GMI rises to 3; Market may be turning, some promising growth stocks at new highs

GMI3
GMI-23
T210843%

To understand human beings, one must concentrate on their behavior rather than their words. The same goes for the markets.   Ignore all of the verbal noise of the media pundits and concentrate on the markets’ actions.   And this market appears to be turning around, at least for now.   The T2108 is well out of oversold territory and the indexes are crossing above both their long and short term moving averages.   All but two   of the market leaders I follow are showing signs of strength, including AZO, AMZN, AAPL, GOOG, FFIV, CMG and BIDU. NFLX has been in a down-trend since July and PCLN is flat. The fact that a leader like AAPL can come through the volatility of the past few months within 1% of its all-time high bodes well for tech and growth stocks.   I am wading into this market and have a position in   AAPL.

The other indicator that is encouraging me to go long is the fact that the Investors Intelligence poll of investment advisers shows about 5% more bears than bulls.   This rarely happens and the market often goes up when so many professionals have given up on the market. Yes, we still have to get through that dreaded month of October, but remember that the “sell in May and go away” mantra says to go back into the market around Halloween. I have seen many markets bottom out in October.

When there are only a few stocks hitting 52 week highs, it is easy to go through the list of new highs   to look for stocks that may surge higher when the market strengthens. On September 7, I wrote about the technical strength in AZO at $313.83. AZO closed on Friday at $331.25 up 5.5%, but more importantly a rise of   over $17.   I buy expensive stocks and trade on the point move, not the percentage move, and a   17 point move on one call option = $1700.

The following stocks showed up on the new high list on Friday, have strong recent quarterly earnings   and look technically promising to me: JAZZ, ATHN, DLLR, EVEP, HITK. I will place these on my watch list for potential buys if the market trend continues up. As this monthly chart shows, HITK has just broken through a major resistance level over the past 8 years. Institutions may have stepped up buying of HITK.   HITK has a 98 (out of 100) composite rating in IBD and is at or near the top in each IBD group comparison.

 

The GMI and GMI-2 are each at 3 (of 6).   The last time the GMI was at 3 was August 1. All of my indicators that reflect the indexes’ place in relation to their moving averages are positive.   The remaining negative indicators   in the GMI will depend on their being a longer up-trend that will show more new highs that continue to move up, and on the performance of the IBD Mutual Fund Index.

If you have a subscription to IBD, take a look at the insightful interview with William O’Neil, the founder of IBD and creator of the   CAN SLIM method, posted on Monday’s homepage of the IBD site.   He discusses a number of the stocks I have highlighted recently, including AAPL, ALXN and ATHN.

Note that the QQQ is now above its 10 week average and leading the market up, while the SPY, which includes financial stocks, is still bearly (pun intended) below its 10 week average, for the 8th week. I generally can make money trading tech stocks when the QQQ remains above its 10 week average. I am still concerned that its 30 week average (red solid line) is declining, but at least the index is now above that critical average.

So, I am   buying some growth stocks in my speculative accounts.   I am considering slowly wading back into the growth mutual fund in stages in my university pension this week, but I prefer the 10 week average (blue dotted line) to be rising. See the pattern at the rise that began in September, 2010. Click on chart to enlarge.

Note that the registration for the Fall 2010 Stock Challenge begins today and is open to honors alumni and all students faculty and staff in the University of Maryland System.

No tags for this post.

7th day of new QQQ short term up-trend; Sell in May and go away?

GMI6
GMI-25
T210873%

While almost all of my indicators are positive, I am keeping an eye on AAPL, which is still weak. The popular explanation for AAPL’s weakness is that its weighting in the Nasdaq 100 index will be reduced on May 2. ETF’s that mimic this index will have to reduce their holdings in AAPL. I am not so sure that is the only reason behind AAPL’s weakness.   This leading stock may just have been pushed to the limit for this market cycle? As we get closer to May, I always remember the analyses that show that one should “Sell in May and go away.”   With the percentage of bearish advisers taking a sudden dip to 15.7%, this party may be getting late. If the percentage of bullish advisers should climb above 60% (it is now 57.3%)   I will become very concerned. Sentiment is a contrary indicator,   most people are bullish near market tops.

No tags for this post.

IBD50 list from 1/10 out-performs Nasdaq100 and S&P500 stocks; Some IBD50 stocks at support

GMI6
GMI-25
T210873%

In January, IBD discontinued the IBD100 list of stocks published each Monday and started publishing a shorter, better list of 50 stocks—IBD50. I rely heavily on IBD’s list of stocks because I am convinced that the high momentum growth stocks that meet their selection criteria do out-perform other stocks in a rising market.   I have shown that in a declining market they do much worse.   Hence the “M” in William O’Neil’s (IBD’s publisher and owner) CAN SLIM approach to trading stocks.   The “M” signifies that one must trade consistent with the overall market’s trend.

I build watch lists in TC2000 periodically for the IBD100/IBD50 list published in Monday’s edition of IBD.   While I recommend that people get a subscription to IBD so they can use their excellent website, some people may benefit from getting at least the Monday edition at the local newsstand. The first IBD50 list I stored was the one published on Monday, January 10, 2011.   Over the weekend I computed performance statistics for the 50 stocks on the list since their close the Friday before publication through last Friday’s close.   I compared the IBD50 stock performance to the stocks in the Nasdaq100 and S&P500 indexes.

This table shows a few interesting things. During this time period, the Nasdaq100 index ETF (QQQ) advanced +2.5% and the S&P500 ETF (SPY) rose   +4.9%.   So this is a period when the nonfinancial tech stocks that make up the Nasdaq100 index and are most similar to the IBD50 type of stocks, underperformed the S&P500 type of large cap,   stocks. Thus, the results for the IBD50 are probably poorer in this period than in periods when tech stocks are outperforming.

Nevertheless, the table tells an interesting story.   Click on table to enlarge. A higher percentage of the Nasdaq100 and S&P500 component stocks rose (67% and 77%, respectively) than the IBD50 stocks (60%). However, more IBD50 stocks gained at least 10% or 20%.   In fact, the IBD50 stocks were much more likely to gain 20% in this period, 18% rose 20%+, compared to 11% of the Nasdaq100 stocks and 10% of the S&P500 stocks.   The IBD50 stock list also contained a stock that gained the most, SINA (+45%), while the largest gainer in the Nasdaq100 stocks was WFMI (+37%) and in the S&P500 stocks, COG (+44%).   The biggest loser in each of the 3 lists (FFIV and AIG) was down -34% to -39%.   The median change (one half of the stocks did better than this value) for the IBD50 was +8%, larger than the median change in the other two lists (+5.5% and +6%), showing that the IBD50 stocks did outperform the other two lists of stocks.

My conclusion from this analysis is that in a period when tech stocks underperformed the general market, the IBD50 stocks did somewhat better.   Most important the IBD50 list was a better place for finding large gainers. And to find the 20%+ gainers one only had to research 50 stocks instead of the 100 or 500 stocks in these other two indexes. Maybe IBD has a good idea here…..

Friday was the 3rd day (U-3) in the new QQQ short term up-trend. When it gets to 5 days, I will be more confident of its longevity.   But keep in mind that the QQQQ and other major stock market indexes remain in longer term up-trends.   Thus, I have not touched my long term university pension mutual funds.   I only transfer them to money market funds when the major trends turn down.   The GMI is at a very comfortable 6.   The GMI2 is at only 5, because the   pattern   4wk moving average > 10 wk > 30 wk is not present.   The 4wk average remains below the 10 wk average.   Both the QQQ and SPY are now above their 10 week averages, a promising sign.   And 90% of the Nasdaq 100 stocks closed with their daily MACD above its signal line, a sign of strength.   One note of caution is that the Worden T2108 indicator is at 73%, near the overbought levels where markets can top out. I will be concerned if the T2108 breaks 80%.

With the start of the short term up-trend I am starting to look for stocks to buy.   I used TC2000 to scan all of the IBD50 stocks that I entered into watch lists this year.   I looked for stocks bouncing up off of their 10 week moving average.   Many growth stocks, once launched, track their rising 10 week averages for months.   I often buy such stocks after they bounce off of this average and place a sell stop slightly below the low of the week in which they bounced.   All of the IBD50 stocks in this table showed up in my scan   as having bounced their 10 week average last week.   The second column shows the lowest price at which each stock traded last week and the point where I am looking to place a sell stop if I were to purchase one of these stocks.   This would be a good list of possible buy candidates for my students and others participating   in our simulated university stock challenge, UMDSMC, to research.

No tags for this post.

GMI at 1, as QQQQ short term down-trend completes 5th day; in cash and short; T2108 still neutral

GMI1
GMI-21
T210844%

I never fight the trend of the general market.   With the GMI registering 1, and the QQQQ short term down-trend having reached its 5th day, I am confident that the best place to be in my short term trading account is on the sidelines or short.   So, I remain in cash and hold a small position in QID. The market peaked on February 16, weeks before the earthquake in Japan.   The   events in Japan have merely enhanced the speed and   the depth of the decline.

I have been writing about a possible change in trend since the up-trend ended on February 22, after its 64th day, and   IBD has called this market in a correction for days. The pre-market futures suggest we will get a large decline on Tuesday, at least at the open.   It is so much easier to profit from owning stocks during   an up-trend, why stay long during a down-trend?   It took me many years to learn this valuable lesson.   The longer term market trends remain up, for now. But remember, every long term down-trend begins with a short term down-trend.

The Worden T2108 Indicator is at 44%, still in neutral territory. A reading below 20% would encourage me to think the market is near a bottom. You can track T2108 yourself by using the Worden program at   www.freestockcharts.com and entering T2108   as the stock symbol. Look below at T2108 in a monthly time frame and you will see that many large market declines have ended with the T2108   below 20%. (Click on chart to enlarge.)

No tags for this post.

QQQQ short term down-trend reaches 4th day; GMI: 1, mainly in cash; 3X inverse ETF’s surge

GMI1
GMI-22
T210849%

The key to profiting in the stock market is to be in long positions during up-trends and on the sidelines or short during down-trends.   Because the longer term trend of the market remains up, I keep my university pension funds invested in mutual funds.   However, in my shorter term trading accounts, I refuse to stay in the market during times like these. The GMI is registering 1 (of 6) and the new GMI2 is 2 (of 6).   With most of my market indicators negative, the odds are against my making money on the long side.   One more day of the down-trend, will provide more evidence of the staying power of the down-trend. Once a down-trend extends for 5 days, it often continues (see below).   The QQQQ (Nasdaq100 index ETF) closed below its 10 week average on Friday, after staying above it for 26 straight weeks.   This is a significant breakdown in the up-trend that began in September.   The SPY (S&P500 Index ETF) is sitting right on its 10 week average and therefore reached week 27 above its 10 week average.   I have found that when the QQQQ closes below its 10 week average, I am unlikely to make money buying tech stocks.   It does not mean that the market will enter a long down-trend, only that the odds have shifted against going long.   Similarly, the IBD Mutual Fund Index is now below its 50 day average for the first time since this rally began in September.   When these growth mutual funds do not do well, neither will I.   That is why this index is one of the components in the GMI. Only 22% of the Nasdaq 100 stocks closed with their MACD above its signal line, another sign of short term weakness.   And the Worden T2108 Indicator is 49%, in neutral territory.   I look for the T2108 to fall below 20 to signal that a market decline may be near an important bottom.

So, if this is not the time to be long, what can one do, other than to sit in cash? The answer is to short individual stocks in a margin account, buy put options , or buy inverse index ETF’s that rise when the market declines.   I have been writing about inverse ETF’s lately.   My favorite is QID, which aims to rise 2x as much as the QQQQ declines.   But there are a number of other ultra inverse ETF’s to buy to bet on a market decline.   I ranked all of the 3X ETF’s in a watchlist I created using the new TC2000 software, according to how well they performed in the period from the recent peak of the QQQQ on 2/16 through Friday’s close on 3/11, a time during which the QQQQ declined -4.06%. The top 10 gainers during this period of a declining market rose between +15.5% to 7.02%!   (Click on table to enlarge.) So this is how one might profit from a declining market. However, please note that one must quickly exit   from one of these ultra inverse ETF’s when the down-trend ends.   What goes up 3X as fast declines 3X as fast.   For those students participating in the virtual trading contest (UMDSMC), you might want to buy   some of these ultra inverse ETF’s in stages, only adding to your position if the decline in the market continues. Working backward from the current 4 day decline, the length of recent declines, according to the way I define them, has been:   2,3,2,16,4,12,29 and 19 days, respectively. Note that none of the declines that reached 5 days lasted fewer than 12 days…..

No tags for this post.

GMI dives to 1; in cash and inverse ETF’s

GMI1
GMI-23
T210846%

The GMI declined to 1; the only positive indicator remaining is the WishingWealth Weekly QQQQ Index, which is still in a Stage 2 up-trend.   But even the IBD Mutual Fund Index is now below its 50 day average, showing that the growth mutual funds are weakening.   The QQQQ short term down-trend is now 3 days old (D-3). The last time the GMI was this low was August 31, at the end of a decline just before the big rally began in September. But the market has now rallied for seven months.

All of us look smart when the trend is up and our trades are profitable.   Now we must accept that our trading gains the past 2 years have been largely the result of a rising market.   “A rising tide raises all ships.”   Well, the tide is going out now and our job is to conserve capital.   I should not be long now, anymore than it made sense to be short during the market’s rise.   A lot of media pundits have been looking for a market correction so they can buy more stocks at lower prices.   Such sentiment is a negative signal.   The market tends to bottom when the pundits report that stocks are going down and should be down. So, this could be the beginning of a major decline—or it could end today.   The point is no one knows how long a decline will last.   So, the key is to protect capital by being in cash or riding the down-trend with short positions or by buying inverse ETF’s. (My long term university pension funds remain invested in mutual finds.)

Inverse ETF’s rise as the relevant index declines.   So, one no longer needs to short individual stocks when one can ride a decline by buying an inverse index ETF.   Among the inverse index ETF’s   and how they performed in Thursday’s decline are QID (+3%), SQQQ (+4.6%), SDS (+3.8%), DXD (+3.7%), DOG (+1.9%), SH (+1.9%) , PSQ (+1.6%). The reason some of these rose much more than others is because they are leveraged ultra short ETF’s designed to   rise 2-3X more than their underlying index declines.   Just keep in mind that the leveraged inverse ETF’s also fall more quickly when their relevant index rises.   So, I therefore begin to slowly accumulate one of these inverse indexes when the short term trend turns down. It is also possible in uncertain times to hedge one’s long stock positions by buying one of these inverse ETF’s, in case the market should decline. Check out the inverse ETF’s by entering their symbol at the Yahoo finance site.

No tags for this post.

Introducing the GMI2; TC2000.com; IBD50 stock performance: put options on LULU

GMI5
GMI-25
T210870%

I have replaced the GMI-R that combined the 6 indicators from the GMI with 4 additional indicator. The new GMI2 contains the 4 indicators from the GMI-R and adds two additional indicators.   The GMI and the GMI2 will each count 6 different indicators.   I have GMI statistics for several years and have found it to be very useful fro keeping me on the correct side of the general market’s trend.   I like to be long if the GMI is 4 or more.   When it declines to 3 or below, I get defensive in my trading IRA.   I use the GMI2 to alert me to changes in key market indicators I like to monitor.   I do not have decision rules based in the GMI-R or the new GMI2.   In severe down-trend both sets of indicators will register zero.

I publish this table every Monday morning.   Click on the table to enlarge. My short term trend count for the QQQQ Nasdaq 100 index) is up again, at U-1.   Since the large short term up-trend ended at U-64, there have been 3 small trends (D-3, U-2,D-2), and now the new up-trend.   So, I have been whip-sawed a little in my trading accounts.   But my longer term university pension money remains fully invested long in mutual funds. The longer term (weekly) trend of the SPY (S&P 500) and QQQQ ETF’s (exchange traded funds) completed their 26th week. The Worden T2108 indicator is at 70%, in high neutral territory.   Readings around 80% tend to occur at short term market tops. On Friday, 34% of the Nasdaq 100 stocks closed with their MACD indicator above its signal line, up from 18% last Friday and a sign of growing short term technical strength…..

As many of you know, I rely on the TC2007 charting program to calculate all of my statistics and to scan for promising stocks.   This weekend I attended the Worden workshop on their new version of the program, TC2000.   This program is internet based and can be accessed from any computer (including Macs) via the internet.   It combines most of the qualities of TC2007 and freestockcharts.com.   I really like it.   I encourage people to introduce themselves to the Worden platforms by going to their free charting site, www.freestockcharts.com, and if you like the look into www.tc2000.com if you want advanced scanning and alerts capabilities. I will be switching to the new platform soon and will do another webinar for them using TC2000, in the fall….

I often   select stocks to buy from the IBD50 list (formerly the IBD100).   Every Monday, IBD publishes a   list of the 50 tops stocks, according to their excellent fundamental and technical criteria.   I thought I would revisit the issue of how well the IBD50 stock list has performed in the recent past. I am looking at the list published on Monday, 2/14. I therefore track the performance from the closing prices on the previous Friday (2/11), through the close on March 4. During that period, the Nasdaq 100 index ETF, QQQQ, declined a little less than 1%.   So, how did the IBD50 stocks do?   A little less than one half, 48%, advanced. 18% advanced 5% or more, and 8% advanced 10% or more.   The top three stocks were SLW (+31%), ARUN (+24%) and EBIX (+18%).   During the same period, 44% of the NASDAQ 100 stocks rose, 12% rose 5% or more, and 2% rose 10% or more.   The top three gainers were VRTX (+33%), DELL (+12%) and KLAC (+9%). So, it looks like the IBD50 stocks performed somewhat better than the Nasdaq 100 stocks during this time period when the QQQQ declined a little.

If one instead had purchased the leveraged bullish QQQQ ETF’s during this period, one would have underperformed the QQQQ: QLD (-1.9%) and TQQQ (-3%).   For the first time that I have done this type of analysis, the leveraged ETF’s failed to outperform the other strategies. Only 30 of the NASDAQ100 stocks fell 3% or more during this period, and 42% fell 2% or more. Thus, it appears to me that buying the leveraged QQQQ ETF’s is more likely to be a winning strategy only if the QQQQ advances during that period. Moral of the story, if I buy a leveraged bullish ETF and the underlying index begins to decline, I better exit quickly…

LULU came up on my daily scan again.   This daily chart shows that LULU appears to have retraced back to its break-out point (at horizontal line, 50 day average (green dots) and 30 day average, red line).   It will be interesting to see if LULU holds up through earnings, which are scheduled for release on March 17. If I owned LULU going into earnings, I would probably protect myself by purchasing a put option, in case its earnings disappoint. A stop loss order would not help me if the stock gapped far down.

A March 75 LULU put option (that expires on 3/18)   would give me the right to “put” 100 shares of LULU to someone at $75 per share, and would cost about $2.80 per share, or $280 for 100 shares (all options are for 100 shares).   This means that if LULU collapsed after earnings release, I could sell my shares the next day at $75.   While I would receive $75 for each of my shares, my take away would be $75 – 2.80 for the option, or $72.20 per share.   So, if I bought LULU at the open on Monday for about $77 per share, and the stock falls after earnings, the largest loss I would incur is $4.80 per share ($77-72.20), excluding transaction costs.   In order to make up for the cost of this insurance, my break even price on LULU is $79.80 ($77 +$2.80 cost of option). In this example, I was buying a put option that expires on 3/18.   If I wanted   protection for a longer period I could pay more for an option expiring in future months.   Buying put options for insurance can be a very conservative strategy for protecting your money if you are buying high momentum stocks that might advance more than the cost of the stock+option. Last September, when I went long stocks at a time that the market had been weak and I was therefore anxious, I protected myself with put options and did quite well. If you are interested in this technique, check out my longer post on buying put options for insurance.

No tags for this post.