Dreaded September? GMI: +3; Stocks show strength; Katrina-induced lower interest rates?

Well it’s September and everyone expects a difficult month. So, guess what?  Do you really think the market will accommodate mass opinion?  I hate to say so, but I think this market is turning.  Declines do not begin when the news headlines shriek of calamity, as they do now.  Did you notice that the market is holding in the face of all of this bad news?  I think that means the selling is over, for now.  I am selling my puts and looking to buy.  Of course I will only begin to wade in and will wait for the GMI to give a definite buy signal. Gmi831  But the GMI moved up again Wednesday, to +3.  The IBD Growth Fund Index is now just above its 50 day average.  And would you believe 248 new 52 week highs on Wednesday!  Many stats improved: 25% (+4) of stocks are in a short term up-trend and 53% (+9) are above their 10 week average.  Between 80%-84% of the stocks in the Nasdaq 100, S&P 500 and the Dow 30 advanced on Wednesday.  That makes two out of the past 3 days that about 80% of stocks rose.  The QQQ and the SPY are now above their 10 day averages, the first sign of a possible reversal.  The percentage of stocks within 5% of their 52 week highs rose to 27% (+7).  It may be time to look at stocks near new highs again.  Speaking of new highs, both HPQ and  MSFT, which I noted in my prior post, advanced on Wednesday.  And many of past year’s winners are showing new signs of life:  HANS, FTO, BTU, CCJ, CAT BMHC, ACR, ATVI, ADSK, DNA, CELG, ALKS, CVH, BBH.

I am not embarrassed to change from bearish to cautiously bullish.  Each day provides new data, and when the indicators change, I must turn on a dime–no pride is involved.  The idea is to make $$, not to be right. A big ego is lethal in this business—in all business……………

The pundits are saying that bonds are rallying (and rates are falling) because the Katrina catastrophe will reduce future economic activity. Tlt831  However, the following chart of an ETF (TLT) that tracks the 20 year bonds, shows that long term bonds were rising, and rates were falling, since August 9, long before the hurricane.  Unless we believe that prescient traders foresaw the hurricane debacle weeks before it hit, we must conclude that the economy was weakening and rates were falling long before the hurricane, and that Katrina’s damage merely intensified the pre-existing trend.  Identical patterns can be found in ETF’s that track shorter term bonds (SHY and IEF)…………………

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Market held Tuesday; GMI: +2; Oil/energy stocks at new highs; HPQ, MSFT ready to rise?

The market had every excuse to have a big decline Tuesday, but it held well above its lows.  The GMI actually increased 1, to +2.  Gmi830 This is because there were 116 new yearly highs.  There were only 32 successful 10 day highs–stocks that hit a new high 10 days ago and closed higher Tuesday than 10 days earlier.  There have therefore been few profitable new high breakouts recently.  Between 29%-30% of the stocks in the Nasdaq 100, S&P 500 and Dow 30 stocks advanced Tuesday.  This was the eleventh day in the QQQQ decline (D-11)………………..

The new highs list Tuesday was filled with oil and energy related stocks:  BTJ, PHX, MDR, CHK, ARD, FTO, GI, IMO, PXD, VLO, TSO, ECA, EIX, DMLP, HOC, BEXP, OII, BR, TXU, SUN, XTO, RRC, PDS, EQT, GRP, TNT, AYE.  These account for almost a quarter of all new highs in my universe of 4,000+ stocks.  I have been writing that more than 70% of all stocks follow the trend of the market averages.  If we want to find those stocks that are rising (counter-trend) in this weak market, it would seem that we must focus our attention on the energy and oil sector.  An ETF in the oil sector is OIH………………..

Most of the Dow 30 stocks look technically weak.  Two exceptions that I think may be promising include HPQ and MSFT.  Yes,  MSFT may be finally moving, after 3 years. Msft  Did you notice that MSFT (I own some) traded this month higher than it has since early 02?  In the first week of August, MSFT had a high volume advance, peaking at 27.94.  Since then there has been a rounding consolidation pattern with nicely declining volume and the stock appears to be holding up well the last few difficult days.  I would not be surprised to see a rise beginning soon.  As long as the consolidation low holds, so will I……………….

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Strong rebound; GMI: +1; MSO

A strong rebound Monday, with a lot of conflicting signals.   While the GMI remains at +1, it is noteworthy that 84% of the  Gmi829_1 Nasdaq 100 stocks advanced today.  This is the highest percentage of advancing NASDAQ stocks since July 8, when the last rally began.  In addition, 80% of the Dow 30 stocks advanced, along with 72% of the S&P 500 stocks. There were 90 new highs Monday and 46 new lows.  This is the highest number of new lows in my universe of 4,000 stocks, since June 27.  There were only 46 10-day successful new highs.  This is day 10 of the QQQQ decline (D-10).  In spite of this snap back, the DIA, SPY and QQQQ remain well below their 30 day averages.  Only 20% of stocks are in a short term up-trend……………………….

The housing stocks did not bounce Monday……………………………

A lot of people are betting on Martha Stewart’s come-back.  Look at this break out in her company’s stock.  Mso Last time MSO stock took off it was in anticipation of her release from prison.  When she was finally released, the stock tumbled.  So be careful–this stock could peak after the first show in her new Apprentice series.  By the way, who is the apprentice–Martha or Donald?……………………

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Stan Weinstein Dow sell signal; GMI: +1; Sick bank stocks; SBUX-in the drink?

"This is one of the easiest gauges to keep up and yet is the most important one.  When the Dow breaks below its 30-week MA and breaks down into Stage 4, it’s time to become very defensive.  Suspend buying even if you see a few stocks breaking out on their charts.  Be sure to sell any stocks that are showing poor relative strength.  Pull up your protective sell-stops as tightly as possible on your few remaining long positions.  Finally, start hunting for ideal short-sale positions. While this key long-term indicator certainly isn’t infallible and will give an occasional whipsaw signal, it is incredibly reliable.  No bear market in the past several decades has unfolded without this gauge flashing a negative signal.

                                        Stan Weinstein, 1988, pp 270-271. (full cite at right)

Read and reread this sage advice. For the Dow closed below its 30 week MA on Friday.  Stan goes on to show how this indicator provided advance warning for all bear markets through the time of his book in 1988–even for the 1929 and 1987 debacles (I could add 2000 to the list). Anyone who continues to buy and hold stocks while the Dow (or SPY or QQQQ) is below its 30 week MA is fighting huge odds.  If you cannot refrain from searching to buy the few stocks that appear to have the "perfect" chart patterns, acknowledge to yourself that you are gambling, not speculating, and are highly likely to fail.   When the market is declining, people become anxious and take profits quickly, so breakout chart patterns that worked flawlessly in the preceding strong market fail quickly and miserably.  It took me almost 40 years to appreciate the above revelations, espoused through the years by most of the successful trading gurus I admire (Livermore, Darvas, O’Neil—see Boik’s book, to right).  End of sermon.

So is this warning signal likely to prove valid or just a false move?  Let’s look at the evidence.  First, even the pros who run growth funds are having trouble making money.  The IBD growth mutual fund index has finally closed below its 50 day average, another sign of the futility of chasing growth stocks in this market environment.  The GMI therefore fell to +1.  Only the QQQQ weekly index needs to turn negative to give us a zero GMI reading. Gmi826 There were only 40 successful 10-day new highs on Friday–only 25% of the 159 stocks that hit a new high 10 days earlier closed higher Friday than  10 days earlier.  There were only 70, 52-week highs in my universe of 4,000 stocks.  16% of the S&P 500 stocks advanced on Friday, along with 23% of Nasdaq 100 and Dow 30 stocks.  Only 44% of stocks closed above their 10-week averages and only 21% are in a short term up-trend.  The percentage of stocks closing withing 5% of their 52 week high fell t0 18%; 6% are within 5% of their 52 week lows (I am adding this "new low" indicator to the "new high" indicator I added in the prior post.)

This week’s WPM shows considerable deterioration in the Dow 30 stocks’ short term and longer term indicators.  Wpm826_1 As implied above, the DIA ETF has closed below its 30 week average and less than one half (47%) of its 30 component stocks closed above their 30 week average, down from 57% on 8/19. All 5 indexes remained below their 30 day averages and there were substantial declines in the percentage of their component stocks that closed above their 30 day averages.  For DIA, the percentage of stocks above their 30 day averages declined from 40% to 17%.  Only about one quarter of the component stocks of the other four indexes remain above their 30 day averages.  Thus, the short term trends for all five indexes and most of their components are negative.  While all indexes but the DIA closed above their 30 week averages, there was some deterioration (in the 30 week averages)in their components too.  Between 54% and 63% of the stocks in these indexes closed above their 30 week averages.  Thus, while the longer term trend is negative for the DIA, the other four indexes remain in positive but weakened up trends–for now.  Will they eventually follow the Dow’s lead?  They usually do eventually, but time will tell.

The only positive technical sign that I have seen is that the put/call ratio is above .90, suggesting that relatively more option players than usual are betting on a decline by buying put options.  So we may get a bounce soon, but it probably will be short lived and a chance to unload holdings.  (A put/call ratio well above 1.00 might make me turn more positive, however.)

My current strategy is to follow Weinstein’s advice and I have already taken the defensive steps that he detailed in the quote above.  I am now concentrating on finding short sale candidates for my IRA.  Among my favorites are the banks.  As short term interest rates increase and long term rates remain stable, the difference between them narrows.  Banks profit from the spread between short term and long term rates. So, it is not surprising that many of the charts of bank stocks are looking ugly. Stocks trading below their 30 week averages include :  WFC, C, JPM, WB, BAC, C–in short, many of the big names.  C826 I could take any example to show you.  Here is a daily chart of Citigroup.  Look at the crossover of the 10 day average (dotted line) below the 30 day average (red line) in mid-June.  This reversal was followed by high volume declines in July.  Is the decline in C over? I would argue that things will heat up more for the banks when the Fed pushes short term rates above long term rates (inverted yield curve). This may not be the proverbial buying opportunity that value investors might perceive………….

From time to time I spot a well regarded high flyer that appears to be reversing.  I did this once with a stock called ENR (Enron), which I bought puts on  long before the bad news broke.  The stock simply looked sick.  Well, I spotted another candidate.  Coffee drinkers please do not get angry with me, but SBUX looks sick to me.  (If I am wrong, please do not sue me on coffee grounds 🙂  Sbux825 When I see a weekly chart of a stock that has been consistently above its rising 30 week average that appears to be below its reversing 30 week average, it sends me a strong signal of weakness to come.  (Click on this chart to enlarge.)  From early 2003 until the end of 2004, SBUX had traded well above its 30 week average.  More impressive, its 10 week average (dotted line) has been above its 30 week average (red line) during that entire period. Now both averages have curved down and the 10 week is below the 30 week.  (Cramer, if he understood and appreciated charts might shout;  Sell!  Sell! Sell!).

Why would SBUX be weakening?  I  don’t know anymore than I knew what was happening behind the scenes at Enron.  The chart is simply picking up selling by the big holders.  Maybe with the pinch of higher gasoline prices on the budget, coffee lovers will stay at home and/or forego that extra cup of $3.00+ java.  Who knows?  But stay tuned. (If it works out, remember you heard it here, first!)

As for me, I am looking at deep in the money January 06 puts on SBUX.  I like tea, anyway.  Have a great week and send me your comments.  It really helps me to keep going.  (Please note, while I try to answer all emails, some bounce back as undeliverable.  Do you lump me in with spam?)

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GMI: +2; a new indicator; TOL– another Cramer favorite weakens

The market was pretty much unchanged Thursday, but the GMI declined to +2.  Gmi825 This is because there were only 87 new yearly highs in my universe of 4,000  stocks.  67% of the Nasdaq 100 stocks advanced, along with 65% of the S&P 500 and 53% of the Dow 30 stocks.  The percentage of Nasdaq 100 stocks closing above their 30 day averages declined to a new low of 29%.  On July 19 the number was 78%.  Only 61 of the 235 stocks that hit a new high 10 days ago closed higher Thursday than 10 days earlier.  Only 22% of stocks are in a short term up-trend.  This is the 8th day (D-8) in the decline of the QQQQ index ETF

I added a new indicator to the table today.  It measures the percentage of stocks in my universe that closed within 5% of their 52 week high.  The number is 22%.  Put another way, 78% of stocks are more than 5% below their 52 week highs.  I think this indicator will provide another measure of the strength of the market and the likelihood of seeing stocks break to new highs…………………..

I can’t count the number of times I have bought puts on the housing stocks only to find them turn up again. Res But I think they may really be topping out now.  Look at this chart of the residential construction sector.  Note that the index is now below the 10 day, 30 day and 50 day averages.  The 10 day (dotted line) is now consistently below the 30 (red) and 50 (green).  This chart pattern is similar to a host of housing stocks such as:  BZH, PHM, LEN, RYL, KBH, MDC, DHI, TOL, CTX, MPH, HOV, to name only a few.  All of them have shown volume spikes recently on down days.  Even TOL, a Cramer favorite, could not retain its gain on good news and reversed to close down near its daily low on Thursday on unusually large volume.  This may only be a correction in housing, but it is consistent weakness among all of the leaders.  Is the roof finally about to cave in?

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IBD Meetup tonight; GMI rises to +3; Moderating interest rates?

A small group (about 7) attended the IBD Meetup tonight.  Attendance usually falls off when people become disillusioned with a declining market.  What was surprising to me was that although most attendees were confused by or hurting from the current market environment, no one (except me) was considering selling stocks short.  While a few were mainly in cash, all were actively trying to find stocks to buy.  This sentiment suggests to me that the market has further to fall.  When everyone wants to short stocks, I will be looking for a bottom……………….

Surprisingly, the GMI actually increased one point as of Wednesday’s close.  Gmi824This is because there were 123 new yearly highs. On the other hand, the percentage of stocks closing above their 10 week averages fell below 50%, to 47%.  This is the lowest percentage since I began tabulating it on June 16.  More ominous, all three ETF indexes (DIA, QQQQ and SPY) closed below their 50 day averages, and all on increased volume…………….

I did find one possible ray of hope. Tlt824  I am not sure what it means, but all of my interest rate indicators (short and long term) are suggesting some moderation in longer term interest rates.  For example, TLT, which tracks 20+ year treasuries, has broken above its 30 day average and the 10 day has actually crossed above the 30 day average.  Rising prices here indicate lower interest rates.  (Similar patterns can be found for IRF and SHY).  Is this simply a retreat to the safety of U.S. securities or does it represent some moderation in the pressures for future rate hikes?…………………………

Regardless, I am now almost 100% in cash in my IRA.  This market is too treacherous and enigmatic for me to trade. 

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Market still trendless; GMI: +2; DIA closes below its 50 day; IBD Meetup tonight

While the market weakened Tuesday, it refused to cave in.  Gmi823 The GMI remains at +2, but there are positive and negative signs in this market.  There were 90 new highs in my universe of 4,000 stocks, very close to the 100 needed to turn that indicator positive.  But there were also 36 new lows, the most since June 27.  The percentage of stocks in a short term up-trend rose to 26%, up from a low of 20% last Thursday. The QQQQ is in its 6th day of decline (D-6).  The DIA closed below its 50 day average for the first time since July 7.  However, the SPY and QQQQ held above their 50 day averages.  Only 23% of the Dow 30 stocks advanced, compared to 34% of the Nasdaq 100 and S&P 500 stocks.

The market still has not chosen a definite direction.  My IRA remains  mostly in cash with a few puts, but I remain ready to hop on the train when a real trend develops.  Wednesday evening is the IBD Meetup.  I am interested in assessing the members’ sentiment towards this market.

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