The Trend Is Your Friend; Bears Feel The Pain Of Top Calling, Once Again

June 14, 2007

A 1.4% jump in May retail sales–the highest in 16 months–sent stocks gapping higher in the morning, as stocks started off the day shaking off yesterday’s selling. Then after holding the morning lows, stocks took off on a very broad rally, off the back of a very bullish Beige book report around 2pm EDT. This helped send indexes higher the rest of the day, closing most of them at their HOD.

The SP 500 led the way higher by 1.5%, the NYSE and DJIA followed with 1.4% gains, the Nasdaq and SP 600 gained 1.3%, and the SP 400 rallied 1.1%. Leading stocks outperformed the broad market again, as the IBD 100 and IBD 85-85 both rallied 1.8%.

Despite these stellar gains, volume fell on both exchanges. However, it was not by that much so it wasn’t like it was a completely disappointing day. But higher volume would have carried a higher conviction to today’s trading. The NYSE volume came in only 1% lower and the Nasdaq came in 5% lower. The bullish take on today’s volume was that volume picked up after the Beige book announcement. So that was bullish.

Breadth was positive on both exchanges, with advancers beating decliners by a 9-to-2 margin on the NYSE and by a 17-to-13 margin on the Nasdaq. On the DJIA there were 29 advancers and only one decliner. This strength could be seen in the gains of the DJIA as that index had its best day of point gains since July 19, 2006. Impressive, indeed.

What still remains not impressive is the disparity between the new highs and the new lows. Despite the indexes being only 1% to 2% away from old highs, the new highs and new lows are basically even. This shows that underneath this strong market, there is still some very weak areas. There were 176 new 52-week highs and 156 new 52-week lows.

I don’t know what else to say here that I have not already covered about why it is silly to try to call tops and short stocks and indexes that are above their 50 dma’s. Yet that is what traders are still doing. I still see people in the amateur chat rooms shorting every other uptick and I see the put/call ratio rising again to .87. It is just amazing, to me, that traders play this game of predictions. I guess I have been around too long to understand what those early years were like but I NEVER remember EVER trying to predict the tops and bottoms. I knew I couldn’t do that. I may not have been the best investor, in my early years, but I thank God I did not make these mistakes early on. Shorting rising stocks, calling for tops, and buying falling stocks. If it wasn’t for “How To Make Money in Stocks” by William J. O’Neil, I am sure I would have. But that books saved me from ALL of those mistakes.

As for the market itself: all indexes are still above their 50 dma, after bouncing off of them today, are 1% to 2% off of their old 52-week/all-time highs, and are doing this despite 8 distribution days on the Nassy and 5 on the NYSE. These are the facts. While it might not be the most bullish situation. All you need to know is that it IS bullish. The market and most leading stocks continue to hold key support and key moving averages, despite this huge wall of worry that is out there. The media and their bashing of one of the greatest economies ever only helps the situation.

The investors intelligence numbers showed bears ticking up to 56.7% and bears dropping to 21.1%. But despite how the newsletter writers think, the general public and some big investors are betting against this market. So far as you can see by the market, the newsletter writers have been bullish for a while and have been right for a while. The smart money is sitting in strong longs and holding on to the big gains. The dumb money is to try shorting every uptick for a few points to the downside. Even if you get every little top right and get those little short swings. Chances are all that trading will not add up to a good strong solid long position in a rising market.

As Jesse Livermore said, “It never was my thinking that made the big money for me. It always was my sitting.” What he means there is: sitting on the sidelines in cash during a bear market and sitting on your position in a bull market riding the swings higher until the ultimate trend came to an end. Here we are four plus years into a raging bull market that started in March of 2003 and that sitting has made you a killing if you have stepped into the right stocks. I have many many holdings up over 100% and a lot more up over 50%. Even though, SERIOUSLY, that is not that great of gains (thank the low VIX, it is not my fault), I guarantee you it is beating the pants off the “smart” short sellers. Let them continue to short the “tops” and call for a correction. That is what this market needs to go higher. The media is only helping this play out.

In saying all of this, however, I WOULD REALLY REALLY REALLY REALLY REALLY love a pullback to start all over. That way we could get the VIX up there, I could short and make some quick money, and then be ready to go long again when the market stages a follow-through after the downtrend. That would set us up for some 500% winners in six months again. Right now, LOL, that isn’t going to happen.

Aloha and I will see you in the chat room.

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