Stocks Stage What Appears To Be A Follow-Through (Heck I’ll Call It One) But When You Look At The Market There Is No Way We Can Trust This

January 31, 2008

I know this is an odd title but I think that we have to get into this right away. A lot of people are a little surprised that the market was up so much today. But I have been warning you that the market was going to be doing this. I was hoping that after the fakeout yesterday the last bulls would have been suckered in for the real selloff. In fact, it was the OTHER WAY AROUND, the move was made to sucker in the extremely bearish daytraders who were looking to get short the pop.

That pop convinced them that the play was right. Well, that play is right in the longer term scheme of things, but for now, the right play is to be in cash. The action today combined with the action yesterday, much less the rest of the week, is the exact reason cash is king. Heck, another reason is if you got bullish today and now you see GOOG and BIDU after-hours does that make you more bullish or cautious? And that folks is why cash is king. The trend is trendless and it is simply an intraday trader’s market.

So why am I calling this move today a follow-through day? Because as we look at all the indexes we can see that we have a move inbetween 1% to 2% on all the indexes, including a move of SP 600 and Russell 2000 of 2.7% and 2.6% respectively. Besides that volume was higher on all exchanges by a decent amount. So we now have our, what I would consider, price requirement and we have our volume requirement. So on that portion of a follow-through definition we are correct. So right now, at this moment, we have a follow through day and that is what I am basing my longs analysis off of (I am not changing it now to show you the rawness of trading and how decision must be made in time after analyzing a lot of data).

So why is IBD not calling it a follow-through day? Well this might be day seven of the rally attempt and it might technically fit the definition of a follow-through day but this is where hardcore common sense and an excellent knowledge of history comes in to change everything.

The rally was on a gain of 2.7% on the SP 600, and that was all well and good, but none of the other indexes had the powerful move that has accompanied every single follow-through day that has led to a prolonged and powerful bull market. The lack of gains in the rest of the indexes is not what a proper follow-through has when you see the right follow-through. Those that have a subscription to Realmoney can go there and see all of the charts of the Nasdaq as we moved from 2000-2004. The bottom in October 2002 to March 2003 came with a ton of accumulation all over that chart with no distribution which is the exact opposite of all the follow-through days that failed leading to the October 2002 lows.

So the fact that we have all of this distribution all over the chart the past three weeks and then combine that with all the distribution on the chart in August and November and it is clear distribution leads the indexes. Such is the case that all of the indexes carry ad C+ to E Acc/Dis rating. When the market bottomed in 2003, IF MY MEMORY SERVES ME CORRECT ON THE IBD 100, the Nasdaq carried an A- Acc/Dis and the IBD 100 carried an A. Those kind of Acc/Dis ratings clearly show a market being accumulated by the big boys. Right now, the big boys are not buying stocks. And speaking of the IBD 100 did anybody see how that index did today? It lost 2%!

Now even though the IBD 100 lost 2%, the IBD New America gained 2.5%. But the IBD New America also carries an E rating. That is because all of the stocks that are new and innovative are all broken. Which is why the IBD 100 and those leading stocks did not rally today. The leaders are broken. The stocks that have been beaten up for months completely led the market higher. If you haven’t seen LEN recently, then you probably are not sure what is making the market rally. And these points lead to the next reason IBD did not call this a follow through day.

There are no fresh leading stocks and there are no innovative industry groups moving up the list due to innovative changes in an industry or a dramatic economical change for the group. My scans, the past two days, have been producing the exact same stocks I saw back in the bear market. Medical stocks dominate the top 20 of the IBD 197 industry groups. But as for stocks in my scans tiny bank stocks, inverse ETFs, pollution/wate management, medical, oil, telecom, funeral, ute-gas distribution, closed end bond, and ag stocks are dominate in my scans. These stocks make up 85-90% of all stocks found in my scan and these stocks are ALL stock that move higher in bear market–even in bear markets that have follow-through days that fail.

So if the gains are not large enough (they need to be over 3% in a very volatile market like we have now), the stocks are not good looking enough, the sectors are loaded with bear market leaders, and distribution ravages this market, how can IBD call this a follow-through day and feel comfortable doing so knowing that so many amateur investors would go all-in thinking they are getting in at the bottom. They can’t do it. But I will say it based on the simple price and volume aspects of it….what if I did not have IBD and had no way of scanning stocks? I would have called it a follow-through, without a doubt.

But, now, we know better.

Trust me, I know for some of you it might seem a little confusing but you have to understand we can not get confident of any follow-through day that comes with so little stocks breaking out. If you guys would study my past big winners you will notice that I have a lot of stocks with very beautiful chart patterns that made huge gains in 1999 and 2003. But even during the bear market I had plenty of huge winners and even after 2003 there were plenty of big winners. So if I can find big winners then, you can believe that I am not going to find them in the future.

The problem is that some people want them now. And I am going to try to tell you all that this style is not that kind of style. You have to wait for the top stocks to break out from perfect patterns. And I take it a step further and only LOAD THE BOAT on stocks that build charts like you will see from AFSI and FMDAY that will be soon posted in the past big winners section as we get to that point–I am really busy over here.

But if you are very patient and you can learn to keep cash heavy during times like this eventually a trend is going to break one way or the other. If it breaks down, those that are professionals can begin another short raid. But when the time comes to breakout to the upside, trust me, I am going to be all over it. I will know which groups are the leaders, which stocks are the leaders, and then which of those are building the HOTTEST and greenest chart. When we get those, we are going to load up. But since AFSI in April of 2007, I have not found anything worthy to load up on that has worked. Readers will remember stocks like INXI, BYI, and SNDA that build near-perfect to perfect patterns that failed. Their failure at first ticked me off but they were clearly warning of an impending bear market. Boy oh boy isn’t it amazing how the stock market can forecast this stuff. Back in 2003, those three stocks would not have failed.

Now tonight some of you might think that because I have 6 longs that the bull is back. But do you notice I have 4 shorts. Doesn’t that seem a bit…uhmm…..volatile and mixed. Just like the market. The four short all look really good as they appear to have broken hard and after a low volume rally they are now all rolling over to puke up their gains. The longs, on the other hand, don’t look like perfect longs should at the start of a true-blue (er, green) bull market. INFA is a bit extended, APOL sure isn’t round by any account, GILT is not guilt free with that odd chart pattern, and TNS is actually a very interesting story and I suggest those with Daily Graphs take a look at the fundamentals and mutual fund growth. That one is impressive. But, still, the chart needs some work.

TNS needs more time working sideways building BOP to max green while remaining on the current pattern of heavy accumulation and low volume pullbacks. But besides the chart needing more work, the stock has a great story and this is a perfect example of a stock that could do very well in a bear market. Which goes to prove Cramer is right about one thing (a broken clock is always right twice a day) when he says there is always a bull market somewhere.

Somewhere important that there is not a bull market is the Utility-Electric Power group. Now, I am not an expert at this but I recently read an article in SFO magazine that explained that normally in bear market utilities rise. Well there was no new revelation there but then as I read on he went on how when you have a bear market and the utilities do not rally it is normally a pretty good precursor to a recession. Well considering we have a falling stock market, falling rates, and falling GDP, to go along with rising inflation, the fact that we also have the Utility-Electric Power sector starting to break down (AES CEG DTE DYN etc…) has to be very bearish.

This is yet another reason that we can see why IBD did not call the follow-through. I know that you will not see them mention anything about that today–that is a gem personally from me! The fact those Utilities are falling is quite shocking. However, the Utilities-Gas Distribution is doing well. But when it is cold, people need heat. There is nothing there to change the dynamics. The fact that the safe Utility-Electric Power stocks are falling along with so many other leading stocks is just not good. There is no other way to paint this. Medical stocks are leading, leading stocks are topping, and Utilities are moving with the ones that topped. This is no normal pullback.

To go along with all of the facts above we have the non-confirmation of a bottom by the put/call ratio moving lower as the stock market fell last two weeks ago into last week but at least it moved higher today to .97, the VIX did make a new high but failed to show any real breakout to new highs hitting 37 and reversing to close at 31, and then the bulls and bears never crossed on the Investors Intelligence survey. There was absolutely NO confirmation of a bottom here. The August lows was a better bottom. This is no bottom. Don’t fall for the bottom callers siren calls. There is plenty of room left to fall.

Some other things that are all wrong with today being a low is that new lows are still beating new highs. When we bottom we are not going to have that issue. But today we saw 41 new highs to 155 new lows. You just don’t see that at real bottoms. You can see that at “tradeable” bottoms. But not real bottoms that launch stocks on big powerful runs. But I am not a daytrader. If you are here looking to flip stocks, you have come to the wrong place. I prefer riding a 50 stock to 300 and then ride it back down to 30. One round of buys and one round of sells. Not this in-and-out crap that so many daytraders try and fail at. It is such a low odds game with an impossible chance to EVER have any long-term capital gains. Instead you will always get the tiny returns, you will lose more than you win, you will pay more in commissions, and you will always pay short-term cap gains taxes. You will never savor in those big giant TASR, BOOM, and MA type of stocks.

Well until the bears can get over 37% in the investors intelligence survey this bear is not going to become a bull. I am just now looking at Helene’s Friday column in Realmoney and it is amazing. The investors intelligence got to 37% three weeks in a row back in August and since then hasn’t been able to get over 35% since then. Back in 2006, the bears were at 35% for a lot more than a few weeks, however, just to remind you again, we can not get over 35% now and therefore we are probably moving lower. I just do not see how sentiment lines up with a bottom and when I combine that with my charts there is no way I can stay bullish here. Even with APOL and INFA breaking out. Those are not good enough for me. They may work now but until better quality longs and a better series of accumulation days come along there is no way I am getting heavily long this market. Instead I am staying cash heavy, shorts medium, and longs light.

Protect your capital, cut your losses, keep your buys small, stay defensive, be careful out there, and for God’s sake don’t be on margin unless you are short. If you are going long, for God’s sake stay off margin unless you are one of those daytraders and then please tell me you are daytrading futures and not stocks. Cause if you are daytrading stocks, you are in the wrong place.

Aloha and I will see you in the chat room where we have a follow-through day every hour it seems with some sort of insanity!!!! ALOHA! Have a wonderful Friday!

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