Stocks Correct Hard As All Indexes Selloff On Higher Volume; Extremely Strong Bullish Intraday Reversal Helps Prevent The Nasdaq From Going Limit Down

November 8, 2007

By the time I woke up today the Nasdaq was only off 30 or so points. But as the day went on the Nasdaq got as low as down 3.7% intraday. I believe I heard that the Nasdaq limits down when it falls 4%. If that is the case, we came very close to a very significant market event. As it turned out, the Nasdaq ended up having its worst two day decline in over five years. It was a very ugly day but at the end the Nasdaq only ended down 1.9%.

Volume did climb over 30% on both the Nasdaq and the NYSE giving both a clear distribution day. Today’s losses combined with yesterday’s on such strong volume has put the market in an official correction mode according to IBD. This confirms what I wrote on this blog last night about this market. It might not be a long bear or it might be a long bear. NO ONE knows. But we don’t need to know how long it is going to be, we just need to know that we are in one.

Other indexes did better as the SP 600 gained .75%, the SP 500 only fell .1%, and the DJIA fell .25%. Considering all the ugly intraday selling, it sure was a pretty darn good close. And truth be told, it is a little hard not to be bullish on the short term with a close like that. However, there was some very important technical developments today.

The leading stocks of AAPL, RIMM, BIDU, and GOOG all saw their shares hit hard and hit on heavy volume. They all broke their recent uptrend lines. Now, while it is possible that the selling could already be done, something tells me it is just starting. Since we have already had the big banks and all the old leaders crack, it is not good to see the leading momentum big-cap growth tech stocks falter. This has been the area that everyone has ran to for gains. Now that they are faltering after such big run ups, there is a high chance momentum will swing the other way as everyone dumps these stocks.

Just like in 2000, these stocks are the YHOO CSCO ORCL of old. There were a select few of big-cap tech stocks that were able to buck the selling that started in 2000. Eventually as the year went on, they also succumbed to the brutal selling. The small-cap leading stocks of 1998 and 1999 topped before these big cap leaders did. We are seeing that now in metal, steel, tech, mortgage, bank, shipping, and chemcial stocks. Energy stocks are starting to falter also. That leaves only one speculative group left-that is Solar stocks. And the way FSLR just put in a huge gain, it is possible that these stocks are nearing a top of their own. Therefore taking profits in the solar stocks is a good idea if you are long FSLR, JASO, or ASTI.

The market is officially in a correction according to IBD and that confirms what I wrote yesterday as I have officially changed my bullish bias to a bearish bent. Now this does not make me a hardcore bear. If the market rallies to new highs, I will be forced to change my bias back to bullish if nice charts breakout while that happens. If the market turns around, yet I find no good looking charts, I will have a bullish bias but will be ready to short the market when the uptrend stops.

When you look at the bullish reversal we had today I am at first inclined to say that we have put in a bottom. But when I see that the put/call only went to 1.10 on all of today’s panic selling and then I see that the VIX didn’t even hit 30 it becomes very clear to me that the crowd is not full of panic despite the panic like selling. That along with the fresh cracking of the last remaining leading stocks and that does not make me bullish.

I have a feeling this particular intraday bounce might get the bulls excited that the trend is going to be up again but instead the intraday bounce has just relieved the extremely oversold condition of the market. The selloff in the leaders will make them seem like bargains. But when I look at the four leaders I notice that all sold off on large volume. GOOG was particularly heavy. Take that action along with the leading Chinese, shipping, chemical, energy, and internet stocks that were the old leaders and are now selling off and you have a pullback that has a much higher chance of being sold on the next rally than it does of turning into another bull leg.

I know it sucks that it is possible that this bull market is over. But I hate to say it, we will never be able to get filthy rich and make big money in a very short amount of time until we start selling off. The VIX is too low and it being under 30 is just not a place where we are going to hit 500% winners in six months or less. We need a nasty 20-30% selloff that sends the VIX to 40-50 that gives us a ton of shorts to make money off of and then sets us up for a bottom that then produces a lot of leading stocks breaking out of strong bases. These stocks will run 100-1000% in six months time left and right. Just like in 2003, every future bull market that comes from a nasty bear will give you a ton of longs to make big money. They all offer a TASR and TZOO in every cycle.

So don’t be upset if this bull is over. And remember I pretty much think the five year bull is done. The market is forward looking and it appears that things might not look that great in the future with a possible President in the White House with an anti-market agenda. Hopefully, that doesn’t happen, and instead we get a free market, low-tax capitalist that believes in strong defense. That would be wonderful.

Anyways, in case some of you out there are not quite yet familiar with me, I need to make one thing clear. Even though I haven’t talked about Jesse Livermore in a long time (because I did not reread his book this summer) I want to make one thing clear. Even though I label my thoughts on the market as bull or bear, I need everyone to realize that in truth I am neither a bull or a bear. Due to my optimistic view on life and because I became a Ronald Reagan Republican at the age of 21 I am naturally a bull and would love to see the market go up every day. However, because I like to make a living in the stock market, when the market turns lower I will be a bear. But, the truth is, I am neither. I could care less if we tank the next 10 years or if we go up the next five. All I want is a trend in a stock somewhere. Whether that trend is up or down, it does not matter. I just want a trend. That is why I am shorting stocks and going long stocks right now. Right now, both sides are working.

The ones that do not work, I cut immediately. The stocks that work on the long and short side I keep holding until I get profit taking signals. Before the months of August and September, I really did not see a reason to short. But around the month of August I started to notice many stocks that were setting up in short patterns were following through and working. Before the end of 2007, I really did not see that in many stocks other than homebuilders and REITS. Since I don’t like shorting those and longs were doing much better, I stuck with the long side.

But recently longs have been acting funny. And the last three stocks I have purchased for my IRA the past six months have all failed. I am 0 for 3, after going 3 for 3. So obviously the tide is changing. And since I like to think I am a decent (but not good by far) surfer, I have gotten used to letting shit waves pass me by until the perfect wave comes. Right now, I feel like that is very important with longs. And since even the good waves (SNDA, BLL, FNDT) are not moving higher immediately it is obvious the swell is passing.

I am still long all my FNDT as it still has max green BOP and is right at the 50 day moving average and putting in a bullish session today. However, the fact that this near-perfect long did not move up immediately is just confirmation of the SNDA and BLL buy in my IRA. HRZ, AFSI, and TESO were my previous three. All three gave me 70% plus gains in under six months each. Now I have had to deal with this. You may ask why I didn’t buy GOOG, RIMM, AAPL, GRMN, or BIDU in my IRA. All I have to say to that is…good question! Why didn’t I? LOL.

Before I go for the night, I want to remind everyone that we already do have one “old” leader breaking down. GRMN has sold off in early Oct, rallied on lower volume, sold off again in late October, and is now continuing to sell off. Since this stock started to move immediately after the stock market bottomed in 2002, I think it is very important to watch this leader. I know it never got as expensive as GOOG, RIMM, AAPL, BIDU, and FSLR but it still was a clear leader with it rising over 900% from its breakout. So that gain makes it a clear leader. I am waiting for a low volume rally to the 50 day moving average before I want to short this. If it doesn’t make it, I guess I will miss this short and have to pray the market rallies with FNDT helping to secure my retirement.

Don’t you guys find it funny how emotional “I” get with stocks in my IRA? I find it funny how easily I can trade with my regular accounts. But when it comes to my retirement money, I don’t like to mess around. 3%-8% losses in my IRA feel like a 20% haircut to my trading accounts. I don’t like losing (just ask anyone who knows me in our Big Wave Trading Fantasy Football league) and when it comes to my IRA I hate losing. I think what bugs me more is the fact that charts like FNDT are as good as they get.

You simply are not going to find a chart like APPY in a stock with fundamentals like FSLR until we get a very deep bear market. Then we can setup some big long bases loaded with max green BOP like TASR did in 2003.

Until that bear market comes, we will continue to fight our way to gains. One last thing, before I go (this time I am serious). If you went short HCN, I want to apologize. All you have to do if you went short that stock is completely cover it now. You need to get out. It has failed. And if you went short POM, mazal tov!! Aloha and I will see you in the chat room. Go with the flow or the flow will go without you.

Posted by Joshua Hayes | Filed Under Market Commentary