Dr. Wish

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 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? (ewish46@gmail.com)

See my disclaimers on prior posts.

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.  (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.  There 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.

New email:  ewish46@gmail.com

The GMI fell to 4, and the GMI-R to 6.  There were more new lows than new highs in my universe of 4,000 stocks on Thursday (100/84).  The QQQQ failed to close above the important resistance level from the last rise (52.84).  We will have to see if it can hold support at its key 30 day average (50.91).