Nicolas Darvas

GMI: 6; IBD 100 performance; AAPL and GOOG

@ 12:01 am

The GMI held at 6 even though few stocks rose on Friday.   There were 203 new highs in my universe of 4,000 stocks and only 13 new lows.   38% of the Nasdaq 100 stocks advanced on Friday, along with 46% of the S&P 500 stocks and 66% of the Dow 30 stocks.   Gmi1020_1 The QQQQ has now closed above its 10 week average for 10 weeks and Friday was the 45th day in the current QQQQ up-trend.   Since August 16, the QQQQ has risen 8.9%, and 73% of the Nasdaq 100 stocks have advanced;   41% advanced more than 10% and 25% advanced more than 15%.   During this same period, the ProShares ETF that attempts to double the performance of the QQQQ (QLD) advanced 16.9%, while the similar “ULTRA” ETF for the S&P 500 index ( SSO) rose 10.9% and the ETF for the Dow 30 index rose 11.7%.   Hence, by simply buying the QLD when the GMI signaled a rise and holding on during this rise, one could have received a 17% return–a return that beat 84% of the Nasdaq 100 stocks.   By buying the Ultra QQQQ ETF, I can beat 84% of the Nasdaq 100 stocks.   Why try to find the few individual stocks that outperform the QQQQ, when I can just ride the Ultra QQQQ ETF?   I can’t wait until the the GMI signals a down-trend so that I can switch to the Ultra short QQQQ ETF   (QID) and ride the QQQQ back down.

Meanwhile, the IBD 100 stocks have not done very well the past few months.   Ibdperf1020 On Friday, 38% of the Nasdaq 100 stocks rose, compared with 23-32% of four recent IBD 100 lists.   Only 43% of the stocks on the list from 10/16 closed higher than they closed on the day the list was published.   4% or fewer of the stocks on each list hit a new high on Friday, somewhat better than the Nasdaq 100 stocks (2).   74-82% closed above their average price of the past 30 days.   The four stocks on the list from 10/16 that hit a new high were :   HCSG, KNOT, AMX and TV.   The list from 10/2 included:   HCSG, KNOT, AMX   and CHL. The list from 8/14 added OKE. The fact that AMX was on all four lists suggests that this stock has had staying power dating back at least to 5/16.

I have been writing about GOOG and AAPL for sometime and have made some money trading them.   But I still make mistakes.   Last week with only days before expiration I wrote covered calls on AAPL and GOOG because the call options were providing incredibly high time premiums for just a few days, through Friday.   I wrote covered calls because I was influenced by some media pundits who said the market had to weaken, and by writing calls I limited my gains on these two stocks.    How many times do I need to remember to heed Darvas’ advice to eliminate all outside opinions from my trading.   When I just follow the market myself I do much better.   The opinions of others tend to destroy my judgment……………..

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.