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

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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.

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QQQ short term up-trend reaches 5th day; adding QLD

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With the new short term up-trend now 5 days old, I am slowly wading into QLD.   Other positive signs include the GMI-2 climbing to 4, and the fact that the latest Investors Intelligence poll shows more bearish advisers than bullish advisers.   This pattern rarely occurs.   IBD discusses the recent history of this indicator on page 1 in “The Big Picture” column. When advisers are bearish, it may indicate we are near the bottom of a decline.   I am content to   wade slowly   into this market in my more speculative accounts. Since my indicators are most sensitive to the QQQ, I prefer to buy the QLD leveraged ETF which I described yesterday.

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QQQ short term up-trend reaches 4th day; buying a little QLD

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I have found that if the a new QQQ short term up-trend lasts 5 days, it often will continue for more days.   I am very slowly wading into this up-trend with a small purchase of QLD, the leveraged bullish ETF that is designed to rise (or fall) twice as much as the QQQ. If the up-trend continues, I will add to my position. If it fails, I will quickly exit. I know the longer term trend remains down, but the shorter term trend, by definition, turns up before the longer term trend. I remain in money market funds in my university pension.

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100% cash; S&P 500 in Weinstein Stage 4 decline

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I was tempted to buy some longs recently and paid the price.   I am now back to 100% cash.   With the GMI at 1, it makes no sense for me to be buying or holding stocks.   When the market turns up, there is plenty of time to go long and profit.   The QQQ short term up-trend is in its 2nd day but another weak day on Monday would begin a new short term down-trend. It is very difficult to have the discipline to stay out of the market, but a few losses quickly gets me back on track.   If I wanted to trade actively, I would be shorting or buying inverse ETF’s that go up as their underlying basket of stocks declines. Note that the QQQ has closed below its 10 week average for six weeks.     The SPY, which is weaker because it contains financial stocks,   has done so for seven weeks. The Worden T2108 Indicator is at 22%, in a neutral range, but close to the level where bottoms have occurred. On August 8, T2108 bottomed at 7%. It will be interesting to see if the market reaches that extreme weak level again.

This weekly chart of the S&P500 Index (click on chart to enlarge)   shows that index to be in a Weinstein Stage 4 decline.   Note that the 4wk average (red dotted line) is below the 10 wk average (blue dotted line) which is below the 30 wk average (red line).   This pattern is a sign to me of a major down-trend. We will know a new up-trend has begun when we get back to a pattern with the 4wk>10wk>30wk, as occurred last October at the beginning of that multi-month rally. The current decline looks more severe than the consolidation that occurred last year, because the 30 week average (red line)   is now declining. A declining 30 week average was one of the patterns that alerted me to get out of the market in 2000, and again in 2008. No one knows when this decline (or any decline) will end.   Better to be safely in cash than to try to guess the bottom. The GMI-2 will increase as the moving averages I monitor turn up and will alert me to a probable change in the primary trend of the market.

 

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