GMI:0; GMI-R:0; Nicolas Darvas on staying clear of bear markets

The GMI and GMI-R remain at zero.  The down-trend in the QQQQ is in place. So, what to do when only 40 of the 4,000 stocks in my universe of stocks hit a new high on Friday while 232 hit new lows?  Friday was the 7th day in the current QQQQ short term down-trend and the GMI has been less than 3 for the past 8 days.  (Click on chart to enlarge.)Gmi0111 The GMI has registered zero for the past six days.  So, I have been telling you how I have been mainly in cash.  I only play when the odds are in  my favor.  So why do the media pundits, including Cramer,  continually look for stocks to buy?  Why are they looking for safe stocks in a rotten market?  I must assume they make no money and have no audience if the public stays away during bad markets.  It is because I was angry at how these mental midgets misled the public in the 2000-2002 debacle that I began this blog. I want to educate the little person as to how I have protected myself from the major market declines since 1995.

So, if you still are unconvinced, listen to what the genius trader, Nicolas Darvas said about bear markets.  Darvas, as you will recall from my favorite post on him (see bottom right), made a fortune in the bull market of the late 1950’s as he traded part-time and literally danced around the world.  In a rare sequel to his best-seller of 1960 (You Can Still Make It In The Market, published in 1977) , Darvas wrote about bear markets.  This book was written after Darvas had experienced the painful market declines in 1970 and 1974.

…..I like to be sure the odds are in my favor. If the market is in a down-trend and the industry group is performing weakly I know that the cards are stacked against me and that my chances of making big profits are poorer than if the market and the industry are strong.  You cannot be too careful in the stock market.  …………….There have been any number of stocks that have multiplied in price manyfold in a bear market, just as there are plenty of stocks that have hardly moved in a bull market.  But my temperament is such that I would rather be safe than sorry.  So I keep out in a bear market and leave such exceptional stocks to those who don’t mind risking their money against the market trend……………..

Many people seem to think they must always keep their money “working,” i.e. constantly invested in stocks.  But why remain invested in a bear market when everything is dropping? Why ride the market up and down and lose on the downside what you have so painstakenly made on the upside?……There are even some people who believe that a policy of “buy and hold” is the best, so they hang on through thick and thin.  Presumably they get some masochistic pleasure from seeing their capital melt before their eyes every two or three years in successive bear cycles, or they just close their eyes, grit their teeth, and sit it out.  With that sort of approach stock-market investment becomes a succession of nightmares.  I prefer to sleep soundly at night, even if it means going into cash for long periods.

Oh that we had more highly visible experts like Darvas, speaking accurately about the stock market! Instead the pundits of the day try to scare us into stocks, lest we miss the next rise.  But no one knows when the turn will come and there is plenty of time to jump on a real bull move.  So I sit on the sideline during this down-trend, comfortably in cash, and wait for the GMI and the market to turn………………

GMI:0; GMI-R: 0; 6th day of QQQQ down-trend

The GMI and GMI-R remain at zero.  Only 63 new highs and 285 new lows in my universe of 4,000 stocks on Friday.  Friday was the 6th day in the QQQQ short term down-trend.  Cramer thinks we have hit bottom–time will tell.  Only 17% of the Nasdaq 100 stocks closed above their 30 day averages.  The Worden T2108 indicator is at 36%.  I remain mainly in cash.

GMI: 0; GMI-R: 0; More than 1,000 new lows

The GMI and GMI-R are still both zero.  An incredible 1,011 stocks in my universe of 4,000 stocks hit a new low on Wednesday.  I am comfortably in cash with a few shares of GLD.

GMI:0; GMI-R: 0; over 700 new lows

Both the GMI and GMI-R remain at zero.  There were more than 700 new lows in my universe of 4,000 stocks on Tuesday.  Cash is king.

GMI: 0; GMI-R: 0; In cash

Both GMI indexes are zero and I remain in cash.  I won’t fight the trend.

GMI: 0; GMI-R: 0; Most new lows in 2 years; mostly in cash

The GMI and GMI-R are now zero.  While the last two times these two indexes were zero the market bounced, I am concerned that the number of new 52 week lows (783) in my universe of 4,000 stocks on Friday was the highest, by far, that it has been since I began posting over two years ago.  And the Worden T2108 indicator is at 31%, still well above the low levels at which bottoms have occurred.  With all indexes I follow now below their 30 week averages, I think this may be the beginning of a severe market down-trend.  Friday was the second day of the new short term down-trend in the QQQQ.  I was stopped out of most of my very small positions on Friday and remain mainly in cash.  I am not looking for bargains.  This is the time for me to relax on the sidelines. 

GMI:2; GMI-R:2; First day of new QQQQ down-trend; Rise into earnings?

The GMI and the GMI-R are at 2.  Thursday was the first day in a new QQQQ short term down-trend.  And yet the Worden T2108 indicator rose from 36% to 39%. And the percentage of the Nasdaq 100 stocks that closed above their 30 day averages rose from 30% to 32%.  While there were 394 new lows in my universe of 4,000 stocks, there were also 68 new highs.  With all of the bearishness and talk of recession by the pundits, maybe we will get an earnings release bounce later in January.  This is not the time for me to go short, and I am instead nibbling at a few stocks that appear to be gaining support. I place a close sell stop as soon as I take a position.  The key to success is to take many small losses and a few large profits.

GMI: 2+; GMI-R: 2+; Mainly in cash

The market weakened considerably on Wednesday.  The GMI and GMI-R are both 2+.  The GMI-R has 10 indicators, compared to the GMI which has 6.  These additional indicators are more sensitive to short term trends and they are now all negative.  I am mainly in cash.

GMI: 4+; GMI-R: 5+; ISRG in 2007 analysis–AOL induced epiphany

The GMI closed out the year at 4+ and the GMI-R at 5+.  The GMI indexes focus more on the performance of the tech stocks, as measured by the QQQQ, rather then the other stocks in the major indexes.  The GMI therefore is masking the deterioration in the Dow and S&P 500 stocks.  The SPY and DIA are trading below their 30 week averages and their 10 week averages are also below their 30 week averages.  This is indicative of a potential serious down-trend.  The QQQQ, while doing better, is also below its 10 week average which in turn is declining.  Should the 10 week decline below the 30 week, the odds point to a serious decline in the tech stocks too.  Will the tech stocks lead the others up, or follow them down?  That is the critical question to be answered in 2008….

I want to show you my analysis of the performance of ISRG the past year, in relation to the trend of the QQQQ.  My prior post showed you the length of the up and down trends that I identified in 2007.  Long before I developed the GMI, I noticed during the big tech rise of the 90’s that even the strongest stocks did poorly when the market went into a down-trend.  I remember looking at the leader, AOL, and seeing that even though it climbed greatly over that period, it still fell quite a bit during market declines.  My analyses convinced me of the value of buying strong growth stocks when the market was in an up-trend, but letting them go during a down-trend.  I decided to repeat my analysis with ISRG, the leading gainer among the Nasdaq 100 stocks in 2007, having more than tripled.

So, I added the performance of ISRG to my table of QQQQ trends that occurred in 2007.  (Click on table to enlarge.) For each up or down-trend, I listed the high and low of ISRG during that period.  You will first note that Isrg almost 159 points(80.61 + 78.30) of ISRG’s rise last year (about 69% of its total gain) occurred during the two major market up-trends that began in April and August.  Now, ISRG was an incredibly strong stock and you can see that even during the down-trends (in red) it did very well.  The striking other relationship in the table is that during the 19 day down-trend from 11/9-12/6, the stock rose 50.91 points from the end of the prior up-trend! However, and here is the key point for me, while ISRG finished the down-trend at 344.79, it had fallen to a low of 264 during that down-trend, a decline of about 10% from the end of the prior up-trend (293.88).  The potential loss is even more dramatic if one had been unlucky enough to have bought ISRG at the top of the prior up-trend at 339.63; the resulting decline to 264 in the next down-trend would have been 22%.  These losses would have occurred in a stock that tripled during the year!  Would I have  been brave (stupid?) enough to have held on to ISRG during such a decline? I reach the conclusion again that even the strongest stock will decline significantly during a market down-trend.  Others will decline more. For that reason, I either sell out or set very close sell stops on my winners when the general market trend is down. It is much safer to ride a strong stock during market up-trends.  This was my epiphany from my analysis of AOL ten years ago.  Do you agree with my interpretation? (

See my disclaimers on prior posts.

GMI: 4; GMI-R: 6; Tough year-end; New email

The GMI was 4 of 6 and the GM I-R was 6 of 10 as of Friday’s close.  As this table shows, the indicators that rely on new highs have been pulling these indexes down.  There were only 43 new highs and 158 new lows on Friday in my universe of 4,000 stocks.  Gmi1228 (Click on table to enlarge.)  Note that while my short term indicator, GMI-S, is at 81%, reflecting recent strength in four indexes, the GMI-L is at 38%.  This pattern reflects a short term rally in indexes that are weakening for the longer term.  This is very ominous.  Note the QQQQ has closed below its 10 week average the past 6 weeks and the SPY for 3 weeks.  More significant, the 10 week average is below the 30 week average for the SPY, DIA and IJR.  Only the QQQQ, a tech index without financials, is relatively stronger.

The difficulty trading the recent market is reflected in this other table.  I broke the trading days in the past year into whether the QQQQ fell into up- or down-trends according to my posts this year.  UpdowntrendsThere were 8 up-trends and 8 down trends in 2007.  For swing traders like myself who like to hold stocks over weeks or months, there were only 2 tradeable rallies, lasting 80 and 50 days. The remaining 6 up-trends lasted 5-9 days.  On the other hand, there were 3 relatively brief tradeable down-trends, lasting 16, 23 and 19 days.  Since December 7, trends have whip-sawed back and forth.  No wonder it has been difficult to make money in December!    Note also that for 2007 as a whole, the market was in an up-trend about twice the number of days (170/78) that it was in a down-trend.  The year 2006 had an 86 day up-trend.  These stats reinforce the idea that traders must jump on these long up-trends when they appear, once or twice each year.

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