Darvas

Happy New Year–What if?; GMI: +2; Trade with the trend

@ 12:01 am

                                                                  What If?

What if……………

…no one can predict the stock market;

…high paid pundits only predict the past;

…Cramer is a modern day Elmer Gantry;

…the stock market is a big casino,  a la Nicolas Darvas;

…to survive, analysts and brokers promote an illusion of order and complexity;

…psychology matters more than fundamentals and facts.

Then we might isolate ourselves from outside opinions, use our charts to maximize the chances of a gain, place our bets, and quickly and ruthlessly cut our losses.  In harmony with the trend and with thoughtful trial and error, each small loss brings us closer to the next big gain………….

The GMI closed out the year with a +2.  A short term down trend is in effect, while the longer term up trend remains intact.  However, as we shall see below, the WPM shows some signs of weakening in the longer term trend of the component stocks of the five indexes I follow. One of the things that worries me is that the percentage of investment newsletters that are bullish is at 60.4%, with only 20.8% bearish.  This is a contrary indicator–market peaks tend to be formed when most advisers are bullish. 

There were only 56 new highs on Friday, and 45 new lows, in my universe of 4,000 stocks.  Gmi1230 Only 39% of the 125 stocks that hit a new high ten days earlier closed higher on Friday than they did ten days before.  21% of the Nasdaq 100 stocks advanced, along with only 17% of the S&P 500 stocks and 7% (2) of the Dow 30 stocks.  The QQQQ has now closed below its 10 week average for the first time in nine weeks.  Only 56% of the stocks in my universe closed above their 10 week averages and a mere 28% are in a short term up trend. Just 3% of the 176 stocks that have doubled in the past 250 days hit a new high on Friday; the leaders have stalled.  20% of stocks remain within 5% of a new high.  Friday was the eighth day (D-8) in the QQQQ down trend. Since this down trend was identified on 12/20, the QQQQ has fallen 1.3% and only 40% of its component stocks closed higher on Friday since 12/20.  With 60% of the Nasdaq 100 stocks declining during this period, why not be short or in cash, and go with the trend.  So many of us lose money by staying long when the trend is down.  The pundits scare us into believing the myth that we will miss the train when the turn suddenly comes.  However, when a meaningful turn comes, there are many weeks and sometimes months during which we can hitch a ride.

The WPM showed marked deterioration in all five indexes.  Wpm1230 All indexes closed below their 30 day averages and are in short term down trends.  Only 24% of the Nasdaq 100 stocks closed above their 30 day averages, along with 33-41% of the components of the other indexes.  While all five indexes closed above their 30 week averages, only a reduced 52-64% of their component stocks did.  Time will tell whether this longer term weakening will develop into a longer term down trend.

So we begin the new year in the midst of a confirmed short term down trend.  For me, this is a time to be short or in cash.  Can this trend reverse quickly?  Of course.    If the market turns up, I can turn on a dime, or dollar, along with the GMI.  The key to conservation of capital is not to fight the current market down trend, especially in view of the strong bullish sentiment found among advisers.  As always, the new year will bring tremendous opportunities for profiting on the bull and/or bear side, as long as I trade in harmony with the market trend and cut my losses quickly.

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

GMI: +4; Mixed signals; GMI: contrary indicator? New Year Nicolas Darvas type stocks

@ 12:35 pm

The GMI remains at +4, and the market should reveal its short term trend this week.   The QQQQ closed Friday just below its 30 day average, and its declining 10 day average is just above the 30 day average (41.52/41.49).   The last time the QQQQ’s 10 day average was below its 30 day was on October 31 at the beginning of the rally. Tomorrow’s close should be very important for defining the short term trend. Gmi1223Only 47% of the 160 stocks that hit a yearly high ten days ago closed higher on Friday than ten days earlier.   In addition, only 10% of stocks that have doubled in the past year hit a new high.   Thus, there is some pressure on the leaders and stocks hitting new highs.   On the other hand, there were 168 new highs in my universe of 4,000 stocks.   But only 50-53%   of the stocks in the Nasdaq 100, S&P 500 and the Dow 30 indexes advanced on Friday.   The percentage of stocks in a short term up trend has risen from 33% early last week to 39%, and 67% of stocks remain above their 10 week averages.   Three times as many stocks are within 5% of a new high than a new low (25%/8%).   This was the eighth week that the QQQQ has closed above its 10 week average, but Friday was the fourth day in this QQQQ down trend (D-4). We therefore have a weak short term trend within a stronger long term up trend.

The WPM also shows this lesser short term strength in the QQQQ (Nasdaq 100) index.   The QQQQ is the only index that closed below its 30 day Wpm1223average, and only 55% of its components stocks closed above their 30 day averages. The S&P 500 stocks show the greatest short term strength, with 67% of its stocks above their 30 day averages.   The S&P Small Cap Index components are also relatively week, with only 52% above their 30 day and 59% above their 30 week averages…..

A reader wrote me that he thinks the GMI is a contrary indicator.   I don’t see it. Gmi1223changes As this chart (click on to enlarge) of the changes in the GMI shows, the GMI registered a +5 or 6 during the major rallies in July and November.   And when it was below 4, it was generally a declining market……………..

I hesitate to list any stocks that I find promising when the QQQQ is weak, but my scan did find some stocks to watch in the new year, if the market up trend resumes:

INGR,TIE,HSVLY,GOOG,LMS,CRM,GMXR,

AAPL,LDSH,AIRM,UBB, ARD, MDR, DBRN,GHL.

All of these stocks (I own a few) are near their all-time highs and have recent quarterly earnings increases of 100%+.   With the exception of CRM, their PE’s are all less than 100.   They all gained in price at least 80% in the past year.   Nicolas Darvas (see links below and to the right) used to concentrate on leading stocks at all-time highs that have already doubled.   To find a stock that will double, I find it best to find one that has already doubled.   Of course, when buying such high momentum stocks, I must immediately limit risk by placing a stop loss order……………..

GMI: +4; QQQQ too tough to call; Some food for thought

@ 9:36 am

The GMI fell to +4 on Thursday, at the same time that the internal indicators showed some strength.  Gmi1222 Between 71-77% of the Nasdaq 100, S&P 500 and Dow 30 stocks advanced on Thursday.  There were 145 new yearly highs in my universe of 4,000 stocks.  But only 46% of the 184 stocks that hit a new high ten days ago closed higher Thursday than they did ten days ago. Buying new highs has not been likely to show a profit.  The Daily QQQQ Index is too close to call.  Thursday was the third day of this down trend (D-3), which shows signs of weakening.  36% of stocks are now in a short term up trend, up from 33% on Tuesday and Wednesday. The percentage of yearly doublers that hit a new high yesterday rose to 13%.  I am doing some nibbling, but the market is on the dividing line between up/down trend.  I am placing small bets until I can determine the short term trend.  The longer term trend remains up, with 65% of stocks above their 10 week averages.  Stocks I am watching (some of which I own) are:  HUM, MSTR, SNDK, AAPL, CHS, GOOG…………….

The great traders (Livermore, Darvas, Loeb) all suggested that one should focus on a small number of leading stocks.  I often say that diversification leads to mediocrity in stock trading.  We want to concentrate in our winners and not have them diluted by our losers.  I just read similar sentiments by William Harnisch, who wrote that diversification is the "plain vanilla of investing." Some food for thought as you mix your egg nog…..