Darvas’ stock market casino, fabricated fantasy, interest rates resume rise, a new trend count; GMI: +5

"It means, as I see it, that the corporation gets the money it needs, absolutely free and clear of any obligation to repay it–ever.  The underwriters get their cut or commission (or both) for placing the stock issue.  The stockbrokers who handle all subsequent transactions in the stock get their commission.  And the public will get "shares" (i.e., chips) with which to gamble–the gamble being, of course, that someone else will pay you a profit on them in the hope of selling them to a third person for a little bit more , and so on in an endless cycle of speculation.  This is, in essence, the entire story of the stock market, as I have found it."

Nicolas Darvas, Wall Street: The Other Las Vegas, Kensington Publishing, 1964, p. 54-55.

I read Darvas’ books in the 1960’s and they had and continue to have a profound impact on my approach to the market.  I know that William O’Neil and some of his colleagues have also referred to Darvas’ influence on their trading strategies.  Here is a man, Darvas, who made almost 2 million dollars in the stock market in 18 months while he danced around the world, subsequently saying that the stock market was just a venue for gambling.

After the internet bubble and the tech stocks collapsed so badly in 2000-02, I think many of the people who were so badly burned, would agree with Darvas.  Nevertheless, there persists an entire industry of people who attempt to make the market seem rational and spend lots of time analyzing the "true value" of stocks.  What if Darvas is right?  All of these people and institutions who are paid millions of dollars for their financial advice are simply involved in a world of fabricated fantasy.  If Darvas is right, the idea of having people trusting their economic futures (and social security) to the whims of the great stock market casino terrifies me. As Darvas says at the end his book, "I walk into the Casino with my eyes open as I would if I were walking into a Casino in Las Vegas.  I ignore the chatter, I watch the action; and, I try my luck."  I believe that this is our mission as market technicians. ……………………………………….

The GMI held at +5 today.  The market has weakened some, Gmi524 however, with only 132 new 52 week highs, down from 197 new highs on 5/18.  There were 28 new lows in my universe of almost 4,000 stocks.  Successful 10 day new highs were 50 today, down from 84 on 5/19.  Only 46% of the Nasdaq 100 stocks rose today, 41% of the S&P 500 stocks and 43% of the Dow 30.  Put another way, the majority of the stocks in these indexes declined or were unchanged today.  This rally may be taking a breather.  Note that the GMI is explained in my post on 4/26.

As long as the GMI stays at +5, I feel comfortable holding stocks and buying stocks that bounce off of support levels.  I am not as confident of buying new highs right now, however. Some of my stocks hit new highs today but closed near their lows of the day (GOOG, BOOM).

There is one big negative that I see.  The short term interestIrx524_1 rate index went to a new high today (click on figure to enlarge). Speculators are again betting on more Fed rate hikes and this could eventually torpedo the market.  If it does, the weakness will show up in the GMI.  Nevertheless, the resumption of the rise in this index just makes me a little more cautious about the possible longevity of this bull move…………………………………………….

I am introducing today another indicator I find useful.  I simply count the days since the current trend began.  Today is day 13 of the rally, as I define its inception.   I will use the term U-13 (for today’s count) to designate the duration of an uptrend. A downtrend will be indicated by D-xxx.  This indicator will help us to monitor the maturity of a trend.  At some point I will show you an analysis I did of the duration of up and down trends over the past few years.  It helps me to determine how likely it is that a trend will continue. In future posts I will include this trend count in the GMI indicator box.

Send me your feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

Google rockets on; Funds to time the market; BOOM-cup with handle; GMI–+5

Well, this market is really moving.  Did you see GOOG’s $13+ rise today?  Honest, I had no idea when I wrote Sunday’s post.  Cramer is shouting– BUY GOOGLE!!!  He obviously had this one right.

  Gmi523 The GMI is solid at +5.  This reading does not mean that we won’t have declines–only that the current trend is up.  These indicators have gotten me out of every major market decline since 98, and I will let you know when I begin to get defensive.  (Remember, past performance does not guarantee future results and blah, blah blah…)  Right now things could not look much better to me.  There were 171 new 52 week highs in my universe of 4,000 active stocks, and only 17 new lows.  Let’s say it again: there were ten times as many new highs than new lows today!  What a turn around in just a couple of weeks.  Today, 53% of the NASDAQ 100 stocks rose, 70% of the Dow 30 and 65% of the S&P 500 stocks.  These numbers are good, but not as strong as a few days ago when we saw 70% or more of the stocks in all of these indexes rising.  So, we are getting a little weakening, which is a good thing. We want a market with some backing and filling so this rise will last a while.

I moved my 401(k) funds from the money market fund to equities about a week ago.  Most mutual fund families allow a limited amount of transfers between funds.  Did you know, however, that there are at least 2 mutual fund families that are designed to allow you to time the market?  If you are good at trading the market indexes, you owe it to yourself to check out the Rydex Funds and the ProFunds.  These funds allow daily trading back and forth in a variety of index and sector funds.  In fact, you can buy funds that move with or opposite to an index, so you can profit from a decline in an index if you are bearish.  Better still, some of their funds are leveraged so that they move twice as much as the indices they  track.  So, if you have the minumum ($15,000 for ProFunds) to open an account and you want to take a bullish or bearish position on the market, these funds may be the way to go. You could also open an IRA in one of these funds.  Read the prospectus carefully and note each fund’s management fees.

I have been meaning to tell you that JNJ is looking sick.  The chart shows high volume selling last week and it only managed a small gain today.  Is the stock telling us something?

BOOM looks like a high volume breakout today–cup and handle?  (I own a few shares of BOOM).Boom The cup with handle pattern was made famous by William O’Neil and his newspaper, IBD. Note the huge rise in BOOM from under $10 to almost $39.  Then it entered a 3 month base.  It formed the top of the right side of the cup on May 10 at 35.18.  Note the huge gap up on high volume to build the right side of the cup.  Today BOOM burst through the top of the handle on volume that was far above its 50 day moving average (blue horizontal line) and closed at 37.64.  The IBD ratings for BOOM are:  Overall–94; RS-99, EPS-89.  Thus, according to the IBD criteria this company ranks in the top 4% of all stocks, with a relative (technical) strength rating in the top 1% and earnings per share rating in the top 11% of all companies.

I already own this stock.  How would I play it if I did not?  I might make a small pilot buy tomorrow and place an immediate sell stop below today’s low at around 31.75.  Alternatively, I might place a buy stop at 39 to purchase a small number of shares it if it breaks through to an all time new high. In that case I might then place a sell stop closer to the breakout point.  In a true breakout, the stock should not come back down below the prior peak.

Other strong stocks to watch include:  SNHY, CLHB, BEBE and of course, HANS.  There are so many more.

Send me your feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

GMI rises to +5, The Google Rocket, Lucky Bill Miller

The WW-GMI moved to a +5, indicating that the markets, especially the NASDAQ stocks, are in an uptrend.  Gmi522 The only component not yet positive is the Successful New High Index.  Nevertheless, that Index shows that 65 of the 104 stocks in my universe that hit a new high 10 days ago closed higher on Friday than they did 10 days earlier when they hit their highs.  Thus, a trader buying new highs 1o days ago had about a 65% chance of owning a stock that increased on the subsequent 10 days.  In contrast, only about one third (15/44) of the stocks that hit new lows 10 days ago were trading lower on Friday. (Even the majority of the new lows 10 days ago rose!) The market is telling us that buying new highs has been a better strategy than shorting new lows.

Remember a few days ago I said that my gut was telling me the market should go down but my instruments were telling me to buy.  One must always go with his/her instruments–the market action.  I do not waste a lot of time trying to divine the market’s direction by focusing on economic news or current events. Don’t get attached to a scenario.  Just watch the market and tune out all of the rest.

So, I am content to own stocks now and to stay with this rising trend.  That does not mean that I will plunge into the market.  Instead, I look for the stocks that are moving to new highs on good volume and I take a small initial position.  If I am right and the stock moves up, I make more small purchases, each one higher than the other. I do not want bargains.  Goog2 The same is true of real estate.  The beach front property that looked too expensive a few years ago today is much more expensive.    Thus, I began buying GOOG at around 221 after it gapped up, and have slowly added more each time it broke to a new high, after it had rested for a few days.  I have kept my sell stops in place and raised them as the stock rises and each time I make a new purchase.

Is GOOG too expensive?  I do not know.  One never knows the answer to such questions until after the fact.  I guess you could say that GOOG was too cheap at 221.  Since GOOG gapped up on 4/22 there have been 20 trading days, 15 up days and 5 down days,  so people are bidding the shares up 3 times more often than down.  So, I just ride the rocket up, knowing that my sell stops will get me out if the stock falters–I have limited my emotion and limited any pontificating about the stock’s likely future.

In a rising market, 70% of the stocks rise, and I am content to hold on with the odds in my favor. How many stocks have come through this year’s sloppy market and are trading at their all time highs? Isn’t that the type of strength we should be seeking in our purchases?  I suspect that many of the rockets to the moon have already been launched………………………………

I had hoped to write about some technical strategy matters this weekend but could not get to it. In the near future I want to cover  moving averages, my tragedy (911) watch list, and  stop orders.  Let me know whether you are interested in any of  these, or other, topics…………………………………….

As you may know, Bill Miller’s Value Trust Fund  receives a lot of accolades for beating the S&P 500 index for 14 consecutive years. I have a somewhat different opinion of the fund’s most recent record than is espoused by the article that I linked to above.  I thought I would share it with you, and welcome your comments.  This fund holds a limited number of stocks (one has to, in order to beat the averages–see my post on the limitations of diversification) and I happened to be examining the fund’s top holdings a few months ago.Amzn  What caught my attention was that AMZN, one of the fund’s largest holdings, had an unusual jump in price and volume in the last few days of 2004, and then immediately tanked in 2005. Between 12/23 and 12/31, AMZN rose 13.77%, while the S&P 500 rose just 0.15%.  Another big Value Fund holding, IACI, also had a huge December rise (+11.87%), followed by a New Year’s collapse. What an extraordinary piece of luck for B.M.—and for his record, that the two stocks making up so much of the fund’s portfolio enjoyed such a surge in year end buying. I wonder, would a big mutual fund family concentrate its buying in a few stocks to preserve the reputation of its star performer?

Send me your feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

GMI hits 4+

The WW-GMI hit 4+ today.  The IBD Mutual Fund Index finallyGmi519  closed above its 50 day moving average, indicating that growth mutual funds are climbing.  The Weekly QQQQ Index is borderline positive.   There were 86 successful 10 day new highs. (See 4/26 post for elements of the GMI)  In fact more than 80% of the 106 stocks that hit new highs 10 days ago closed higher today than 10 days ago.   There were also 157 new highs today and only 31 new lows. Seventy percent of the NASDAQ 100 stocks rose today, 62% of the S&P500 stocks and 60% of the Dow 30 stocks. This market rally is firing on all cylinders.

Last week I transferred all of my 401-k funds from money market funds to equity funds.  Over the past 7 years I have succeeded in avoiding all serious market declines by being in cash.  There is no necessity to take a buy and hold approach with company 401-k plans. Most fund families allow you to switch funds a limited number of times.  In October, 2000, I sold out my growth funds around 103 and watched them drop to below 40.  I hope my timing is correct this time.

Even though I think the trend is up, I religiously place sell stops below every purchase.  We can never take the market for granted.  This weekend I will return to strategy. Next Wednesday is the IBD meetup.

Send me your feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

Livermore on profits, Cramer on sleepers and 15 Hot Stocks–WW-GMI: +3+

In explaining to Walter Chrysler (yes, THE man) why it was a mistake when he, Livermore, took a profit too soon in a trade, Jesse said:

"You remember that old joke about the guy who goes to the race track and bets on the daily double and wins, then takes all his winnings and bets it on the third race and wins. He does the same on all the other races, and wins.  Then on the eighth and final race, he takes his hundred thousand dollars in winnings and bets it all to win on a horse, and the horse loses.

Well, he’s walking out of the track and he meets a pal of his, who says, ‘How’d you do today?’

‘Not bad,’ he answers, smiling.  ‘I lost two bucks.’ " (the money he started with)

     Jesse Livermore, World’s Greatest Stock Trader, by Richard Smitten, 2001, p. 226

Livermore was saying he made a mistake by selling when he had a profit because he was scared of losing the money he had made.  He should not have been scared, however, because he was playing with the track’s money (the profits) and was not risking the money he started with.  Fear was not a valid reason for selling, the only good reason to exit a profitable trade, according to Livermore, is a technical signal resulting from the stock’s behavior.

One of the reasons that Jesse Livermore made (and lost) several fortunes in the market was that he averaged up on profitable trades and was not afraid to risk his profits.  Risking your capital, however, was suicide for a trader. This approach is similar to the one espoused by Loeb when he said to slowly average up as the trade worked out.  That way, you would not risk much of your original money.

Today, Jim Cramer espoused a strategy that was as antithetical as possible from the way the great traders (see book by John Boik) operated.  Cramer said to look for stocks that have not moved up, the sleepers, and to buy them because they would be more bullet proof in a possible decline.  Remember the quote from Crane that I posted a while ago saying that buy signals were simply evidence that a stock was already being bought by others?  Both Livermore and O’Neil  and Darvas talk about buying stocks that have demonstrated strength by bursting to new highs on unusual volume.  Why would anyone attempt to seek winners by finding stocks that are not moving in a rally!  (Now I can surmise why Cramer has said his wife, The Trading Goddess, had to rescue his hedge fund several times.) We already talked about not buying rockets that are sitting on the launch pad–they may never take off. The gurus I listen to have written that the big money is to be made in buying the leading stocks–the ones that burst to new highs as soon as the market gains strength.

So, I decided to run a scan using TC2005, to find all  stocks (in my universe of 4,000) that hit a new 52 week high in the past 10 days.  I found 371 stocks.  I then ranked them by EPS gain in the past quarter and excluded all stocks with less than a 100% gain in earnings, that had not at least doubled in the past year and that were not trading near all time highs. Tc2000 The matrix shown here (click on it to enlarge) presents the 15 stocks that survived my screen, ranked by earnings gain the past quarter (the first EPS column).  The second EPS column is the increase in earnings 2 quarters ago, and the last EPS column is the increase over the past year.  An interesting characteristic of these stocks is that the PE (price divided by earnings per share) ratios are all below their earnings growth rates. This may be symptomatic of a market that has not yet bid up growth stocks to astronomical levels. The revenue column is revenue growth over the last 4 quarters.  The next column presents MoneyStream, the Worden TC2005 indicator similar to on-balance volume I described a few posts ago.  The next column shows the price today divided by the price 250 days ago, and the final column shows the volume this month divided by the volume 6 months ago.  A  rocket often has extraordinary increases in volume as it rises.

Not all of these stocks are buys.  However, I wanted to show you an effective way of screening powerful stocks and a way to present the information so it is easy to obtain a snapshot of some important fundamental and technical indicators by which to compare stocks. Of course, I want to buy such strong stocks only if the market is rising—-like now!!

The market keeps growing stronger.  The GMI is +3+.  It is probably Gmi518_1 really a 4, because the IBD Mutual Fund Index was very close to its 50 day average as of this morning’s edition and the index probably broke above it with today’s advance.  When this index turns positive, it indicates that the mutual funds that concentrate in growth stocks are beginning to do well and augurs well for those of us who buy growth stocks.  There were 197 new 52 week highs in my universe of almost 4,000 stocks and only 30 new lows.  There were 65 successful 10 day highs and only 16 successful 10 day lows.  Increases occurred in 84% of the NASDAQ 100 stocks, 80% of the S+P500 stocks, and 87% of the DOW 30 stocks.

Right now the trend is up—finally.  Another sign of the turn is that some of my trader friends have abandoned the market and thrown in the towel on trading. Those of us who went short or stayed in cash these past difficult months can now take advantage of the bull trend. There is a time for every season…….

Send me your feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

Deflated Today GMI: +2

I had a bad day, today.  Not in the market, but on the road.  Driving back from Baltimore on the interstate, I ran over a piece of wood with nails in it that punctured both tires on the passenger side.  I waited over 2 hours for AAA to come and tow me.  So I am tired and deflated, puns intended.  I need to retire my car tomorrow. So, I will just update the GMI tonight.

The GMI rose to +2.  The Daily QQQQ index is on a firm up trendGmi517  now.  The Daily SPY Index is positive again.  There were 77 52-week highs today in my universe of almost 4,000 stocks, and 55 new lows.  Sixty-nine percent of the NASDAQ 100 stocks rose today, 78% of the S+P 500 stocks and 77% of the Dow 30. The only negative I saw was that the short term interest rate index closed above its 50 day average again, after 2 days below.

Keep an eye on NDAQ if it closes above 15.05.  GOOG hit a new high today, as did PRGS.  NSI and IVGN may pop again.  FORD is on the move again.  (I own some of these stocks.)

Send me your feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

A Good Day–PTRY–WW-GMI: +1

The GMI stayed at +1 today but there were some positive developments.Index516 The successful 10 day new high index climbed to 47, the highest since last April 6.  Moreover, 55% (47/85) of the stocks that hit a new high 10 days ago closed higher today than 10 days ago.  There were only 31 successful new lows–only 40% of the new lows 10 days ago closed lower today than 10 days ago.  Thus, a trader betting on new highs 10 days ago has had a better chance of succeeding than a trader shorting new lows.

Still, there were only 54  52-week highs today compared with 63 new lows in my universe of almost 4,000 stocks.  The Daily SPY index went to undecided today and the important Weekly QQQQ index improved, but is still too close to call.  About 74% of the NASDAQ 100 stocks rose today, along with 84% of the S+P500 stocks and 90% of the DOW 30 stocks.  So the big caps joined in the party with the tech stocks today.  I am most positive on the action of the QQQQ and am long that ETF. The short term interest rate index (see graph in yesterday’s post) closed below its 50 day average for the second consecutive day, a very good sign of less pressure on rates.

My strategy now is to maintain some long positions and wait to see if this rise is for real.  Every long position has a stop order to sell not far from today’s price.  I have no patience with any stock that fails to behave as I expected.  This is the discipline needed to succeed in the market.  It took me 40 years of trading to get to this point.  You can teach yourself this rule immediately.

Among the stocks hitting new highs today that all have triple digit increases in earnings last quarter and are at all time highs:  KND, FORD, CHE, PTRY, SE, PRU.  These are stocks for further study.  Some are extended.  Study their charts and look up their fundamentals and company profile at Yahoo finance (just enter the stock symbol on that link).

Let’s take PTRY as an example.  Ptry PTRY topped out at 35.60 on February 17.  It then began a decline to 27.33 on April 18.  It next began a rise to 34.77 and reacted back to its 10 day moving average (dotted line).  Today it broke to a new high and closed at 36.70 on the highest volume since last October.  (The horizontal blue line reflects the 50 day moving average of volume.)  PTRY produced a gap of .65 between Friday’s high of 34.03 and Monday’s low of 34.68.

How might I trade this stock?  One way would be to make a pilot buy of a small number of shares at the open tomorrow and to place a GTC (good til canceled) sell stop at 34.65, just below today’s low.  If this stock is really strong it should not trade below 34.68 and close today’s gap.  If I am wrong, I will risk a little more than 2 dollars per share (purchase price-sell stop execution price). Another way to trade it is to buy it only if it breaks today’s high of 36.95. (On stocks rising like this one, I often consider selling, the day it closes below its 10 day moving average.)

But before buying, I would check out the company profile and its key statistics on Yahoo.  Looks like the company is making money in the convenience store market.  And the IBD stats give it an EPS rating of 95 and a RS rating of 95, and a composite rating of 98.  Thus IBD rates this company as being in the top 2% of all stocks.  It is noteworthy that other companies in the same sector include SE, WFMI and SPTN, all stocks that have been hitting new highs–a very good sign that the sector is strong.

Send me your feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.