Jim Cramer

GMI:+6; My favorite posts; GMI as a trend indicator; WPM shows all indexes strong; Jim Cramer on charts; Some big earners at new highs

@ 9:50 pm

NOTE:    A NEW SECTION TO THE BOTTOM RIGHT PROVIDES LINKS TO MY FAVORITE PRIOR POSTS.  THESE INCLUDE MY STRATEGY POSTS, DEFINITIONS OF THE GMI COMPONENTS, AND MY ANALYSIS OF WHY THE TRADING TECHNIQUES OF THE GREAT NICOLAS DARVAS WORK BEST DURING BULL MARKETS AT ALL-TIME HIGHS.

What a week!  The GMI remains firmly at a maximum +6.  Gmi1111 I will show you below how the GMI has kept me out of the market (or short) during declines and back in during rallies.  80% (57/71) of the stocks that hit new highs 10 days ago closed higher Friday than they closed 10 days earlier.  In contrast, only 24% of the stocks that hit new lows 10 days ago closed lower than they did 10 days earlier.  The moral?  In a strong market buying new highs is much more likely to prove profitable than shorting new lows. There were 234 new highs on Friday and only 44 new lows in my universe of 4,000 stocks.  56% of stocks are in a short term up-trend and 53% closed above their 10 week averages.  Almost three quarters (72%) of the 165 stocks that have doubled in the past year closed above their 30 day averages, along with 80% of all of the Nasdaq 100 stocks.  Friday was the ninth day (U-9) in the QQQQ (Nasdaq 100 ETF) up-trend.

Here is a chart of the changes in the GMI since its inception. Click on this to enlarge.  Note the periods Gmi1111_1 when the GMI is greater then 5 that it has been a good time to be long.  The GMI was +6 for all of July and 5 or greater since November 1. I leave you to judge whether it is a useful market timing indicator.  It is for me.

The WPM showed major strength in all five indexes.  Wpm111105 All of the indexes closed above their 30 day and 30 week averages.  83% of the Dow 30 stocks and 80% of the Nasdaq 100 stocks closed above their 30 day averages and the remaining three indexes were not far behind.  60% or more of the component stocks are now above their 30 week indexes.  This is a market where all types of stocks are participating and where both the short term and longer trends are up.  It is noteworthy that the Dow 30 stocks are now quite strong. 

We never know how long a trend will last.  But it is important to hitch a ride on a strong trend early and ride it until it flashes warning signals.  The reasons behind this up-trend will eventually come out.  But often times the good news comes out closer to the end of the up-trend than to the beginning.  It is important not to fall into the trap of waiting for a rationale for an up-trend before getting in.  When your train leaves the station, it does little good to stay on the platform and argue that the schedule is off or that it should not have departed.

Cramer had a nice interview on 60 Minutes tonight.  It was a love feast–I thought they were supposed to be investigative reporters!!??  Anyway, I though I would quote you what JC has to say about charts in his new book.  "Looking at the chart, the graphic demonstration of where a stock has gone, is not homework.  It can tell you nothing.  …………..In investing a picture is not worth a thousand words; in fact it is almost worth nothing.  A chart is never enough to buy a stock. Never. Don’t be conned into believing that looking at a chart can suffice for homework; it simply can’t." (Cramer, 2005, pp86-87.)

I agree with Cramer that trading decisions should not be made solely according to a chart.  (Why not buy stocks that look technically strong AND that have good fundamentals?)  A few pages later Cramer writes: "Because stocks anticipate the fortunes of their companies, the collapse of Maytag the stock occurs ahead of Maytag the company." (p. 110).  Cramer proves the value of charts.  If a stock tanks before the bad business news underlying the decline comes out, the only way we outsiders can discern the weakness early enough to get out is by studying the stock’s price and volume trends via its chart.  Studying the Nasdaq’s chart got me out of the market in 2000, and had me buying put options (selling short) on Enron long before the bad company news came out.  I rest my case.

Here are a few stocks with good fundamentals and charts.  Among the stocks that hit new highs on Friday, who are up at least 60% this year  and who have recent quarterly earnings  increases of  100% or more are:  TIE, LMIA, NWRE, TRAD, IRIS, HANS, ISRG, HUBG, MRVL, VTAL, HOLX, GHL, JLG, SUPX.  I own some of these and think they are good stocks to research.  I make a small pilot buy and slowly average up in the ones that work out.  I also always place a stop loss for insurance, to limit my losses.  Have a great week.

Please send me your feedback at: silentknight@wishingwealthblog.com.

GMI: +5; For whom the bell TOLs–my August post on housing; The rally continues

@ 12:01 am

                                                  MY POST ON AUGUST 26

"I can’t count the number of times I have bought puts on the housing stocks only to find them turn up again. Res But I think they may really be topping out now.  Look at this chart of the residential construction sector.  Note that the index is now below the 10 day, 30 day and 50 day averages.  The 10 day (dotted line) is now consistently below the 30 (red) and 50 (green).  This chart pattern is similar to a host of housing stocks such as:  BZH, PHM, LEN, RYL, KBH, MDC, DHI, TOL, CTX, MPH, HOV, to name only a few.  All of them have shown volume spikes recently on down days.  Even TOL, a Cramer favorite, could not retain its gain on good news and reversed to close down near its daily low on Thursday on unusually large volume.  This may only be a correction in housing, but it is consistent weakness among all of the leaders.  Is the roof finally about to cave in?"

In this field of market analysis one must take credit for those few times one gets it right. Last August, it became clear to me that the housing stocks were all acting badly.  And on Tuesday, the roof finally caved in with TOL’s almost 14% decline  when it announced a slowdown in business.  The beauty of technical analysis, and the weakness of relying on public business information, is that the chart shows the selling behavior of those in the know long before the bad news comes out.  Shame on anyone who was holding TOL since August.  Remember I showed you "naked charts," where the price is invisible, so the 10 and 30 day moving averages can be clearly seen?  Look at this chart of TOL. Tol1108 Last August the 10 day average (dotted line) declined below the 30 day average (red line) and a few days later the 30 day average curved down.  Look how easy it was to see the change in trend.  No one should have been caught in Tuesday’s huge decline.  Perhaps we should have a rule only to buy/hold stocks when the 1o day average is above the 30 day average and both averages are rising……………………….

The GMI declined 1, to +5.  This decline occurred because there were only 93 new highs on Tuesday.  Gmi1108 All other indicators remained stable.    Only 41% of the Nasdaq 100 stocks rose, 41% of the S&P 500 stocks, and 37% of the Dow 30 stocks.  Tuesday was the sixth day in the QQQQ up-trend.

Please send me your feedback at: silentknight@wishingwealthblog.com.

GMI: 0; WPM steady; Cramer calls a bottom; Be cautious

@ 7:30 pm

The GMI remains at zero, although the Weekly QQQQ index is too close to call.  Gmi1014_1 Friday was the eighth day in the QQQQ decline (D-8). While things look pretty bearish, there were some signs of market strength.  There were 27 new yearly highs in my universe of 4,000 stocks on Friday, up from just 8 on Thursday.  There were still more new lows, 110, however.  But between 70-80% of the stocks in the Nasdaq 100, S&P 500 and Dow 30 indexes rose. This was the highest percentage of advances in the S&P 500 since September 9.  The percentage of stocks that have doubled in the past year and closed above their 30 day averages increased 11, to 36%. And the percentage of stocks within 5% of their 52 week highs increased 3, to 8%. It may be that the formerly strong stocks are beginning to recover.

The WPM shows only a few changes since last weekend.  Wpm1014 The S+P midcap and smallcap indexes are now below their 30 week averages.  The QQQQ is the only index that is above its 30 week average–barely.  None of the five indexes closed above their 30 day averages.  In terms of the component stocks for the five indexes, the largest changes occurred for the midcap stocks, with only 19% (-7) of these stocks closing above their 30 day averages and only 41% (-5) above their 30 week averages. The Dow 30 stocks showed a little bit of improvement.  The eight Dow 30 stocks above their 30 day averages are:   IBM, BA, AIG, WMT, UTX, GE, JNJ, and C.

While the GMI and WPM indicate confirmed down-trends in U.S. stocks, it is important to be ready to react if the rally on Friday continues this week.  There are some signs of strength that should not be ignored.  First, we are entering the end of year, a season when the markets tend to rise.  Second, the put/call ratio broke above 1.00 one day last week, indicating that people were buying more puts than call options.  This means that traders are betting on a decline in stocks.  When the put/call ratio goes above 1.00 it often signals at least a short term bottom.  The ratio of actual shorting of stocks by the public versus the specialists on the floor of the NYSE is at very high levels (5-year high of 4.67 on 9/23, according to IBD), again indicating that the public is almost five times more likely to be betting on a decline than are the pros on the exchange floor.  Which side would you rather be on–that of the pros or the crowd? Finally, on Friday, Cramer called a bottom for the current market decline–does he represent the crowd or the omniscient insiders?  Cramer thinks the pessimism (i.e., selling) is overdone, but I seem to remember that all declines and advances go far beyond what people think is justified.  The Investors Intelligence poll of investment advisors now stands with 45.8% bullish and 29.2% bearish.  While the percentage of bears is moving up, there are clearly a lot of bulls to be converted. Check out this chart of the NYSE % bulls for an idea of the cycles and how much further sentiment could decline.

So, the bottom line is that this is a very tough market.  No one, perhaps except Cramer, can discern a change in trend before it has happened.  I guess where I come out on  all of this is to be short or in cash, but to be ready for a real change of trend, if it happens on sharply increased trading volume.  But remember that the indexes can retrace a lot of their recent declines without breaking their down-trends.  It never pays to be married too long to one trading scenario.

Please send me your feedback at: silentknight@wishingwealthblog.com.