I am back from a much needed vacation. In the past two weeks my market indicators strengthened a lot more than the QQQQ would indicate. The QQQQ is in its 22nd day (D-22) of its current short term decline and has closed below its 10 week average for 12 weeks. However, the GMI is now at +3 and surprisingly, the IBD Mutual Fund Index is back near its 50 day average and is too close to call (?). The latter indicates that the growth funds are starting to rise. I have found that when these funds start rising, I can make money trading IBD type growth stocks. While 70% of the 21 stocks in my 4,000 stock universe that hit a new high 10 days ago closed higher on Friday than they closed 10 days ago (i.e. successful 10 day highs), only 25% of the 260 stocks that hit a new low 10 days ago closed lower. This suggests that shorting new lows has been unlikely to have been profitable recently. I am glad I closed out my shorts before I left on vacation. It was better to have bought stocks at new highs. There were 213 new highs on Friday in my universe of about 4,000 stocks. Reflecting the out-performance of the big cap stocks, my Daily SPY Index has now turned positive. The GMI-L is now at 50, up 25 from my last post on 7/21. The GMI-S is at 81, up 75 from its low pre-vacation reading. All four of my short term indicators for the DIA and SPY are positive, compared with 3/4 of the IJR indicators and only 2/4 of the QQQQ indicators. Clearly, the small cap and tech stocks are lagging the big cap stocks. This is not surprising, because after a decline, people are most confident buying the blue chips. After these trades yield some profits, they move on to the more speculative stocks.
But a look at my universe/IBD 100 performance comparisons tells a slightly different story. While the indicators for my stock universe all strengthened the past 2 weeks, so did my IBD 100 indicators. 65% (+30) of my stock universe closed above their 10 day averages, as did 63% (+48) of the IBD 100 stocks from 5/15. My earliest indicator of a possible up-trend–stocks trading above their MACD signal line, was 69% for both my stock universe (+32) and for the IBD 100 stocks of 5/15 (+50). Thus, incredible improvement has occurred in the short term indicators of both my stock universe and the IBD 100 type of growth stocks. The action of the tech and small cap stock indexes (QQQQ, IJR) fail to reflect this improvement. In fact, as of Friday, twice as many stocks in my universe were within 5% of a new high (18%) than a new low (8%). In spite of their recent strengthening, the IBD 100 stocks of 5/15 are not out of the woods yet–only 21 of them (21%) closed higher on Friday than they did on 5/15 when this list was published; 28% of them are down 20% or more. As IBD frequently cautions, one should not simply buy the IBD 100 stocks and hold them through a weak market……
So where are we? First of all, during a few days in my vacation I tuned into CNBC and was struck by the bearishness of the comments. These pundits tend to look backward at the market rather than focusing on the the current trend. There is much wisdom to be gained from other successful trading gurus (Darvas was an extreme example) who tuned out all media gossip and focused on their technical indicators to assess the market’s trend. In his most recent excellent book, John Boik says that the very successful IBD-type trader (Roppel) he describes used to keep CNBC on all day with the volume muted. For me to be successful in trading, I also must tune out the huge amount of misinformation on the airwaves and concentrate on my analysis of the technicals.
So, for now, it looks like the big cap stocks have turned up and the IBD type growth stocks are showing some signs of strength. I have closed out all of my shorts and am now looking to purchase stocks with good technicals. If the GMI continues to climb I will wade slowly into this market. There is no need to hurry, because there is plenty of time to jump on board the train, if a real up-trend is starting. Among the technically strong stocks I am watching are (I own one of these): GPIC, OCN, OMNI, BVX, FAL, IAAC, DAKT,VOL,TXUI BMRN and EME. Also, the four IBD 100 stocks from 5/15 to hit a new high on Friday were: SAFT, CLB, CTSH, MVK. It’s nice to be back…….
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