Nasty Day Ends With All Indexes Suffering A Distribution Day; Day Six For DJIA And SP 500 Officially Puts The Rally Under Pressure
May 22, 2008
For those that do not know what that means, it means that it is time to raise cash by selling down some of our longs. We recently have gone long quite a few stocks that have performed very well. Some of you made the right decision and took a lot of profits when some were up 20% to 50%. That was very smart. I did take some profits but with my larger holdings I was trying to hold for some powerful gains, thinking that volume still might enter the market to the upside as funds went back to work so they would not show underperformance.
Instead it looks like they are starting to return as sellers and with all the indexes reversing or failing right at the 200 day moving average it appears that the 50 and 200 DMA’s will be resistance for the market that the funds will use to sell into. I pray that I am wrong and that tomorrow we are up a lot so that we can resume the uptrend with our longs. However, I am not wishy-washy and know when it is time to pair back my positions. After today, it is time.
Some might be upset that you are not selling at the top and getting the gains you thought you were going to get. But trust me, one day, WHEN VOLUME IS HUGE ON THE indexes, these same stocks WITH EVEN BETTER AND MORE GREEN TO MAX BOP GREEN CHARTS will show up and run and produce 300% to 2000% gains. Sadly, too many of you will be used to selling too much off when the stock is up 10%, 25%, and 50% that you will miss out on most of the gains. For some of you, that are EXTREMELY new, that is OK. But for those of you who have seen this game before, you know that selling too soon is not the smart thing to do.
I would rather have a 50% gain turn into a 25% gain and then sell it all with only a 10% and THEN KNOW THAT I AM WRONG, instead of selling everything with a 60% gain only to watch it then subsequently run 300% to 500% (which is still doable as I had more than a handful do that since Aug/Oct 2006–that is when the market got a lot harder as the VIX completed fell through the floor.
Even though it remains very difficult to put together any large victories. Stocks in the oil&gas arena are still producing some solid gains. So what that 9 of the top 10 industry groups were down today, for the past few weeks they have been on fire. That is why in sectors that had the most stocks making new 52-week highs there were 9-out-of-10 that were oil&gas. Anywhere from 28% of the stocks to 100% of the Canadien Int. made new highs. This is a very huge share of one sector to control over the market when it comes to leadership. The only other group that had over 25% of the stocks in its group making new 52-week highs were the Steel stocks with 28% making it to a new high.
There were 224 new 52-week highs compared to 149 new 52-week lows. If you guys do not remember and if you newbies do not know, new lows were beating new highs immediately after the selling starting. In fact new lows started to beat new highs during the summer and even a little bit before that. New highs have been lagging for so long that I got so used to it that when the new highs started to show up and match new lows I got very happy. That was one of the reasons for my bullishness as something VERY important like new highs showing up and beating new lows on down days and new highs KILLING new lows on up days shows a VERY healthy and broad market. This is the strength I am looking for and since we did see new highs start climbing I had no choice but to lean to the bull side. Until yesterday, from the March lows, that has definitely paid off.
But now it is very hard to be a bull anywhere else but energy and steel. Out of the 224 stocks hitting a new 52-week high today, 123 were energy, with 11 in metals, 9 in medical, and 8 in utilities. These were the only groups with more than 5 stocks hitting a new high. The transports and mining each had 5 in their groups hitting a new high. But that is all that was leading us during today’s selling. Imagine what is going to happen when those 123 energy stocks decide to stop going up.
If oil is what is keeping this market up, we could be in a lot of pain in the short term, if we are blowing off a top here soon. The futures contract on a daily arithmetic sure does look exponential and there is only one word to describe MXC and DO and that word is parabolic. If anyone is actually considering purchasing these stocks you have severe mental problems. These stocks are so far away from their 200 day moving average that even if you told me it was a for sure thing they will be higher tomorrow, I would tell you to that I still am not buying them. I simply do not buy stocks that are up 975% in one month. LOL. If anything I am looking for a top which appears to have been Wednesday.
Do you notice the tail in the upper range of the stock price for MXC? Do you notice that the volume is even larger than the HUGE HUGE HUGE day yesterday that made the rest of the big up days and big volume surges look weak. PDO is still closing very strong and that is why I still own 15% after taking most of it off today and tomorrow. A 207% gain in nine days is pretty good. But sadly this was only a normal position. It was CANSLIM so it got more than most but due to where it was at on the chart, by being so far away from the 50 and 200 DMA. But after having so many up days in a row (10 out of 11 up and 6 out of 6 up) MXC and PDO are clearly closer to a top than a bottom. Watch out and DEFINITELY DO NOT BUY IT UP HERE. Even a pullback would be so extreme and would mess up these charts because they both just had CLIMATIC moves today on CLIMATIC volume. These stocks runs are done basically (I am sure there is still a little bit more they can go…but how much further can they go really?).
The stocks that are clearly lagging are the retail and banks. Banks make up 38 of the 149 new lows being the number one group in weakness. So make sure you stay out of this group as even a leading stock in a laggard industry is not a safe buy. The banks estimates for the next few quarters are so bad that you can be sure the market is not looking for anything solid any time soon.
This may be why the put/call has jumped to barely over 1.00 as traders started buying puts and took the index to .86 to over 1 on just a 1% drop. I wonder what would happen after another 1% drop. It probably will not be good for the perma-bears as it appears the crowd is quickly growing into a fearful crowd. This fear is causing them to make bets that they are “for sure” are going to work out. That has caused the NYSE short-interest ratio to hit another all-time high of 13.72. That makes it almost a full 14 days to cover all the shorts that are out there on the NYSE. This is usually a bullish indication as the market makes sure the most pain is suffered by the crowd that doest the same thing everyone else does.
Will those amateur short sellers be right? History says no. But you never know. Now that gold is hitting a one-month high, along with crude’s 3% rally to $134, you can bet a lot of people are going to start feeling a lot of pain at the pump and in their wallets. That makes for less money to invest in the stock market. Without new money to buy stocks why should a stock rise? Well, it could, obviously by funds moving a bunch of money from laggards and putting it into the few leaders.
One index that is for sure leading is the CRB index. The CRB, thanks to oil, gold, and every other commodity out there, is hitting a new high which goes to show that the bull market is still very much alive in the commodity markets. And obviously it is alive in our oil markets. That is why everything oil is hitting a new high.
Before I get out of here, I just want to remind you that the intermediate uptrend in the indexes have been broken to the downside as the indexes have failed RIGHT AT THE 200 day moving average. That means that on the short term the trend is now down which means that we must monitor our existing longs carefully for signals to completely jump ship.
Right now there are a lot of negative headlines that continue to dominate the news. As long as that happens I figure we should be able to climb the wall of worry. But today’s selling gave the NYSE based indexes 5 to 6 distro days and that is a big red flag. This means you must be market neutral here and let the market prove itself WITH VOLUME. It may come back on the downside or we may reverse higher here. I am not for sure and neither is anyone else. My charts say to hold but at the same time they are also saying “I am sorry, I don’t feel good.”
Well, charts, neither do I. Great luck everyone, be careful out there, and remember….cash is evidently still king. Don’t be in a hurry to put on a trade until we can get some more conviction. As long as I do not have any perfect charts (DGLY lost its max green BOP and has had three bad days in a row, officially killing its perfect make up–now it is just near-perfect) I refuse to go in on full margin shooting the moon. I will take it easy here and let the market tell me what my next move should be.
Stay positive on the stock market. The good times WILL COME AGAIN. They always do. Aloha and I will see you in the chat room where hopefully my wake-up greeting will be better than today. I wake up and we sell. Sorry. ALOOOOOHAAAA!
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