Darvas

The short term uptrend remains intact, with the GMI at 2 (of 6) and the GMI-R at 4 (of 10).   The Worden T2108 indicator is at 43%, the highest since last September and well out of bottom territory.   Tops often occur when the T2108 is at 70% or better.   Another sign of strength is that 68% of the Nasdaq100 stocks closed above their 30 day averages, the most since August 28th.   And the dollar may be breaking its up-trend, causing gold and other commodities to rise…..

If you got a chance to see the Wall Street Journal on Wednesday, you may have read the sad story about Bill Miller’s fall from grace.   This icon of buy and hope and addiction to value has seen his fund and his career get shattered.   It is very depressing that such a good stock picker apparently had no plan to abandon stocks that developed down-trends.   Fundamental analysts kept telling him how undervalued his stocks were, even as many became more and more undervalued, and descended into oblivion. We need to remember that “value” is a myth.   As Nicolas Darvas wrote, the only reason to buy a stock is if it is rising; if it is not rising there is no reason to own it.   I   hope Bill Miller can keep his job and that he learns from his painful experience.

My General Market Indicators (GMI, GMI-R)   remain at zero.   There were only 23 new highs and 2185 new lows in my universe of 4,000 stocks on Thursday.   On October 10, there were 2832 new lows, so this decline has not eclipsed the number of new lows set at the October low.   The Worden Indicator is back to 5%, a level where prior bottoms occurred.   On October 10, it was at 1%.   Since 1986, the level was lower only once, in October, 1987, when it hit 0.5%. The T2108 indicator measures the percentage of NYSE stocks above their simple 40 day moving average.   It used to be a reliable indicator of when the market reaches tops (above 70%) and bottoms (below 20%).

When we take a step back from the current hysteria and look at the Dow Index each year in perspective, an amazing fact comes out.

As this yearly chart shows (it tracks each year back from the current day and does not correspond exactly with a January to December calendar) the current decline in the Dow appears minuscule when compared to the one in 1929-1932.   The 1987 decline does not register much and the 1974 decline just touches the 30 year moving average trend line (red line).   In fact, the current decline is well above that trend line. So, we may not be near a bottom today or this year……….. The great temptation that we all face is to buy the bargains and look for a bottom.   If I have learned anything from studying the great traders of the past (Livermore, Baruch, Darvas, O’Neil) it is that one cannot predict the market, only ride the current trend until it ends.   Thursday was the 58th day since I labeled the beginning of the current QQQQ short term down-trend on September 2nd.   For me, the trend is still down, so I remain in cash with a few short positions.

Thank you, Beth, for the vote of confidence.   I also want to acknowledge that Beth independently made similar comments about the Dow’s history on her email to the members of her local trader’s meetup.

No change in my indicators on Monday.  There were 3 new highs and 980 new lows in my universe of 4,000 stocks on Monday…..

Jesse Livermore once wrote that no stock was too low to sell (short).  As you may know, one of the indicators in the GMI computes the percentage of stocks that hit a new high 10 days ago that closed today higher today then they closed 10 days ago.  The logic is that in a rising market, stocks that break-out to new highs should keep rising.  In  fact, Nicolas Darvas wrote that a pattern of failed break-outs often tipped him off to a coming bear market. Well, the reverse is true in a declining market.  In a declining market stocks hitting new lows should continue to decline.  So, I compute each night a similar measure–the percentage of stocks at new lows 10 days ago that closed lower today than they did 10 days ago.  Would you be surprised to learn that, with one exception, since September 8 (the 5th day of the current QQQQ down-trend) each day 50% or more of the stocks that hit a new low 10 days before closed lower than they did 10 days earlier.  In fact, the percentages were above 80% on many of the days during this down-trend.  The bottom line:  during the current down-trend, shorting a stock on any day it hit a new low was very likely to be profitable 10 days later.  Trade consistent with the down-trend or go to cash!