Bear Market?

“Jim Rogers: Bob, there’s no question we’ve had a big pounding in the market in the last two weeks. So we may be due for a rally. But the market is going to be down this year and it’s going to be worse next year. We had huge amounts of money spent in 2003 and 2004 by the government to win an election. Now we have to pay the price. It’s not the end of the world. It’s just a bear market.”   THE COST OF FREEDOM RECAP, SATURDAY, April 23.

I like to watch Jim Rogers every Saturday morning.   In 2000, at the height of the tech market mania, Damon Vickers was the only radio commentator I heard who had the courage to tell (really scream) people to run for the exits.    Today, Jim Rogers is equally explicit (but calm) about his concerns for the state of the economy and for the U.S. stock markets.   And Jim is no neophyte.   He made his fortune in his 30’s trading along side George Soros.   When Jim speaks, I listen.

As long as I am talking about the   Fox Cost of Freedom Saturday morning telecast, I must mention The Chartman, Gary B. Smith. Gary was a presenter at my university’s investors speakers series a few years ago.   I missed his presentation, but heard about his accolades for the TC2000 technical analysis program that he was using.   It was on his recommendation that I subsequently switched to that program and became an enthusiastic user of TC2005.   (When I placed 5th in the Barron’s Stock Challenge a few months ago-in the professor category- I contacted Gary and we had lunch together.)   Gary is an avid chartist and writer who brings his considerable expertise in technical analysis to the Bulls & Bears program on Saturday mornings.

I received a question from a reader today asking me if I am somehow associated with   IBD or TC2005.   The answer is an unqualified no.   I am simply an enthusiastic and dedicated customer of both concerns. I can honestly say that I did not begin to make money in the market until I subscribed to IBD in the 80’s.   And, as I shall show in a subsequent post, the TC2005 program lets me do amazing scans of the market quickly and at low cost. (The program itself is free–how can one beat that?   I just pay about $25 each month for downloads of stock prices.)   How do you think I compute the WW General Market Index (WW-GMI)   and my other indicators each night?

Speaking of the WW-GMI, it is stuck at dead zero again.   Are you surprised?   Only 11 stocks that hit new highs 10 days ago closed higher today than 10 days ago.   That’s 11 out of 4,000!   Only 40/4,000 stocks even hit a 52 week high today.   Most telling, 99 stocks hit a 52 week low 10 days ago and are trading lower today than 10 days ago. So, the odds of having a successful short trade on a new low are 9 times higher than being successful going long on a new high!   The key to success in the market is trading with the odds in one’s favor.   At the very least, these statistics tell me not to buy any stock hitting a new high.   By the way, 208/4,000 stocks hit a new 52 week low today, five times the number that hit a new high.

I have been down on the housing stocks for sometime.   Today, 21/26 stocks in that sector declined.   Check out the trends in such stocks as MDC, MTH, BZH, CTX, MHO, WLT or DHM.   (I own puts on two housing stocks not shown here.)   Now, take a look at a chart of DIS, which fell 3.5% today on above average volume.   Do you think the weakness in housing stocks and a leisure stock like Disney is telegraphing something about the future economy?   Maybe this market smells the R word (recession).   It would not be the first time that the Fed tipped the economy into recession in its zeal to put a lid on inflation.   Remember, the Fed is an exclusive club of bankers, whose first priority is to protect all of their banks’ outstanding loans from the ravages of inflation.

I thought you might like to see a long term monthly chart of the NASDAQ Composite index. Click on this chart to enlarge.   It doesn’t take much chart knowledge to see the difference in the chart pattern since mid-2000.   Between 1993-2000 the index closed above its rising 30 month moving average (the red line). Then it began a sustained 3 year decline with the index below the average. After the bottom in 2002 there has been a relatively weak recovery.   Note the moving average is barely rising.    The time to make big money is when the indexes are rising smartly as they did in the 90’s.   You could have ridden that index up for years.   You could also have ridden it down for 3 years.   There is plenty of time to ride a real trend.   Right now we don’t   have a long term trend that is   worth riding–at least not in NASDAQ stocks.

IBD Meetup Group Night

Tonight was Investor’s Business Daily Meetup Group night.   Investors all over the world who are interested in IBD trading strategies can meet on the last Wednesday of each month to share their insights on investing and trading.   Tonight, about nine of us met at a local restaurant.   There is a core group of regulars with a few newcomers attending once in a while. Tonight it was all experienced members who are fairly addicted to trading the market.   We all study stock charts, read IBD, and use many of the IBD investing tools.

Tonight’s meeting was different than the other meetings   that I have attended during the past year.   No one circulated piles of charts of promising industries or stocks to buy.   The discussions were subdued and everyone said that no one was making much money trading. They were licking their wounds and lamenting that this   was the worst market in a long time.

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About the General Market Index (GMI)

Index This market just makes you want to scream, doesn’t it?   Now you know why I stay out of sick markets and sold my MHS days ago.   Here is a stock that broke to a new all-time high at the end of March and held up for a few weeks.   It seemed like a good “defensive” stock, being in the management of prescription drug programs.   So what happened today?   It announces quarterly earnings today up 27% but apparently did not boost its profit outlook for the rest of the year.    So what does it do? It declines today 9.12%! This is the type of action one gets in a market that is in a downtrend with few stocks successfully holding new high ground.

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The Interest Rate Index

WishingWealth 10 day successful new high index:   4/25   20; 4/22 19;   4/21    28;   4/20    12

Range since March, 2005:    8-106 (This index counts the number of stocks, of 4,000, that hit a 52 week high 10 days ago and closed today greater than they did 10 days ago.)   With only 20/4000 stocks hitting new highs   and continuing to rise, it would seem to me that this is not the time to buy stocks trading at new highs.   I will wait for a stronger market.   I have a similar index that counts new lows that continue to decline–it is 56 today.   New lows are a better bet than new highs these days.

Housing stocks (and MHS) popped today.   Housing’s   downtrend appears to me to still be intact.   The market’s volume on the rise seems unspectacular.   As I have noted before, I would need to see much more strength before my indicators would signal a turn.   Let’s see what happens after earning are all out.   Remember, all of these earnings represent the past and the market always is looking forward.

I received the following explanation about the short term interest rate index that I highlighted yesterday:   IRX-X data come   from the CBOE symbol IRX-E.   You can get more information on the IRX-X by clicking the link:

Interest Rate Options

As best I can tell, this index tracks the yield of the 13 week treasury bills.   Maybe we should be trading these options–as we saw yesterday, this index sure does trend.   If any readers know more about these options, please email me so I can pass it on.

The Downtrend Continues?

“Want to know how to make a small fortune in the stock market?
Start with a large fortune!”

I thought you would probably want me to back off of the strategy discussion (see yesterday’s post) and to return to my take on the market.   A number of people have written to me about going short.   This interest, together with the skepticism about the market’s rally in the media cause me to pause, just a little.   However, I do not reverse direction until my market indicators start to change. So, I wait, mainly in cash and put options in my IRA.   (I did sell my one small long position, MHS–I got tired of holding anything at odds with the general market trend.) The attached chart (click on it to enlarge) Irxx shows the consistent rising trend in short term interest rates that started in May, 2004. (I have asked the TC2005 support staff at Worden.com to tell me the basis for this index, and will report back on their answer.) The Fed’s persistent pressure on rates is one of the obstacles to a rising market.   Historically, in its fear of inflation, the Fed typically misjudges how much to put on the brakes and eventually brings the market and the economy to a screeching halt.   (In spite of this track record, traders tend to delude themselves into thinking that this time will be different and we will get a “soft landing.”) This short term interest rate index has been hugging its rising 10 week moving average for months, and just bounced off of the average to a new high, after a few weeks of a plateau.   This renewed rise is not a good omen.   A consistent reversal in this index will probably foreshadow a subsequent bottom in the market–but not immediately.   So, we will keep an eye on this index.

IBD’s Monday edition published a put/call ratio of   .86.   This means that 86 puts were traded for every 100 calls.   (Puts are options that gain when the underlying security falls; calls gain as a security rises.   In other words, puts are bets by option traders that a security will fall, calls are bets on a rise.   Did I imply that people are gambling?)   This ratio is a contrarian indicator, which means that it typically predicts the opposite type of   market movement than would be expected from the trades.   If an extremely high number of option traders are bearish (buying more   puts than calls) then the market often tends to rise, at least short term.   People are most scared at bottoms and overly optimistic at tops.   Most of the time, traders are more bullish than bearish and the p/c ratio is below .80.   When it stays above .80 for a while and gets above 1.0, the market usually is in store for a bounce.   The current ratio is not at an extreme.   However, if it breaks 1.0 this week it may signal short term   strength in the market.   If the P/C ratio   starts to trend lower in this depressing environment, say below .60, watch out below!

I am short some housing stocks.   It is rare that I find so many companies in an industry with the charts looking so sick.   Here are a few, in no special order:   RYL,OHB,LR,LEN,MDC,MHO,DHOM,WCI,SPF,DHI.   I did not run out of ugly symbols, but you get the picture.   Even   lofty NVR appears to have broken its uptrend on a number of large volume declines.   Is it too late to sell these?   Who knows, but the current trend is obvious to me.   Could insiders possibly be showing us something about the future of housing?   Watch behavior,   not words.

I hope you have a good trading day tomorrow.   The trend is your friend.

WishingWealth 10 day successful new high index:   4/22 19;   4/21   28;   4/20   12 (for definition, see Madness post)