Nicolas Darvas

CNBC: Forever Bullish

@ 8:10 pm

I think you do your listeners a disservice.

Mutual funds must stay invested, individuals do not.   About 70% of stocks go with the market indexes.   When the indexes are declining as they have been for weeks, it is your duty to tell people not to fight the trend.   Get out of the way, safely in cash,   or go short.   Why try to find the few exceptions that can fight the trend.   Go with the odds, as Livermore, Baruch and O’Neil did.

There are enough pundits urging people to buy–you are smarter than that. Or will you lose your audience if you tell people to stay in cash?

Sent to Jim Cramer,   MadMoney show, April 15, 2005

Today, Cramer told his audience to “AVOID” 80% of stocks in this economic environment.   He then went on to describe the stocks they could buy and proceeded to the lightning round of rapid buy/sell/hold advice.   Why does a talented hedge fund manager who clearly sold short and traded options, never advise his listeners to do what he did?   Why is he always looking for buys, when he thinks 80% of stocks are declining?   Does he think the rest of us cannot be trained to use these techniques which he, himself, used, to profit from declines?   Buy in a declining market?   This is insane–now I know why they named the show MadMoney.

One reader sent me a quote from the professor, Peter Navarro, www.peternavarro.com, suggesting why CNBC has a penchant for bullishness:

“Ah, those bullish fumes that so very often make the CNBC bubbleheads such wonderful contrarian indicators.   Oil prices off the charts, interest rates moving inexorably up, inflation pressures building.   No worries.   Be happy at CNBC- cause bearish rhetoric makes for bad ratings- and besides, it’s not their money they are losing for you.”   Navarro’s Broad Outlook for the Market: Smile for the CNBC Camera, 4/4/2005.

Now, I thought I was irreverent!   In researching this quote, I looked over Peter Navarro’s free weekly report and was very impressed.   You might want to check it out at www.peternavarro.com, click on   weekly column. It is nice to see someone else who is not afraid to talk about shorting stocks or to be in cash! Do you think that if Cramer advised listeners to short some stocks, it would destroy his ratings? I think it sure would help his credibility.   This weekend I will begin to discuss how we little people can take advantage of shorting like the big guys–unless the market should undergo a sudden metamorphasis.

Speaking of the market, the WW-GMI for today remains at zero.Index503 There were only 14 stocks   that hit a new high 10 days ago and closed higher today than they closed   10 days ago (when the stock made the new high).   Thus, few of these new highs were successful.   The analogous number for new lows 10 days ago is 43.   In addition, there were more new 52 week lows today than highs (79 vs. 69 in our universe of 4,000 stocks).   However, the SPY is very close to the area where my daily index will turn positive.   If it closes above 117 for 2 days , the index will turn positive and suggest to me that a tradeable rally has begun. The QQQQ is still far away from signaling a turn.

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I hate to say I told you so, but remember I said Monday night that COCO, CECO and APOL looked sick?   They declined , -4.26%, -9.74% and -1.31%, respectively, today. I guess it was a lucky call.   I sure didn’t know any news about CECO; it was all in the chart. Ceco I identified the downtrend in the weekly chart but have printed the daily chart here to show you the tremendous decline   it had today.   Click on the chart to enlarge it.   Notice how the 50 day moving average (green line)   had topped out in February and that the stock met resistance at this average.   Note the large gap down in February on high volume- a sign of massive institutional selling.   (Gaps in price are worthwhile tracking.) The stock rose back to the 50 day and closed the gap and then began its decline.   The selling was all visible in the chart, and I never knew anything about a class action lawsuit against the company.   Nicolas Darvas would say if he shorted the stock, that he had become a silent partner with the sellers by jumping on board after them.

The housing stocks with the ugly charts   tended to decline today too.   I think this weekend I will post a table tracking the performance of the ugly charts after I   commented on them.   Maybe I should compute a pulchritude index for stocks.   Tomorrow will be a pivotal day for the SPY.   Will it close above 117?

Taking Stock of the Market

@ 8:01 pm

“MY ONLY SOUND REASON FOR BUYING A STOCK IS THAT IT IS RISING IN PRICE .   IF THAT IS HAPPENING, NO OTHER REASON IS REQUIRED.   IF THAT IS NOT HAPPENING NO OTHER REASON IS WORTH CONSIDERING.”

Nicolas Darvas, Wall Street: The Other Las Vegas, New York: Kensington Publishing,1964, reprinted 2002, p. 134.

Actually, Darvas (who made 2 million dollars in the market while traveling around the world,   during 18 months in the late 1950’s)   also liked to buy companies in visionary industries and with good earnings or the promise thereof.   Do you know that the American Stock Exchange suspended stop orders after his best selling book was published.   For many years I could only use stops on the NYSE.   Now, with computerized trading, I can use stops on all stocks.   The book quoted above was blackballed by the financial press (no one would advertise the book, especially Barron’s, even though his book helped boost Barron’s circulation) because in the book, Darvas had the nerve to compare the structure and functions of the NYSE to those of a casino.   Imagine suggesting that trading   stocks had something to do with gambling! Things are different today, of course.

In yesterday’s post, I told you how I focus on finding stocks that behave like rockets in the same way that Darvas did.   The strategy of buying strong stocks at new highs in a bull market is also advocated by great traders like Livermore, Loeb and O’neil.   While I recommend reading the masters directly, John Boik’s new book, Lessons From the Greatest Traders of All Time. provides a good overview of these persons’ trading philosophies.

Friday’s bounce did not come close to changing my General Market Index (WW-GMI.)   As the table below shows, the index is still stuck on zero. Only 54 stocks out of my universe of 4,000 hit new highs on Friday.   Ten days ago, 22 stocks hit new highs and only 12 of them closed higher Friday than they did on the day they made the new high.   In comparison, 229 stocks   hit a new low 10 days ago and 135 of them closed lower on Friday than they did on the day they hit the new low.   The bottom line is that there were 11 times (135/12) as many “successful” new lows than “successful” new highs in this market.   Moreover, in the last ten days we had somewhat better odds of profiting from shorting new lows (135/229=59% ) than by buying new highs (12/22=55%).   Are you still betting on stocks to rise?   The IBD growth mutual fund index is below its 50 day average and its 200 day average.   So growth stocks are not doing well.

The situation is even worse than this index indicates.   Since January 3, the NASDAQ 100 (QQQQ) has fallen 11.4%.   Of the 100 stocks in this index, only 20 stocks have risen.   The median decline was 12.9%, meaning that one half of the declining stocks in the index fell more than 12.9%.   Twenty of the stocks fell 19% or more in this period.   If you bought any of the NASDAQ 100 stocks at the beginning of January you had an 80% chance of a losing trade.

Maybe you did not have enough foresight or knowledge to detect the beginning of the decline in January.   What if you waited until March 11 , when the decline resumed, after a brief pause.   Between March 11 and last Friday, the NASDAQ 100 index lost 5.9%.   During that period, 75/100 stocks or 75% declined, with a median decline of 9.2%.   By getting out of these stocks in mid-March you would still have avoided sizable losses.   My point is that even if you miss the exact change in the trend, it still helps to get in synch with the trend.   Most people, when they have a loss, hope that things will get better, and when they are nursing a profit, fear losing it.    Reverse the emotions.   Hope when you have a profit and fear when you have a loss.   In a downtrend, go to cash or short, and swim with the tide.

Why is everyone addicted to being bullish?   Why do we only want to buy stocks?   Why does the media run from shorting?   We can have the media pundits recommending the purchase of stocks in 2000-02 as they declined   from triple digits to single digits.   But advising people to short stocks is too risky for them?   Traders profit from price trends, and stocks move up and down.   It is time to educate ourselves about profiting from market declines or to at least run from the market during times like these.   Are you convinced yet?

THE BOTTOM LINE IS THAT WE MUST TIME THE MARKET AND WE MUST GO WITH THE MARKET TREND IF WE WANT TO PROFIT IN THE STOCK MARKET.

A lot of industry groups have been declining.   I have been saying for weeks how sick the housing stocks look.   I noticed this weekend, however, another industry that looks sick–education.   Check out APOL, CECO, COCO.   I am not recommending that you short them; just take a look at their weekly charts and see if you detect the danger signs.

I guess everyone will be watching the Fed action this week.   The Fed is in a bind.   If they raise rates, it means they are still sensing a risk of inflation.    If they do not raise rates, the pundits will opine that the Fed must see a weak economy on the horizon.   Perhaps the best outcome would be for them to raise rates and say they are almost through.   It probably won’t matter, however, the die may already be cast with regard to the economy.   Give me a word that begins with “R.”

Let’s Talk Strategy

@ 11:18 am

“it is utterly useless for us on the outside, who buy and sell comparatively small blocks of stock, to conjecture about what “they” are doing.   We cannot know what the insiders intend to do, but we can see their orders on the tape when they execute them.   That is why my plea is for everyone of us to have no mere opinions of his own, but to allow the actions of the market to tell him what is passing.”
(Humphrey B. Neill, Tape Reading & Market Tactics, 1931, New York: B.C. Forbes Publishing Company; 14th printing, 2003, Vermont: Fraser Publishing Company)

When Nicolas Darvas was interviewed by Time Magazine in the early 60’s and it came out that he made almost 2 million dollars in the market in 18 months (while he was dancing around the world!), he noted that he read and reread Neill’s book (along with Gerald Loeb’s).   Neill’s book has been reprinted many times and I happened to find it on the shelf of my local Barnes and Noble store.   Neill dedicates his book, “to my losses, with a deep appreciation for the experience and knowledge which each loss has brought me.”

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