GMI: +2; Holding cash

The GMI is +2 and we are in the second day (D-2) of the new QQQQ down-trend. I will wait to commit funds Gmi0707 until after earnings season.  Since 5/15, only 27% of the IBD 100 stocks listed on that date and 34% of my universe of nearly 4,000 stocks have advanced at all.  With odds like these I should only be short or in cash.  My scan of the market yielded 16 rocket stocks and 384 submarines.  Only 2 IBD 100 stocks (PMTI, CME) from the list on 5/15 hit a new high on Friday.  It would be insane to chase growth stocks and anticipate new highs in this market.

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

GMI: 0; Down-trend continues; All stocks are bad, but

Not much new on Tuesday.  The GMI is at zero.  More stocks advanced than on Monday; 35% of the Nasdaq 100, 22% of the S&P 500 and 23% of the Dow 30 stocks.  Only 9%of the Nasdaq 100 stocks are now above their 30 day averages.  Gmi0613 There were only 13 new highs and 292 new lows in my universe of nearly 4,000 stocks.  The QQQQ is now in its 23rd day of a decline.  My stats are now around the levels last seen in October, 2005, when that decline was ending.  It remains to be seen whether we are near a bottom or at the beginning of a major decline.

The IBD 100 stocks again fared worse than my universe of stocks.  Ibd0613_1 5% of the IBD 100 stock posted on 5/15 rose on Tuesday, compared with 17% of my stock universe.  However, one bright spot was that 16% of the IBD 100 stocks and 23% of my universe of stocks closed higher than they opened the day.  There were almost no new highs in both groups of stocks.  Three times as many stocks in my universe are within 5% of a new low than a new high (20% vs. 6%).  Only 15% of the stocks in my universe closed above their 10 week averages, a new low since I began recording this statistic in 2005.  Almost all of the IBD 100 stocks closed below their 10 day, 30 day and 10 week averages.  Still, twice as many IBD 100 stocks remain in a bullish stage 2 up-trend (53% vs 26%).

I remain in cash and/or holding puts on some weak stocks.  The Dow could rally some 240 points before I would consider that a new up-trend had begin.  The markets remain in a confirmed down-trend.  By now, everyone should see through the widely proclaimed conventional nonsense that stocks have intrinsic value.  Stocks are only worth what someone else will pay for them.  And each person’s assessment is driven more by mob psychology and greed and fear, than by rational logic.  How else can you explain why a stock like GS can release great earnings and be punished like it was on Tuesday.  In a down-trend, all events are seen through a dark glass that is perceived to be half empty.  Everyone sells quickly because they think that the next guy will sell. As William O’Neil says, all stocks are bad unless they are going up.  But I say that "bad" stocks can make a trader a lot of money if s/he shorts them correctly. (My TC2005 scan of the market found 232 Submarines and only 2 Rocket stocks on Tuesday evening.)

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

GMI: 0; 185 Submarines, 8 Rockets; Brainwashed against shorting

The GMI is back at zero.  All six indicators in the GMI are negative.  In fact, I have found that I cannot profitably trade growth stocks when the IBD Mutual Fund Index is below its 50 day average.  But now the index is below its 200 day average, a clear sign that the best growth mutual fund managers cannot  trade this market profitably.  Gmi0609 The QQQQ has closed below its 10 week average for five weeks.  On Friday, only 27-37% of the stocks in the Nasdaq 100, S&P 500 and the Dow 30 indexes advanced.  There were 32 new highs and 38 new lows in my universe of almost 4,000 stocks.  Only 15% of the Nasdaq 100 stocks closed above their 30 day averages, and only 24% of the stocks in my universe closed above their 10 week averages.  Friday was the 21st day in the QQQQ down-trend (D-21).  The GMI-S is zero, and the GMI-L is now at 19.  The low readings in the longer term moving averages tracked by the GMI-L imply significant market weakness that could persist for quite a while.

The IBD 100 stocks continue to weaken and underperform the general market, as measured by my universe of stocks.  Only Ibd0609 32% of the IBD 100 stocks as of 5/15 advanced on Friday, compared with 37% of my universe.  Stocks in my universe were much more likely to have closed above their 10 day (27% vs 5%), 30 day (24% vs. 9%) and 10 week averages (26% vs. 19%).  The IBD 100 stocks were still stronger with regard to the 30 week averages (68% vs. 40%), indicating that the greater short term weakness in the IBD 100 stocks has not yet nullified their superior strength in the longer term trend.  This relationship is clearly shown in the new statistic in the table, Bullish Stage 2 trend (see Weinstein book at right for a discussion of Stage analysis).  68% of the IBD 100 stocks remain in a bullish Stage 2 up-trend, compared with 38% of my universe of stocks.  It remains to be seen whether the IBD 100 long term up-trend will be overcome by their weak short term trends. Only 12% of the IBD 100 stocks posted on the list on 5/15, closed higher on Friday than they closed on 5/15.  Anyone who thought that the IBD 100 stocks were good "buy and hold" candidates have been taught a costly lesson.

I have been 100% cash in my pension for several weeks now.  I have told you before that I am a chicken and that I go to cash at the first sign of market weakness.  In this way, I have avoided all significant market declines since 1995, but have not missed out on the subsequent rises.  In a market like the current one, it makes no sense to be invested on the long side or to try to find the few stocks that might resist the down-trend.  I go to cash and/or try to short some of the many stocks that are declining.  In spite of the myths spread by the market pundits, there is plenty of time to jump back on board once the market has confirmed a new up-trend.

My current scan of my universe of 4,000 stocks using TC2005 yields 185 Submarines and just 8 Rocket stocks.  There are clearly plenty of stocks in a down-trend that offer good odds of being profitable shorts.  Too bad that we have all been brainwashed into thinking that shorting stocks is too risky.  It is much more risky to buy stocks in a market down-trend.

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

GMI: 0; IBD 100 stocks decline more; My epiphany on discount brokers; Submarine stocks

The GMI is still at zero.  Gmi0519 Only 11% of stocks are in a short term up trend.  There were 15 new yearly highs and 105 new lows in my universe of 4,000 stocks.  Only 7% of the 485 stocks that hit a new high ten days ago closed higher on Friday than they closed ten days earlier.  In contrast, 10 of the 12 stocks that hit a new low ten days ago closed lower. Shorting stocks at new lows has been profitable lately.   Stocks did rebound on Friday with 60-72% of the stocks in the Nasdaq 100, S&P 500 and Dow 30 indexes advancing.  Friday was the seventh day (D-7) in the current QQQQ short term down trend…….

Last Monday I built a watchlist of the 100 IBD-100 stocks as of 5/16.  Some people I know select all of their buys from the IBD-100 list.  This past week,  only 14% of the IBD-100 stocks rose.  The median rise was +4.85%.  On the other hand, the median decline among the 85% of the stocks that declined was -7.2%, with 27 stocks falling between 10-19.7%.  In contrast, 18% of the Nasdaq 100 stocks advanced last week along with 22% of the S&P 500 stocks.  The point is that the IBD 100 growth stocks performed worse than the Nasdaq 100 and S&P 500 stocks last week.  This is a prime reason why IBD staff and others say that one should be in cash when the market indexes turn negative.  Growth stocks cannot fight the market trend…..

I had an epiphany regarding discount brokers recently.  For many years I had my account at Brown and Co.  When it was taken over recently by E-trade I transferred my accounts to Fidelity.  Only then did I realize how costly being at Brown had been.  While Brown had cheap commissions, they paid very little interest on my cash balances.  This is important because I go to cash in bad markets. Fidelity, on the other hand, automatically places my cash in their Cash Reserves money market fund.  Right now I receive about 4.62% on my cash at Fidelity. Even though I trade a lot, the lower commissions would not offset the minimal interest paid by some firms.  So, if you are using a discount broker, find out how much interest they pay on cash balances.  You have to dig a little to find out.  You too may be surprised……

I promised that I would talk about submarine stocks this weekend.  Submarines are the opposite of rocket stocks.  They are stocks that appear to be in confirmed down trends and likely to continue to sink.  Much of my strategy was developed after reading Weinstein’s book and O’Neil’s book on shorting and studying the excellent charts both provide.  I use TC2005 to scan the market for submarine stocks.  As of Friday, there were 140 submarines and only 8 rockets, a good reflection of the current weak market. I scan my 4,000 stock universe for optionable stocks that have closed below their 10 week average for 7 consecutive weeks and where the 10 week average is below its 30 week average.  This provides a list of stocks that I can visually review for a bearish pattern.  I like to find stocks that have peaked at least 4 months ago and where the peak was far above its prior yearly low.  I am looking for bull market leaders that have already  topped out.  I look primarily at weekly charts and want to find as least one (preferably more) week since the peak during which the stock has declined on atypically large volume.  Finally, to time the short, I want the stock to have bounced down off of its 10 week average in the past few days.  If the GMI index looks weak, I purchase deep in the money puts that have 6-9 months to go and that have minimal time premium. I close out the position if the stock trades above its declining 10 week average.  I trade puts because one cannot sell stocks short in an IRA account, because shorting requires a margin account.  However, not all discount brokers allow the purchase of puts in IRA accounts (Fidelity does).  Here are two examples of submarines I have identified and shorted.

I thought that housing stocks should top out as interest rates rose.  When I ran my scan for submarines, a lot of housing stocks came up.  I therefore was confident in an industry-wide down trend.  CTX was a perfect short for me.  Shortctx The stock made a top in July  and declined on heavy volume.   It then made another attempt to go to a new high, but the volume petered out in early January and the stock started to decline.  This looked like a double top to me.  The important 30 week average (red line, see Weinstein’s book to right on stage analysis) started to decline as the 10 week average (dotted line) began a decline and crossed the 30 week  in March, 8 months after the peak.  At about the time of the cross there was a week with a large volume decline,  indicating the big guys were unloading the stock.  The failure of CTX to rise above its declining 10 week average provided a sell short signal for me and I bought deep in the money January 80 puts to give me enough time for the decline to mature.  Subsequent weekly declines on volume far above its 50 week average (blue line) gave me confidence to continue buying puts as the stock fell. 

The major elements of this successful trade were:  1) a declining stock in an industry that should weaken at this stage in the economy; 2) a stock that had risen strongly and then peaked over a sufficient time period (8 mos) to exhaust the bargain hunters and short sellers; 3) high volume declines as the stock peaked; 4) 30 week moving average reversing down; 5) a cross of the 10 week below the 30 week and a failure to rise above the declining 10 week.

Now, take a look at CCL and see how many of these characteristics you can find in this stock which I successfully shorted before last week’s decline.  Shortccl For my last assignment, take a look at the following stocks that came up this weekend in my submarine scan.  See how many of these you think are good short candidates: LOGI, APOL, KOSP, OCR, SFY, MLS, CMX, IVGN, OSG, COO.  Given the recent large market declines, this may not be the best time to take on new short positions.  But if a subsequent rally fizzles, this is how I will locate new shorts. Let me know if this analysis was useful to you and send me any questions you may have…….

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

GMI: +1; Indicators weaken more; some submarines

The GMI remains at +1, but just barely.  Gmi0515 There were 121 new yearly lows and 28 new highs in my universe of 4,000 stocks  on Monday.  The last time we had over 100 new lows was the end of October, 2005.  Only 31% of the 274 stocks that hit a new high 10 days ago closed higher on Monday than they did 10 days earlier.  On the other hand, 70% of the 37 stocks that hit a new low 10 days ago closed lower.  This is a clear indication that shorting stocks at new lows has been more likely to have been profitable than buying stocks at new highs. Similarly, there are 114 submarine stocks, compared with just 12 rocket stocks. These are stocks in solid down trends or up trends, respectively.  Only 31% of stocks are in a short term up trend and only 39% in longer term up trends.  11% of stocks are now within 5% of a new low.  Monday was the third day in the new QQQQ down trend (D-3).

I have sold  all of my stocks but one (AAPL).  All of my short positions (put options in my IRA) are profitable.  It has almost been too easy to make money on the short side.  Famous last words????!!!!……………..

People are much too scared of shorting stocks.  But the great traders always go with the trend of the market, up or down.  Buying  put options is a way to go short while limiting possible losses.  In fact, some of my put options expire next January, giving me lots of time for the down trend I have detected to grow.  It is very comfortable to be holding a put on a declining stock that has months to fall. The key is to detect the decline relatively early on.  I simply use TC2005 to scan the entire market for "submarines" that show a clear top about 4-6 months ago and a declining trend on large volume. I detected 114 submarines tonight.  They include:  CMTL, CHS, URBN, SO, GENZ, HOV and CMVT (I am short some of these).  Take a look at the weekly charts of these stocks and note the heavy selling and declining 30 and 10 week moving averages.  It is noteworthy that many of the submarines are utilities and housing stocks, suggesting that we are seeing industry-wide weakness, a good omen for shorting.

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