Oversold Bounce Continues As Stocks Climb Higher Closing Near The Highs On Lower Volume; Day Two Of Rally Attempt (Three For SP 600/RUT)
January 24, 2008
It was an impressive day of gains for the general stock market as the main indexes rose between .9% and 1.9%, ignoring the 13% decline in 2007 existing-home sales which was the biggest drop in 25 years. However, most of the gains came early on and was followed by extremely volatile intraday price action that sent stocks all over the place on the DJIA leaving behind a very ugly intraday chart. But by the end of the day, all the indexes made a late day dash for a strong finish. If that intraday index chart of the DJIA would have been a ride I would have gotten sick. Luckily, I have learned to avoid rides like that and that is why I am holding over 50% cash. This is not a market you want to be riding. It is probably best for anyone with a longer time frame than a few days to sit this one out.
It was the second straight up day for stocks but this up day came on lower volume which is not really a big deal as the second day higher is not important. What is important is day four through 10 where we are looking for a gain of 1% or more (preferably 2%) on higher volume than the day before. If we get that, we will have officially have been given the green flag to go back to hunting for longs. However, there is no way that anything great can come from a market that was ravaged by such heavy volume selling so quickly.
If the Nasdaq and IBD 100 had A- Acc/Dis ratings when the market followed through in March 2003 and succeeded, I find it hard to believe a market with multiple D and E ratings in the indexes will do well if a follow-through day occurs within the next 11 days.
There are simply too many charts out that that have been hit hard by very heavy volume selling (distribution) and the chances of them moving higher and continuing higher here without another major setback is probably under 10%. History shows that when multiple leading indexes and stocks top on huge volume and Medical stocks start to move up the top industry groups that we are normally going through a down market cycle. Even if the chemical and big-cap high tech growth stocks get near old highs, I still believe the chances of seeing higher highs is near impossible.
The leaders are destroyed, there are zero fresh new industry groups setting up with powerful stocks building proper patterns, and everyone wants to buy the dip. I hear bottom callers and rally believers everywhere. I see them on CNBC and in the gym. Everyone believes the lows have been seen and that this tax rebate will put a floor in the market. These people are simply speaking of “hope.”
They “hope” their stocks are done going down and are now leaving it up to “hope” that they will rise again. The fact is that the retail crowd has gotten involved in the stock market too late, once again, and they should replace their “hope” with “fear.” They should be “fearing” that there stock might fall another 25-50% after a brief rally. They should “fear” that it might take five years for their stock to move higher again if it falls off 50%, and they should be “fearing” that their stock might never rise again. I know that is a bit much but the sheer ignorance of some of the talking-heads and the general public, right now, is very disturbing.
I have not seen a level of this complacency on such a vicious selloff in a very long time. And even though the general public is calling this a crash, no one is selling. Just like in 2002 when a LOT of people finally gave up and sold stocks at the bottom when it appeared stocks will never come back again, this stock market is not going to bottom until we see the same thing.
The fact the VIX is below 28, bulls are still ahead of bears on the investors intelligence survey, and the put/call has fallen to .80 shows that the crowd has no real fear. They are nervous. But they are not fearful.
A couple of things, right now, help increase that optimism. The rebate stimulus plan is seen as a short term fix and that is making people happy, but a $500 to $1,200 check is not going to make ANY impact for longer than a few months. Just like in 2001, this failure of a plan will not help the market. It didn’t help in 2001 and it will not help now. But it did give us a great long that I just happened to post today since we just arrived on this date in my ‘past big winners’ section. So it isn’t that bad, I guess. But as for any real impact to the economy, someone doesn’t understand the power of real tax cuts to a silly little rebate check. What a joke.
The other item that will make people feel like the bottom is in, when in fact it more-than-likely is not, is that MSFT topped analyst views announcing strong earnings. That helped the stock rise 4% after-hours after the stock rose 4% during hours. So this combined with up big AH is making everything look like all is well in the stock market universe. Sadly, I believe a lot of new schmucks (I call it like it is; you don’t get lies from me–go to Wall Street for that) and ignorant analyst are going to buy too early and help wipe themselves out even more than the last pullback did to so many.
Did anyone see that guy on Youtube? That was a little funny, I must say. But I guess turning $55k into $15k is never funny. I must say that I have NEVER in twelve years taken that kind of loss. I am proud to say the chances of me ever taking a loss like that is zero, in the stock market. I pay way too much attention to capital preservation during market downturns to ever suffer that kind of hit.
The reason I can not take that kind of hit is that I ride the trend and at the slightest hint of trend change I start selling. Also, I normally try to never have more than 5% in any one holding. I will go up to 10% in bull markets where stocks are working perfectly–rising on huge volume with shallow low volume pullbacks–and I am seeing gains immediately after taking the position. When there is not a clear uptrend, I pull the reigns in and when there is not a clear downtrend, I pull the reigns in. However, as long as there is action and there are good charts, i will play. But when a very long bull market ends and the intial leg of the top is over, stocks normally go into a choppy consolidation zone that normally leads to the direction that the market was in before entering the zone. However, these zones, after a major cycle change, can last a long time. This is what is happening right now and why we are seeing such wild intraday action with such ugly daily charts. This action is the reason why I am now over 50% cash. This is the first time since the middle of 2002 that I have had this much cash in the portfolios.
This is not the kind of market to load up on stocks and make big bets on margin in your favorite stock. This is the kind of market to either build a significant cash position or get very short-term. And I am not sure how many of you are good at going from a CANSLIM state of mind to a daytrader state of mind. But a few people can do it and for the few that can they should go for it. If I wanted to make that shift, obviously, I could make that shift. However, I believe it would be a lot more work for a lot smaller reward and I would have a very hard time getting used to be focused the entire time the market is open. It would not be hard chart wise as the intraday charts 15 and 60 minute would become my daily and weekly but it just is not for me. And me understanding this is what is going to help me last longer by riding it out in cash than by investing like a crazed daytrader.
There are very few traders like David who is a subscriber in the platinum chat room. He has an uncanny ability to trade on a much shorter time frame and do very well. I believe that most who traded like him would not fair NEARLY as well as he does. I do not think I could even come close to matching the profits that David can generate trading on a shorter time frame than I do. Do you miss the big gains like the big general trend in gold? Yes. But still for him this works and his gains prove that he is doing very well at it. Missing out on the big uptrend in gold though. That is unforgivable. 
What is not unforgivable or forgettable is how long a bear market rally can last. Don’t forget that not only did the nine biggest up days on the Nasdaq happen during the 2000-2002 bear market but that bear market had many bear market rallies that sucked in many bottom callers. So you must be careful to think that we have bottomed so soon after such a nasty selloff. Especially with the possibility of another Fed cut in the books. I am sure that stocks will rally a little bit off that news even though it is the Feds clearest signal that they have really screwed up. Might as well try to fix it now, now that it is too late. It can’t hurt.
Another clear sign, before I go, that I want to show you is the number of stocks in the Your Weekly Review. When I first started to add them to the list, before reading the piece, I wasn’t too shocked until I saw that it was continued on the last page of the newspaper’s A section. After getting to the end and seeing a few more I thought there was a mistake. But then after reading the article I found out that indeed there were 64 stocks in the list (IBD says 40 but they listed 64 stocks and only 40 charts–I think the writer didn’t look on page A14 for the rest of the list). Before the top in November, there were over 200 on the list, during one of the weeks. This is clearly your sign that leading stocks are in trouble and that going long is wrong.
We are going to have to wait for this downtrend to play out. When it is finally over, we will see a lot of stocks with great fundamentals setting up and breaking out of perfect patterns. Before that day comes, though, there is sure to be a lot more pain in store for the bulls who just can’t help themselves from buying the “bargains” on the dips. Good luck with that strategy bulls! It worked for five years and the chances of it working for a sixth seems irresponsible and silly.
Aloha and I will see you all in the chat room!!
SIDENOTE: I JUST COMPLETED AN INTERVIEW WITH TRADERINTERVIEWS.COM TODAY AND HE PUT A LINK UP ON THE SITE FOR MY SUBSCRIBERS SO I WANTED TO POST THE LINK HERE.
ALSO I WANTED TO ASK A HUGE FAVOR. IF ANY OF YOU ARE REALMONEY.COM SUBSCRIBERS OR SUBSCRIBED TO REALMONEY.COM DUE TO MY COLUMNS (NEW ONE TOMORROW), IF YOU CAN PLEASE SEND KRISTIN BENTZ AN EMAIL AT Kristin.Bentz@thestreet.com I WOULD GREATLY APPRECIATE IT. ESPECIALLY IF YOU WERE A SUBSCRIBER, QUIT, AND THEN REJOINED BECAUSE I AM WRITING FOR THEM. THIS WILL ENSURE THAT I CAN WRITE A COLUMN EVERY DAY (RIGHT NOW SHE ONLY WANTS 3) SOONER THAN LATER. THEY WILL LET ME WRITE MORE BUT THEY WANT ME TO DO JUST THREE NOW, UNLESS I CAN CONVINCE THEM READERS WANT TO READ MY COLUMN. I AM TRYING TO GET IT HIGHER SO WE CAN GET MORE STOCKS DISCUSSED. THANK YOU VERY MUCH, IF YOU CAN DO THIS. MY COMPLETE APPRECIATION FOR THIS IS HUGE. MAHALO FOR ALL OF YOUR KOKUA!!
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Josh, thanks for these insights. Each day I read IBD’s Big Picture, the Worden Report, and your Stock Commentary. Combined the three are teaching me how to understand what is moving the indexes and what significance to place on those changes. As a new investor I can’t tell you how very valuable all of this is and how fortunate I am to have learned about these excellent resources from you.
As for popular sentiment, I agree that there is a lot of hope floating around and much of it is unjustified. Perhaps it is better to say that this hope ought to be qualified by attention to facts. From what littel I know, I see reason for optimism, especially when I look at the Dow-30, for example, in Telechart on the weekly.
Correct me if I have it wrong but it looks a lot like a left shoulder in July 07, a head in October 07, and a lower right shoulder in December with a roll over starting in Jan 08, at the 50 dma, right as it crossed the 200 dma. This rolloever of 3-4 weeks has come on increasing volume each week and even some red BoP. Maybe all you can do is hope when things looks this bad?