Nicolas Darvas

GMI: 0; 324 new lows; bear market leaders?

@ 12:01 am

Wednesday’s action pushed the GMI to zero.  There were an amazing 324 new yearly lows and only 15 new highs in my universe of 4,000 stocks.  Only 15% of the stocks are in a short term up-trend and only 22% closed above their 10 week averages.  Gmi1012_1 Only 25% of the Nasdaq 100 and S&P 500 stocks rose on Wednesday, along with 33% of the Dow 30 stocks.  Only 6% of stocks are within 5% of a new high, while almost three times as many (17%) are close to a new low.  Only 30% (-15%) of the stocks that have doubled in the past year closed above their 30 day averages.  So, even the best performing stocks are staggering.  With the GMI at zero and stocks heading toward new lows, we might be in the throes of a burgeoning bear market.  My university pension has been in cash for weeks and my IRA is now 96% in cash.  I indicated last Sunday that the Darvas and O’Neil type growth stock strategies do best in markets that are at historic peaks.   Now is not the time to be buying stocks in anticipation of new highs.  It is time to be short or  in cash.  The CNBC pundits Wednesday morning were complaining that the market has no leaders.  Nonsense!  How about all of the stocks that are leading the market down.  Bears can lead a parade too.

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

Nicolas Darvas trading techniques require markets at all-time peaks

@ 12:49 pm

The basic principles of my method are in fact quite simple:

Firstly, except in exceptional cases I only buy the stock of companies in new or developing industries, i.e., companies whose growth and earnings prospects look highly promising.   I never buy stocks in established industries, in companies with huge capitalizations, or in companies which are already so big that the prospect of substantial growth is highly unlikely.

Secondly, having found such lively stocks, I certainly do not buy them straightaway.   I first check the overall market trend to ascertain whether stocks in general are in an uptrend.   I then check whether the stock belongs to a strong industry group, i.e., a group that is performing well in the market relative to other groups. Only when I have satisfied myself on these two points do I look in more detail at the stock that interests me.

Why all these precautions?   Because I like to be sure that the odds are in my favor.   If the market is in a downtrend, and the industry group is performing weakly I know that the cards are stacked against me and that my chances of making big profits are poorer than if the market and the industry are strong.   You cannot be too careful in the stock market.

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GMI: +1; WPM shows weakening; Folly of fighting market’s trend; On Nicolas Darvas

@ 12:00 pm

What a devastating week for the bulls.     The market internals continue to weaken, with only 24% of stocks in my universe of 4,000 in a short term up-trend.   The GMI remains at +1, with only the Weekly QQQQ Index still barely positive.   There were only 28 new highs on Friday and three times as many new lows.   On Friday, only 55% of the Nasdaq 100 stocks, 66% of the S&P 500 and 50% of the Dow 30 stocks advanced, an insignificant bounce up from the week long decline.   Friday was the third day in the QQQQ down-trend (D-3).   Since its peak on August 2, the QQQQ   (Nasdaq 100 ETF) has declined 4.3% and only 34% of its component stocks have advanced, with only 18 stocks (18%) advancing 5% or more.   Why fight these odds?

The WPM shows the extraordinary weakness in the short and long term trend measures of   five market indexes.     All five indexes are below their 30 day averages and only 20-34% of their component stocks are above their 30 day averages.   The Dow 30 stocks continue to show the greatest weakness, short and long term.   The big industrial Gmi1007companies are clearly weak.   The DIA and SPY ETF’s are both below their 30 week averages, an indication of longer term weakness in trend.   Only 30-50% of the component stocks in all five indexes closed above their 30 week averages, suggesting that all of these indexes may find themselves below this key average soon……….

It has taken me 40+ years of trading to understand the folly of fighting the overall market trend.   Whether I look at Livermore’s “line of least resistance,” or O’Neil’s “M” in CANSLIM, or Nicolas Darvas’ writings (See Boik’s books at right) I find these gurus all saying that there is a time to be out of the market when it is declining, or to be short.   This is a very difficult rule to follow because even in weak markets, I am tempted to go long when I find the “perfect” text book price pattern that brought huge profits in a prior rising market.   The critical point to remember is that the same price pattern that works so well in a rising market, is likely to fail in a declining market.  Half of the battle for Wpm1007conserving capital is to resist the temptation to buy that unusually strong stock in a bad market.   The odds of success are against me.   And yet, being in the market is so seductive.   (One way I handle such a temptation is to use a very small portion of my portfolio to buy that irresistible stock–just in case I am right.) This topic is so important, I will prepare another post this weekend that will delve into the writings of my favorite guru, Nicolas Darvas, as they apply to the importance of following the market trend.