Stocks Get Hit With A Real Distribution Day; Was It Really As Bad As It Seemed?

October 12, 2007

I want to immediately get to the point of the last question. I simply do not see the selloff that we had yesterday as being that bad overall. After going over all of my current holdings and making sell decision a couple of things became quite obvious. One, the selling was very contained and most stocks that pulled back did so on average volume and did so after already putting in long sustained uptrends. Two, the stocks that did selloff hard that I had to sell due to breaking below key levels were all cheap speculative POS stocks. The only one that was not was BA and that one has been a laggard for quite some time.

Now, the stocks that did pullback, we have to realize, needed to pullback after the gains we have seen. It is not good that volume expanded as much as it did and that the reversal came in such a horrific and dramatic fashion but those kind of moves are very sharp and help raise the level of the fear in the market creating what should be good buying opportunities. However, something about this selloff lacked the fear that is normally associated with these kind of swoons.

At the end of the day, the put/call ratio only hit .78 which was lower than yesterday’s close. So despite the massive and fast selling there was actually no fear generated what so ever and possibly even more of a bearish scenario fear actually declined. So even though the selling looked very contained and there did not appear to be any panic selling in any of my holdings, it is possible that the market will see that later. Some selloffs start with the crowd very complacent and the pullbacks seem normal and when it appears the stock should bounce that is when they fall on heavy volume. The way the put/call ratio is acting it seems that if there is going to be more selling, this market environment would be the one to create it.

The NYSE short interest ratio is still near all-time highs at 8.88 but I have noticed that this indicator seems to be working the opposite of how it should. Yes, the market has rallied as it increased, but every time it sets a new all-time high the markets seem to swoon. This happened in August and now it has happened in October with this ratio. If that ratio is in fact bearish it doesn’t help that 60% of the II guys are bullish and only 20% are bearish. This market is very extended and it is possible all of those that want to be long are already long.

Or it is possible that they are waiting for pullbacks just like we had today and will buy this market to new highs tomorrow. The point that I am making here is that anything can happen. The only edge that we have are in our charts. If our charts are telling us anything it is that the selling was left to the big cap tech leaders like RIMM AAPL GOOG BIDU etc… . But right now the rest of the leaders look strong, like DRYS and DSX, and it appears this should HOPEFULLY be just a blip in what is just the start of a massive uptrend.

The one thing you must not do here is top call. Saying that this is the top sounds just as ignorant as it did in 2004, 2005, May 2006, August 2006, February 2007, August 2007, and then now. When will it end with you perma-top callers. Grow up and realize the best investors in the world do not predict bottoms or tops. We just prepare for them. Am I prepared for one? Yes. Do I see all my 99 EPS and 99 RS stocks looking like ZNH and JRJC? No. So I don’t think we are topping yet. But heck no one knows when it is going to happen till after the fact. So remember the only top calling in the indexes I want to see are the tops that are called after the fact that we know it is a top. If you top call the March 2000 top on the Nasdaq….YES!! You are right. If you are calling a top in China….shame on you! For the 60th time, you are probably wrong.

Listen to your charts and trade by your charts. If you have any big winners from the August lows and have not taken any profits, please take some profits, if you have any stocks that are not showing you gains and have gone against you by 7%, please consider selling all of it. The most important thing is to not sell out of a whole position here in fear of a possible top. Ignorant and scared traders ALWAYS do that. The best know to partial out and hold a core position until you are given the final sell signal. That is the ONLY way you will nail those 1000% returns when the market fixes itself again. Right now, great luck finding anything moving that much, with a VIX below 20. Hell, great luck finding anything like that with a VIX below 30.

One day this market will have the VIX back in the range of 45-20. And when those days come then we can make a killing, just like we used to (or I used to) from 1996-2004. Aloha and I will see you in the chat room where the action is always in control and disciplined. Do you know how great it is to watch a market selloff and sit back with a bunch of pros and just enjoy the action, EVEN WHEN YOU ARE LOSING MONEY? Trust me, it is great! When you make a ton of money, losing a little here and there is just part of the game. God bless and great luck!!

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