A Google Confession–WW-GMI: +1

I have a confession tonight.   The past few days I have been saying that I do not fight a downtrend and stay mainly in cash or short.   Well, I am not perfect. I could not resist nibbling at a stock that was resisting the downtrend.   For several weeks now, Cramer has been recommending GOOG as a great buy.   (I know I criticized Cramer yesterday for not urging viewers to go short or to cash, but he is not perfect either. We can forgive him.)   Cramer maintains that GOOG will earn about $7 per share (total profit/total number of shares) this year.   If the company has a PE ratio (price per share/earnings per share) like Yahoo’s (PE=55), then the stock could reach a price of around $385 (PE: 55=385/7).   Now, I can’t just take Cramer’s word for it.   I have to go to the charts to see if the stock is acting well. Wklygoog_1 You may remember that GOOG came public in a Dutch auction around August, 2004 at around $100.   (Click on weekly chart to enlarge.) The media pundits all said that the stock was too expensive.   That was a buy signal.   The pros probably wanted to accumulate the stock without competing with the little guys.   So the stock hesitated for a few days and then climbed to $216 by February, 2005.   The stock doubled in less than one year!

Remember I wrote a few posts ago about my desire to find rockets as Darvas did–stocks that will go to the moon?   Well, Darvas wrote that one thing he looked for in a stock was a doubling in the past year.   The best predictor of a person’s behavior is his/her past behavior.   The same is true for stocks.   Want to find a stock that will double in the next year–find one that has already doubled in the past year.   Don’t take my word for it.   Look up some of the winners of the past bull market– DELL, CSCO and more recently, CME, BOOM, FORD and HANS.   Rockets keep doubling and hitting new highs and always appear too expensive. You do want to go to the moon, don’t you?   So GOOG passed that test.   It was also trading near an all time high, another characteristic of a rocket.

GOOG declined for a few months and gapped up to a new high in late April (see daily chart) on huge volume, when great earnings were released.Googdly_1 Clearly, people with a lot of money were purchasing this $200 stock.   Was it too late for me to buy?   Was the rise just caused by bears covering their short sales? (buying back the shares they had borrowed from their brokers and sold in anticipation that they could buy back them back at a cheaper price, and pocket the difference in price)   Well, this is what I am trying to share with you tonight– I have found that many stocks begin their advance or decline with a huge gap in price. The trick is to wait to see if the gap is filled.   If the stock keeps on rising to new heights without closing the gap, it is often a sign of tremendous strength. (Note that in January, 2005, a similar gap up was quickly filled—and failed.)   I use TC2005 to scan the entire market for   stocks that have gapped up or down.

So, I bought a few shares of GOOG a few days after the gap, at around 220, and immediately placed a stop order to sell them around $214, if the stock started to close the gap.   In other words, I was willing to take the risk of losing about $7 per share in exchange for the possibility of a profit of $50 or more per share.   I have no idea if GOOG will continue to rise or not.   My point is that I have placed my wager and can now separate myself emotionally from the stock.   I will either profit or lose a little.   (If you are unwilling to have a lot of small losses you should not trade stocks.) I don’t even watch GOOG very much.   Remember, Darvas made his fortune when he was out of the country and far away from the market.   The further one is away from the market, the less the emotion that can kill one’s judgment, and the trade. GOOG closed today at $228.50.

What I want you to understand from this example is the strategy to purchase a potential rocket, and then to place an immediate stop order to control your potential loss if you are wrong.   (Note: A stop order to sell at $214 becomes a market order to sell as soon as the stock trades at or below the stop price.   This does not guarantee the price I will get when I sell the stock.   If GOOG gapped down from above $214 and opened at $210 one day, I would be sold out at the next price, probably around $210.   This would be a relatively rare event, but there is always this risk when using sell stops.)   The next decision I have is when to increase my position if the   stock continues to rise and where to raise my sell stop to.   Livermore and Darvas would make a small pilot buy and then add to the position only if the stock rose, proving them correct in their first purchase.   NEVER BUY MORE OF A STOCK THAT HAS DECLINED–NEVER THROW GOOD $$$ AFTER BAD.   Just take your loss, admit you were wrong and learn from your mistake.

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The WW-GMI moved to +1 today!   Wwmi504 There were 103 new 52 week   highs in the universe of 4,000 stocks that I follow.   However, the IBD Mutual Fund Index remains below its declining 50 day moving average.   The WW-Daily SPY index will turn positive tomorrow if SPY closes above 117 tomorrow.   If this rally proves to have legs, I will begin to close out my put options and go long. The private education stocks were weak again today– APOL (-3.56%) and COCO (-.80%).   I am ready to turn on a dime if this market shows me a definite change in trend.   If it is a real change in trend, I will have plenty of time to gradually take on my line of stocks.   Have a great trading day.

Let’s hope that Charles Kirk’s relative will get better soon and that he will return to writing his excellent blog soon, at www.thekirkreport.com.

CNBC: Forever Bullish

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?

Fed Up With This Market?

“October.        This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”

Mark Twain, The Tragedy of Pudd’nhead Wilson, 13, 1894

Why did Mark Twain pick on October first, 35 years before the big crash?   Was he a closet market technician into long term cycles?   However, he was smart enough to protect his reputation by naming a few other months.

The WW-GMI is not a leading indicator.   It is a summary of the indicators I watch to tell me the current trend.   By definition, the index will not register a strong market until after the turn has come.   The WW-GMI is still zero. (click on the table to enlarge)Index502 There were only 12 “successful” 10 day new highs today.   (See prior posts for indicator definitions.) However, we did see that 88/4000 stocks hit a 52 week high today.   The QQQQ would have to close above 35.84 to get me interested.   It closed at 35.12.   The SPY would have to close above 116.70, it closed today not too far away, at 116.40.   Note that I said, to get me interested, not to get me confident to buy.   I expect that the end of this decline will come with a bang, not a whimper.   But I never marry a scenario.   I just wait to see how the market behaves. You have to observe the glass carefully for a while to determine if it was half full or half empty.

Everyone is glued to the Fed tomorrow.   It is possible they could say something that could make this market explode to the upside.   However, I shall wait until things happen, and will not jump the gun.   Right now, my portfolio is 10% short, all through owning puts that expire at least 2 months from now.   I can afford to wait out any minor bounce, as long as the indexes do not violate their downtrends.   If they do, I will sell the puts.   I never go against the trend.   In a coming post, I will describe why I think buying puts in a declining market makes sense (and dollars). I also think that put options can be used with minimal risk and will show you how.

Many thanks to www.thekirkreport.com for mentioning my blog.   I check Kirk’s blog every day for his keen insights, and welcome his referrals.   Check some of my earlier posts to undertstand my trading philosophy and background.

Taking Stock of the Market

“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.”

My Trading Strategy, Part II

IT TAKES A ROCKET SCIENTIST!

(Copyright ©   2005, by Eric D. Wish.   All rights reserved.)

“There is no magic about buy signals. They are only devices by which we call our attention to stocks that have already begun to attract the attention of others.”

Burton Crane, The Sophisticated Investor, 1964, p. 49

Can you believe this?   The day after I tell you how much I admire Jim Rogers, he goes on television and tells everyone that   he   buys stocks that are near their lows and avoids those hitting new highs.   I guess I better set the record straight by telling you where I stand on this issue.   Assume you are looking over a field of rockets, all on their launching pads.   Your job is to determine which rocket will take you to the moon.    There are a number of ways to approach this problem.   One person might study all they could about the model of the rocket and its history.   They might find what similar rockets have done in the past and that a rocket with a particular size and payload should be able to go quite far.   This strategy is equivalent to the approach taken by the fundamental analyst.   He (or she) knows the company’s prior earnings and projections for the future.   He can tell you all the reasons why a particular company’s stock should do well–earnings, cash flow, sales, industry trends etc.   He can estimate the stocks “true” value.    

Read moreMy Trading Strategy, Part II