Covered Calls

GMI: 1; More new highs than lows; Performance of GMI; Strongest IBD100 stocks

@ 12:01 am

The GMI moved up  one, as the QQQQ Weekly Index turned "bearly" positive.  For the first time since July 23, there were more new highs than lows in my universe of 4,000 stocks (61 vs. 46), a promising sign.   Gmi0817 The Worden T2108 count of the percentage of all NYSE stocks closing above their 40 day averages has now rebounded from an extreme low reading of 8% to 16%.  Finally, the SPY and DIA have now closed below their 10 week averages for 4 consecutive weeks.  I have written before that I am much more successful buying growth stocks when the QQQQ is above its 10 week average.  Only one of the 16 short term indicators for the IJR, DIA, SPY and QQQQ is positive (GMI-S: 6%) .  Friday was the 15th day in the current QQQQ short term down-trend.

A reader asked me to post a chart of the recent performance of the GMI.  There is no magic to the GMI.  It is merely a count of the six market characteristics that I find useful for tracking the current trend.  These indicators have helped me to survive in the market and have kept me out of all major market declines since 1994. Gmiperform0817 Remember that I am a chicken.  I have no problem going entirely into cash and waiting for the storm clouds to clear.  I typically start to exit the long side of the market when the GMI falls below 4 and to buy once it climbs back above 3.  I refuse to own stocks when the GMI is low.  I do not fight the tide. The GMI measures only  the behavior of the markets and not what people think or hope will happen. At the close of the day of the sudden drop in February, the GMI registered 1 (down from 6) and stayed below 4 until March 21. From March 21 through July 24, the GMI registered between 4-6, but mostly 5 or 6. During this period the market rose about 11% and I had much success trading on the long side and writing covered calls.  The GMI fell to 3 at the close on July 25th and has been below 4 since then. So, I have escaped the latest carnage……

The great trader, Jesse Livermore, refused to label a market bear or bull.  He said that these terms have too much baggage regarding longevity and size of a move.  He asserted that he could only characterize the current trend of the market.  I agree with Jesse’s opinion.  The market appears to me to be in a down-trend and it remains so until the GMI rises to 4.  I understand how difficult it is for people to refrain from buying or holding stocks even when the odds are against them.  It took me a very long time to learn to respect the trend of the market and not to fight it. (I used to profit in the up-trend and give it all back and more in the subsequent decline.) This is THE KEY to successful trading…..

While this is not the time for me to buy stocks, I find that declines offer the best opportunity to find the next winners.  The few stocks that can resist the market decline tend to become stars. While 80% of the 440 IBD100 stocks I monitor have declined since July 19, the following are the ten biggest gainers: ISRG +33%, HMSY +32%, MORN +26%, ANSS +24%, BLUD +22%, GMCR +21%, RADS +20%, FSTR +19%, NVT +18% and SMDI +18%.  Some of these may be among the best stocks for me to focus on when the market turns…..

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GMI: 6; All indicators positive; T2108 only 55; OMX weak

@ 10:00 pm

The GMI has been at a maximum 6 since July 3.  (Note :  I mainly post when the GMI changes.)  The GMI has been 4 or above since March 20.   If I had merely bought and held the Ultra QQQQ ETF, QLD, since then, my portfolio would have increased by about 24%.  It’s that easy–just catch the trend and ride it until it ends.   Gmi0713 Of course, I did not do this, but I have done well during this time writing covered calls, and riding AAPL and GRMN and FTO, all of which I wrote about.  In fact, I would say that if one has not made money during this rally, s/he should just stop trading and invest in a mutual fund or the SPY. The market provides brutal feedback, one knows the score by whether s/he makes or loses money.

The T2108 is 55%, so this rally probably is a long way from the toppy 80’s. However, the QQQQ has closed above its 10 week average for 16 weeks. A close of this index below its 10 week average, currently 47.53,  would be a sign of weakness and a signal that the up-trend is weakening.  Meanwhile, I will not fight the tape, although I could not resist buying some puts on OMX, which is in a steady downtrend. Holding a short on one very weak stock will enable me to make money when this strong market starts to correct.

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Gmi-5; GMI-S, 19; markets weakening; GOOG, GRMN, IOC

@ 12:01 am

The GMI fell to 5 on Monday, with only 94 new highs in my universe of 4,000 stocks. The GMI-S fell to 19, with few short term indicators remaining positive. I still think that this decline is setting up a rally when earnings come out in July.  The major indexes are still above their 10 week averages.  So, while the short term may look weak, the longer term up-trend is still intact.  I am holding covered call positions and a lot of cash.  GOOG and GRMN still look strong.  And then there is IOC which is giving me 10% premiums on my covered calls.  A lot of people must be betting that their natural gas find will pan out.  I am very pleased to sell these persons calls on my shares at huge premiums.

I will let you know if my indicators weaken.

Note my disclaimers on my prior posts.