NONE are breaking down on heavy volume right near the 50 and 200 DMA. They are all either already down beyond 25%, too far away from their key moving averages, the RS line does not show negative divergence, or the volume is way too low.

The one group I know I would never be short and still looks great to be long (but not to initiate fresh buys) is the oil group. Oil climbed $1.89 to close at $119.37 and I assume $125 is right around the corner if this trend continues to move the way it has been. This strength is obvious in the new highs list with 62 of 130 new 52-week highs coming from the energy sector. The next two best were agricultural and chemical stocks with six in each group. There were 184 new 52-week lows which is 54 more than new highs so the short amount of time the new highs were beating the new lows is now over. The breadth being negative before Tuesday’s session was the hint that today’s session might not be that great. But if you are long stocks like oilandgas-US expl prod stocks you are KILLING@ it.

The top five industry groups based on six-month price performance are OilandGas-US Exploration/Producation, Chemicals-Fertilizer, Machinery-Farming, Steel-Producers, and Energy-Other(solar, coal, nuclear, etc…). If you are long stocks in those group you are doing very well right now. We are long FEED, NEU, and CMP which are all up between 57% and 77% within 1 1/2 to 2 1/2 months. This is normally how all our best longs are supposed to perform. Every stock I ever go long IS SUPPOSED TO act just like this NEU and CMP. These two stock have been a bit of a stinger too as they have given me scary profit taking signals by having at least a couple of days where the stocks appeared like they were going to crack wide open. If I can find more stocks that look like my ‘past big winners’ and that look like BKE and DGLY but with HA’s BOP, I think I would like this market a lot better. The fact that volume is still missing and such poor action exist around the earnings season, to go on top of all my max green charts being nowhere in site, will keep me cautious for a while.

Despite that, the put/call is at .96 (according to IBD, 1.06 at the CBOE site) and it seems that every time we get a little bit of selling, traders get more and more active in putting out puts. I guess they expect the next leg to be down. Too bad the NYSE short interest ratio is hitting another all-time high of 11.25 which means it now takes OVER 11 days to cover all the shorts on the NYSE at the current average daily volume. That is the highest it has ever been and if volume does come in above average on the days when we are higher you better believe all that sideline cash by mutual funds, the retail crowd, the put buyers that will have to buy stock to cover their put, the shorts that will have to cover into a rising market that the big boys are buying is going to push stocks a lot higher.

Right now the market is expensive in the DJIA with a p/e of 64 and I am not sure what fund is buying the DJIA with that p/e ratio. So if volume doesn’t show up in this market any time soon, you may have to do some hard work to find stocks like MCF as very few stocks are going to be showing up in the scans that are loaded with the right characteristics that I look for. Heck, at least the Nasdaq has an A- acc/dis rating. A little bit more volume and that should get it back to an A which hopefully will help produce more longs.

Basically, there is a lot of wishful thinking about the market, and a little bit more frustration watching things not act as they should. This is why I still believe holding anywhere from 50% to 60% cash is the right thing to do. There are some nice stocks to be long, with most coming from the energy sector, but most stocks are still just drifting along. The bottom line is: I need to see volume to the upside or downside, before my cash level is going to drop. After today it is back to near 50%. Hopefully, I don’t have to raise too much more cash. I would love to see my few select longs do well in this sleepy market.

Aloha and I will see you in the chat room where sleeping the day away might be a wise idea, if volume remains that low. Better yet, at least we have the start of the MLB season, the start of hockey playoffs (Rangers, Penguins, and Sharks all made it!!! Capitals and Ovechkin did not. :(), and NBA playoffs. Combine that, with the north shore getting less crowded as all the mainland transplants go back home and you have some uncrowded days at the bay and a wonderful and powerful almost DOUBLE OVERHEAD (at dumps it was double–really south, breakwall was almost double–my backyard) swell to start the summer season, and you have an AMAZING start to the week!! Hopefully, there are no more BRKR’s and we can get some more stocks that are like POT MOS and AGU–those are some amazing parabolic climax runs!

ALOHA!!

Subscribe To Site:

Full Post Feed | Summary Feed | Comments Feed

Posted by Joshua Hayes | Filed Under Market Commentary

Comments

RSS feed | Trackback URI

1 Comment

Comment by Joshua Hayes

2008-04-23 02:27:15

How many professionals do you know that come out and IMMEDIATELY admit their mistakes? Cramer waits till the stock is down 50-60% to say he is wrong.

I tell YOU IMMEDIATELY and then apologize because I expect perfection from myself, EVEN THOUGH I KNOW IT IS IMPOSSIBLE IN THE STOCK MARKET.

This happened to me before and it will happen again. In raging bull markets like 99 and 03 it did not happen. But there are always a few of these, thankfully stocks like B** and D*** are on the trend to make up for it but even they could fail in this market. Nothing surprises me and this is why cash is king.

Most stocks that move like the stocks I am going long should NEVER be losing their max green BOP or even moving down. We went long a stock recently that acted JUST LIKE THEY SHOULD ALWAYS act. And in the RIGHT MARKET they do

Sorry, the comment form is closed at this time.