Darvas

GMI: 5?; GMI-S: 100; Short-term rally?; IAI

@ 12:01 am

I leave town for a few days, and the market rallys.  In my defense, I remind you that my previous post did say that I saw some signs of strength in the market.  I noted a bullish divergence in the MACD and more new highs (94) than I had seen in a long time.  However, I failed to pay any attention to another major sign of strength given off by the market–its failure to decline after the terrorist plot in Britain was announced.  The market glass is always half full or empty and the way that the market responds to major events provides valuable clues as to how the masses are feeling towards stocks.  (The same is true about how the market responds to news regarding individual stocks.)  Gmi0818_1

So the GMI rose to 5 on Thursday and remains a 5? after Friday’s action, questionable because there were only 97 (very close to the 100 needed to turn that index positive) new highs in my universe of 4,000 stocks.  However, the GMI-S is now at 100, indicating that all of my short term indicators for four major stock indexes are positive. However, the longer term GMI-L is 63, and the Weekly QQQQ Index in the GMI is still negative.  The QQQQ is finally back above its 10 week average but remains below its key 30 week average.  In contrast, the SPY and DIA are above both their 10 week and and 30 week averages. Five times as many stocks in my universe are within 5% of their yearly highs than their lows (21% vs. 4%). 

As I read these statistics, it looks like the short term trends for the stocks represented by DIA, SPY, QQQQ and IJR are up.  The longer term trends for the large cap stocks (SPY and DIA) are also up.  Thus, this appears to be a tradeable rally and I closed out all of my short positions and have been slowly wading into the market on the long side.

The IBD 100 stocks are still underperforming. 23% of the IBD 100 stocks from 5/15 are in a short term up-trend, compared with 47% of my universe of 4,000 stocks.  Since the 5/15 IBD 100 list was published, 21% have risen, compared with 45% of my stock universe.  Only one of the stocks on the IBD 100 list from 5/15 hit a new high on Friday (DRIV), and only three of the stocks on the IBD 100 list for 8/14 hit a new high (DRIV, NVEC and PNFP)…

In my early years in the markets during the 60’s and 70’s, I noticed that after each major decline the new bull market would rise on record daily trading volume.  Back then, I remember the first time daily volume reached 10 million shares. This trend towards higher volume with each advancing market has continued to this day, so that now daily trading volume is measured in billions of shares. I therefore reasoned in my youth that it was pretty much a certainty that the stock brokerage industry (Darvas considered them to be the casinos) had to prosper with each new bull market.  So if I bet on any industry to recover from a declining market it would be the stock brokers(bet on the house).   But which brokers to buy? Iai  I want to diversify across a few of the big brokers so I do not get stuck with just one or two laggards. Fortunately, since May there is a new ETF that includes a number of stocks in the U.S. brokerage industry (IAI).    If this up-trend is for real, I will watch this ETF very closely……….

Please send your comments to:  silentknight@wishingwealthblog.com.

GMI: +3; QQQQ masks underlying strength in IBD-100; Stocks to watch

@ 12:01 am

I am back from a much needed vacation. In the past two weeks my market indicators strengthened a lot more than the QQQQ would indicate.  The QQQQ is in its 22nd day (D-22) of its current short term decline and has closed below its 10 week average for 12 weeks.  However, the GMI is now at +3 and surprisingly, the IBD Mutual Fund Index is back near its 50 day average and is too close to call (?). Gmi0805  The latter indicates that the growth funds are starting to rise. I have found that when these funds start rising, I can make money trading IBD type growth stocks.  While 70% of the 21 stocks in my 4,000 stock universe that hit a new high 10 days ago closed higher on Friday than they closed 10 days ago (i.e. successful 10 day highs), only 25% of the 260 stocks that hit a new low 10 days ago closed lower.  This suggests that shorting new lows has been unlikely to have been profitable recently.  I am glad I closed out my shorts before I left on vacation. It was better to have bought stocks at new highs. There were 213 new highs on Friday in my universe of about 4,000 stocks.  Reflecting the out-performance of the big cap stocks, my Daily SPY Index has now turned positive.  The GMI-L is now at 50, up 25 from my last post on 7/21.  The GMI-S is at 81, up 75 from its low pre-vacation reading.  All four of my short term indicators for the DIA and SPY are positive, compared with 3/4 of the IJR indicators and only 2/4 of the QQQQ indicators.  Clearly, the small cap and tech stocks are lagging the big cap stocks.  This is not surprising, because after a decline, people are most confident buying the blue chips.  After these trades yield some profits, they move on to the more speculative stocks.

But a look at my universe/IBD 100 performance comparisons tells a slightly different story.  While the indicators for my stock universe all strengthened the past 2 weeks, so did my IBD 100 indicators.  Ibd0805 65% (+30) of my stock universe closed above their 10 day averages, as did 63% (+48) of the IBD 100 stocks from 5/15.  My earliest indicator of a possible up-trend–stocks trading above their MACD signal line, was 69%  for both my stock universe (+32) and for the IBD 100 stocks of 5/15 (+50).  Thus, incredible improvement has occurred in the short term indicators of both my stock universe and the IBD 100 type of growth stocks.  The action of the tech and small cap stock indexes (QQQQ, IJR) fail to reflect this improvement.  In fact, as of Friday, twice as many stocks in my universe were within 5% of a new high (18%) than a new low (8%).  In spite of their recent strengthening, the IBD 100 stocks of 5/15 are not out of the woods yet–only 21 of them (21%) closed higher on Friday than they did on 5/15 when this list was published; 28% of them are down 20% or more. As IBD frequently cautions, one should not simply buy the IBD 100 stocks and hold them through a weak market……

So where are we?  First of all, during a few days in my vacation I tuned into CNBC and was struck by the bearishness of the comments.  These pundits tend to look backward at the market rather than focusing on the the current trend.  There is much wisdom to be gained from other successful trading gurus (Darvas was an extreme example) who tuned out all media gossip and focused on their technical indicators to assess the market’s trend.  In his most recent excellent book, John Boik says that the very successful IBD-type trader (Roppel) he describes used to keep CNBC on all day with the volume muted.  For me to be successful in trading, I also must tune out the huge amount of misinformation on the airwaves and concentrate on my analysis of the technicals.

So, for now, it looks like the big cap stocks have turned up and the IBD type growth stocks are showing some signs of strength.  I have closed out all of my shorts and am now looking to purchase stocks with good technicals.  If the GMI continues to climb I will wade slowly into this market.  There is no need to hurry, because there is plenty of time to jump on board the train, if a real up-trend is starting.  Among the technically strong stocks I am watching are (I own one of these):  GPIC, OCN, OMNI, BVX, FAL, IAAC, DAKT,VOL,TXUI BMRN and EME. Also, the four IBD 100 stocks from 5/15 to hit a new high on Friday were:  SAFT, CLB, CTSH, MVK.  It’s nice to be back…….

Please send your comments to:  silentknight@wishingwealthblog.com.

GMI: 0; GMI-S: 6; GMI-L: 25; Gone fishing

@ 12:01 am

While the GMI has been zero for some time, note that the GMI-L is now 25 and the GMI-S is 6.  This means that all but one of the 16 short term indicators for the four major indexes are negative; and now the long term indexes are weakening.  Gi0720 12% of the Nasdaq 100 stocks rose on Thursday along with 21% of the S&P 500 stocks and 27% of the Dow 30 stocks.  While 18% of my universe of 4,000 stocks rose, only 6% of the IBD 100 stocks from 5/15 rose.  The market is slaughtering tech and growth stocks.  Only 50% of the IBD 100 stocks from 5/15 are in a bullish stage 2 up-trend, the lowest percentage since I began tracking this indicator on June 9 (range: 50-81%).  Only 32% of these IBD 100 stocks from 5/15 closed above their 30 day averages.  The QQQQ is in its eleventh day (D-11) of the current short term down-trend and has closed below its 10 week average for 10 straight weeks.

So what to do?  I am going on vacation, but will try to update the GMI sometime between now and early August when I return.  Every successful trading guru I respect has written that there are times to be out of the market.  The eloquent Jesse Livermore said there were times to go short, go long, and to go fishing.  Nicolas Darvas said only to trade when one’s conditions for trading are perfectly met by the market.  The "M" in CAN SLIM says to stay out of growth stocks when the general market is declining.  There is no hurry or urgency to trade. With the market acting so schizoid, I am going fishing.  The saying, "in May go away," has never been more appropriate.  Check out Thursday’s Investor Education myth buster article in IBD for an analysis of why it makes sense to be out of the market during declines.  Perhaps the market will give us a better opening in the fall.  Conservation of capital keeps one in the game…….

Please send your comments to:  silentknight@wishingwealthblog.com.