GMI dives to 1; in cash and inverse ETF’s

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The GMI declined to 1; the only positive indicator remaining is the WishingWealth Weekly QQQQ Index, which is still in a Stage 2 up-trend.   But even the IBD Mutual Fund Index is now below its 50 day average, showing that the growth mutual funds are weakening.   The QQQQ short term down-trend is now 3 days old (D-3). The last time the GMI was this low was August 31, at the end of a decline just before the big rally began in September. But the market has now rallied for seven months.

All of us look smart when the trend is up and our trades are profitable.   Now we must accept that our trading gains the past 2 years have been largely the result of a rising market.   “A rising tide raises all ships.”   Well, the tide is going out now and our job is to conserve capital.   I should not be long now, anymore than it made sense to be short during the market’s rise.   A lot of media pundits have been looking for a market correction so they can buy more stocks at lower prices.   Such sentiment is a negative signal.   The market tends to bottom when the pundits report that stocks are going down and should be down. So, this could be the beginning of a major decline—or it could end today.   The point is no one knows how long a decline will last.   So, the key is to protect capital by being in cash or riding the down-trend with short positions or by buying inverse ETF’s. (My long term university pension funds remain invested in mutual finds.)

Inverse ETF’s rise as the relevant index declines.   So, one no longer needs to short individual stocks when one can ride a decline by buying an inverse index ETF.   Among the inverse index ETF’s   and how they performed in Thursday’s decline are QID (+3%), SQQQ (+4.6%), SDS (+3.8%), DXD (+3.7%), DOG (+1.9%), SH (+1.9%) , PSQ (+1.6%). The reason some of these rose much more than others is because they are leveraged ultra short ETF’s designed to   rise 2-3X more than their underlying index declines.   Just keep in mind that the leveraged inverse ETF’s also fall more quickly when their relevant index rises.   So, I therefore begin to slowly accumulate one of these inverse indexes when the short term trend turns down. It is also possible in uncertain times to hedge one’s long stock positions by buying one of these inverse ETF’s, in case the market should decline. Check out the inverse ETF’s by entering their symbol at the Yahoo finance site.

Introducing the GMI2; TC2000.com; IBD50 stock performance: put options on LULU

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I have replaced the GMI-R that combined the 6 indicators from the GMI with 4 additional indicator. The new GMI2 contains the 4 indicators from the GMI-R and adds two additional indicators.   The GMI and the GMI2 will each count 6 different indicators.   I have GMI statistics for several years and have found it to be very useful fro keeping me on the correct side of the general market’s trend.   I like to be long if the GMI is 4 or more.   When it declines to 3 or below, I get defensive in my trading IRA.   I use the GMI2 to alert me to changes in key market indicators I like to monitor.   I do not have decision rules based in the GMI-R or the new GMI2.   In severe down-trend both sets of indicators will register zero.

I publish this table every Monday morning.   Click on the table to enlarge. My short term trend count for the QQQQ Nasdaq 100 index) is up again, at U-1.   Since the large short term up-trend ended at U-64, there have been 3 small trends (D-3, U-2,D-2), and now the new up-trend.   So, I have been whip-sawed a little in my trading accounts.   But my longer term university pension money remains fully invested long in mutual funds. The longer term (weekly) trend of the SPY (S&P 500) and QQQQ ETF’s (exchange traded funds) completed their 26th week. The Worden T2108 indicator is at 70%, in high neutral territory.   Readings around 80% tend to occur at short term market tops. On Friday, 34% of the Nasdaq 100 stocks closed with their MACD indicator above its signal line, up from 18% last Friday and a sign of growing short term technical strength…..

As many of you know, I rely on the TC2007 charting program to calculate all of my statistics and to scan for promising stocks.   This weekend I attended the Worden workshop on their new version of the program, TC2000.   This program is internet based and can be accessed from any computer (including Macs) via the internet.   It combines most of the qualities of TC2007 and freestockcharts.com.   I really like it.   I encourage people to introduce themselves to the Worden platforms by going to their free charting site, www.freestockcharts.com, and if you like the look into www.tc2000.com if you want advanced scanning and alerts capabilities. I will be switching to the new platform soon and will do another webinar for them using TC2000, in the fall….

I often   select stocks to buy from the IBD50 list (formerly the IBD100).   Every Monday, IBD publishes a   list of the 50 tops stocks, according to their excellent fundamental and technical criteria.   I thought I would revisit the issue of how well the IBD50 stock list has performed in the recent past. I am looking at the list published on Monday, 2/14. I therefore track the performance from the closing prices on the previous Friday (2/11), through the close on March 4. During that period, the Nasdaq 100 index ETF, QQQQ, declined a little less than 1%.   So, how did the IBD50 stocks do?   A little less than one half, 48%, advanced. 18% advanced 5% or more, and 8% advanced 10% or more.   The top three stocks were SLW (+31%), ARUN (+24%) and EBIX (+18%).   During the same period, 44% of the NASDAQ 100 stocks rose, 12% rose 5% or more, and 2% rose 10% or more.   The top three gainers were VRTX (+33%), DELL (+12%) and KLAC (+9%). So, it looks like the IBD50 stocks performed somewhat better than the Nasdaq 100 stocks during this time period when the QQQQ declined a little.

If one instead had purchased the leveraged bullish QQQQ ETF’s during this period, one would have underperformed the QQQQ: QLD (-1.9%) and TQQQ (-3%).   For the first time that I have done this type of analysis, the leveraged ETF’s failed to outperform the other strategies. Only 30 of the NASDAQ100 stocks fell 3% or more during this period, and 42% fell 2% or more. Thus, it appears to me that buying the leveraged QQQQ ETF’s is more likely to be a winning strategy only if the QQQQ advances during that period. Moral of the story, if I buy a leveraged bullish ETF and the underlying index begins to decline, I better exit quickly…

LULU came up on my daily scan again.   This daily chart shows that LULU appears to have retraced back to its break-out point (at horizontal line, 50 day average (green dots) and 30 day average, red line).   It will be interesting to see if LULU holds up through earnings, which are scheduled for release on March 17. If I owned LULU going into earnings, I would probably protect myself by purchasing a put option, in case its earnings disappoint. A stop loss order would not help me if the stock gapped far down.

A March 75 LULU put option (that expires on 3/18)   would give me the right to “put” 100 shares of LULU to someone at $75 per share, and would cost about $2.80 per share, or $280 for 100 shares (all options are for 100 shares).   This means that if LULU collapsed after earnings release, I could sell my shares the next day at $75.   While I would receive $75 for each of my shares, my take away would be $75 – 2.80 for the option, or $72.20 per share.   So, if I bought LULU at the open on Monday for about $77 per share, and the stock falls after earnings, the largest loss I would incur is $4.80 per share ($77-72.20), excluding transaction costs.   In order to make up for the cost of this insurance, my break even price on LULU is $79.80 ($77 +$2.80 cost of option). In this example, I was buying a put option that expires on 3/18.   If I wanted   protection for a longer period I could pay more for an option expiring in future months.   Buying put options for insurance can be a very conservative strategy for protecting your money if you are buying high momentum stocks that might advance more than the cost of the stock+option. Last September, when I went long stocks at a time that the market had been weak and I was therefore anxious, I protected myself with put options and did quite well. If you are interested in this technique, check out my longer post on buying put options for insurance.

Markets rebound–again; QQQQ weekly chart reveals market trend; TDSC rockets higher

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The GMI and GMI-R are both indicating a general market up-trend. The Worden T2108 is back to 74%, still in neutral territory.   Meanwhile this weekly chart of the Nasdaq 100 index shows it to be in a firm up-trend since September.   The key bullish pattern of 4wk>10wk>30 wk average is evident and the index has continually found support at its 10 week average (blue dotted line).   I have to relearn the lesson over and over again, to focus on weekly trends, so as not to be shaken out of the market by daily fluctuations. Note also the Stage 2 up-trend, with the index well above the rising 30 week average (red line). A key sell signal for me will be a close below the 10 week average, currently at 56.83. For those of you new to charting and technical analysis, you can use the free chart program at freestockcharts.com.   Just add the moving averages, 4,10,30 as indicators and select the week as your time period on the chart. (Click on chart to enlarge.)

Last December, I wrote about a Judy’s pick, TDSC, at around $31.   Yesterday TDSC rose 10% to $53.29,   an all-time high. My stock-buddy, Judy, researches “concept” stocks, and finds more future winners than any other person I have ever met.

QQQQ Short Term Up-trend resumes; Worden workshop coming to DC; RWB stock: PRGO

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The GMI rose to 5 and the GMI-R to 7 on Monday.   I began a new QQQQ short term up-trend count. I still will feel more confidence in the new up-trend if it reaches day 5.   Nevertheless, it is okay for me to go long again in my short term account.   My university pension account has remained 100% long in mutual funds the entire time.   There were 367 stocks at new 52 week highs in my universe of 4,000 stocks on Monday, a sign of strength…

The students in my classes use the TC2007 stock charting program to analyze stocks.   The Worden people, who offer the program, are coming to the Washington, DC area this Friday and Saturday.   The one day workshop is free in the morning and will take place at the University of Maryland Conference Center in College Park. I use TC2007 to run all of my analyses and statistics. UMDSMC participants may want to attend the workshop on one of these days.   It is how I learned   to use the TC2007 software. I will attend the workshop on one of these days.

A stock on Monday’s new high list that is at its all-time high and and a RWB rocket stock is PRGO.   Note in the weekly chart below that PRGO   has appeared in IBD’s New America column of visionary companies twice in 2010. I always want to buy the strongest stocks that are near all-time highs.   In the stock market, the strong get stronger, until they top.   When they top, I always have an exit plan to limit losses. Most people want to buy a stock that will go to the moon, but are reluctant to buy stocks that are launched and heading to the stars.   People looking for bargains in the stock market often end up with losers.

University of Maryland Stock Challenge now open

All students, faculty,   staff and honors alumni of the University System of Maryland are invited to register for the Spring 2011 Stock Challenge.   Registration is free and everyone gets a $100,000 margin account to trade.   It is a great way to learn how to manage an account without risking real money.   There are a lot of educational links on the site.   Register at   www.umdsmc.com.