Stocks End Lower For The Sixth Day Out Of Seven As Volume Comes In Lower; Oversold Rally Should Be Expected Here

November 16, 2007

After a pretty flat open, stocks pretty much held steady until around 11AM when the downtrend started showing up. The trend stayed down most of the day, adding to the pain of the bulls, until the last 30 minutes of the day when a short and quick rally helped send stocks off their lows of the day. However, it was still a day mired in red and the SP 500 and Nasdaq each lost 1% and the DJIA almost managed a 1% loss losing .86%.

The good news for the bulls was that volume did come in lower today, after yesterday’s lower volume selling. The fact that the selling the past two days has been smaller than the previous day’s lower volume rally shows that the market is a bit oversold here and that an oversold Thanksgiving rally has to be expected soon. Combining the lower volume with the fact that the market has been lower six of the past seven days and you have some high odds of a rally coming to fruition.

There are some other technical items that also make me think we have to expect a rally soon. The put/call ratio did spike to 1.12 at the close today. And even though I do not see any fear in this market with the VIX being at 28, the fact that the put/call ratio did spike to 1.12 indicates that there is a little bit of fear creeping into this market. However, it is not the bottom kind of fear. That fear is a spike to 1.5.

The new highs to new lows is also another item that has recently caught my interest. When we began to selloff we consistently saw new lows over 300 on the way down with new highs staying under 100. Now we continue to have new highs around the 40-60 area but the new lows have fallen to 200 or lower the past three days. So the fact that there are not as many stocks hitting new lows despite the continuation of selling indicates that we are a bit oversold.

The two final things that make me think we are oversold is that if the S&P 500 closes down for the week this will be the first time since early 2004 that the S&P 500 has fallen for five consecutive weeks. At the same time, the percentage of stocks below their 40-day moving average is hovering right around 20% and the stocks below their 200-day moving average is around 30%. Though this is far from a “real bottom” extreme reading (10% for the 40-dma and 20% for the 200 dma), it is still very oversold. The bottom line: we should expect a bounce.

Now that we got that out of the way, I have to say that when this bounce ends-and I do expect it to end sooner than later-I believe we will only be in a better position to short stocks. It is simply hard for me to believe that this possible bounce is going to lead to a new bull market. Like I have told everyone, over and over, this market has sold off and has taken EVER SINGLE leader with it to some degree. This is the first time that the market has weakened to this degree where the big boys are now getting hit.

I always tell people that when a few stocks lead us higher (like the four horseman were) and big-caps take the lead from the small-caps, we are either near the end of a bull market or in a bear market. Since we have not fallen 20% from the top, I can only assume we are near an end.

The other sign that makes me believe we must be near the end, though anything is possible OF COURSE, is that my shorts are doing much better than my longs. Even in pullbacks in 04, 05, and 06 I did not see shorts do this much better than longs. In February and July, both times, I was forced to sell many stocks as they cracked important support levels. However, those pullbacks still kept many charts in uptrends that made them worth holding for higher gains. This pullback has knocked the crap out of most of these strong stocks that have been able to hold up during the other pullbacks. This is the first pullback that looks really ugly on all the charts.

I promise you I would not be saying this if I still had a ton of leading longs holding up in perfect bases showing few signs of selling. Also if I could find some nice green charts setting up I might think differently. Heck, don’t forget, TESO showed up during the February to March plunge and AFSI was setting up a nice max green base during then. We don’t have that now.

Another thing we have that we didn’t have ALL OVER THE PLACE is leaders breaking down with severe selloffs on heavy volume and red BOP. This kind of ugly rolling over simply was not seen before. I wish I could say that I have seen this ugly selling before during this rally and that we have nothing to worry about. But that would be lying and if you know me you know that I suck at that. If you are wondering how I was able to be such a good poker player, all I have to say is that bluffing is NOT lying when you are at a round ring game full of hairy guys. It wasn’t Church. I don’t think this market is bluffing. I think it is sick and we are at the start of a possible bear market.

So there you have it. I do expect a bounce that could last a week to two weeks but I do expect it to fail either at the highs OR a few percentage points above the highs. I think it could be possible for the market to hit new highs and convince EVERYONE and their mom that this market is going to continue to go higher forever. That would be the ultimate suck out that could then set us up for a really bad selloff. However, with the amount of selling that has already hit the leading stocks that you see me listing every day in the forums and in the chat rooms, I truly doubt we are going to see that scenario.

I hope everyone is doing well out there. For learning purposes I want to let you all know that I am about 40% short 40% long and 20% in cash right now. Since the market is still rewarding some of my longs and I am getting a lot of medical longs (ADAM VMSI ANW) and three out of four longs tonight were medical stocks I continue to have a decent long stake. Not many look like DGC and RICK but there are still enough holding up to have me holding them.

The biggest reason I am still long so many stocks is because my rules are strict and when I have a big gain in a stock up a lot and has been a long for over 3 months I always hold some (10-20%) until it closes below the 200 day moving averages. I still have a ton of longs (MA, IHS, APPY) that are still above the 200 day moving averages. I do this so I never miss a huge move in a top stock. I have sold so many stocks before they broke the 200 dma only to see them rally 100-200% plus without me. So now I normally wait till these big winners break that line. However, since I know that this is a bear market and that we probably will not see the highs, the old me would have been out of stocks like IHS MA and APPY completely.

Aloha and I will see you in the chat room, where the trend is always our friend. ALOHA!!$$!!

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