Amateur bulls and dip buyers get whacked | stockbee


Amateur bulls and dip buyers get whacked

I got lots of emails from readers who are down 20% plus in last few weeks. While I might sympathize with your pain, I have no empathy. When there is a change in market characteristics, if you are slow to react to it or if you failed to anticipate it, you get whacked pretty hard.Since the beginning of this correction, there has been chorus of amateur bulls exhorting dip buying. Action like what you witnessed yesterday is good to separate the men from the boys.

Market Monitor

Total 4% plus bullish breakouts=72
Total 4% plus bearish breakouts=816
65 day bullish/bearish ratio= 400/954
Stocks up 50% or more in a month=5
Stocks up 25% or more in a month=31

If you are down 20% plus in this correction, you need to seriously examine your methodology. There was ample time to get out early in this down move. There was no need to buy dips when the market character changed. One of the greatest strength for small and mid size speculators is flexibility, you don't have to turn big tankers like big speculators have to, plus you don't need to adopt their methods of dip buying when market is in confirmed downtrend.

The entire logic behind Market Monitor is to anticipate and avoid such periods and lower the drawdowns. For 350 days in a year, it seems like unnecessary chore to track it, but it pays you off in the 15 days, when it matters.


Rhonda said...

The market monitor is such an incredible tool. Thanks so much for updating this daily.

S said...

Hi Pradeep,
How do you calculate 65 day bullish/bearish ratio


Mike said...

What do you make of a stock like POT which went up like 8% in the last two days when market tanked?
Does this say one should perhaps buy POT or can POT also roll over soon like most other solid stocks?

thanks for your thoughts,

Mike said...

Care to comment on what Navellier says about the market? He says this is a great buy opp as market has not been this cheap in a decade.

Weekly Marketmail
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Friday, August 03, 2007
Believe it or not, things are looking up; but you wouldn’t know that judging from today’s sell-off. What’s getting overlooked right now is second-quarter earnings are stronger than anticipated, and the U.S. economy could be gaining momentum.
As such, the Fed’s “soft” economic landing period is more than likely ending. In fact, the analyst community is now forecasting that third and fourth-quarter earnings will also be up-trending. This bodes well for the overall stock market, especially when you consider how undervalued stocks already are.
Price-to-earnings ratios have continued to plummet, and remain at more than decade lows, as earnings have risen faster than stock prices during the past few years. Last week’s sell-off and today’s continuation caused stock valuations to drop even lower.
“Stocks are just as undervalued now as they were in 2002,” said Mark Dodson at Hays Advisory.
When stocks are extremely cheap, you usually see a big pickup in insider buying. Well, guess what?!
“Corporate executives have done more buying in the last week than at any time since the eve of the Iraq War and bottom of the bear market in March of 2003,” added Mr. Dodson.
The insider buying is likely what suddenly drove the markets higher late in the day on Wednesday. Moreover, Hays Advisory believes that the sudden surge of insider buying confirms that corporate buybacks are nowhere near over. If that’s the case, it doesn’t matter if private equity is dying. There will be plenty of buying pressure to drive stocks higher. No wonder Hays Advisory moved its equity-allocation recommendation to 100% this week.
If that’s not bullish enough for you, consider this. The inflation picture is continuing to get better, and the improvement could accelerate soon. The reason is energy prices are expected to fall after Labor Day, when demand drops. Of course, this is assuming that we don’t have a bad hurricane season.
Meanwhile, employment is showing signs of weakness. July payrolls rose just 92K (127K consensus), and the unemployment rate increased a tenth to 4.6%. Some economists believe the unemployment rate will continue to drift higher. If that happens, you can bet the Fed will lower interest rates, especially if the housing market continues to tank. In fact, the Fed funds futures contract is now pricing in 100% probability that the Fed will lower rates by 25 basis points by the end of January.
The June personal income report showed that inflation is already within the Fed’s 1%-2% comfort zone. Specifically, the PCE deflator’s year/year gain was 1.9% and dropping. Therefore, since interest rate adjustments made by the Fed take about 18 months to filter into the economy, it will not wait until the year/year rate falls to the lower end of its comfort range before it cuts rates.
By the way, Treasury yields have already dropped in the open market, and the Fed rarely fights market rates. As such, we believe the Fed will lower rates this year, but not at its next FOMC meeting on Tuesday. We believe the Fed will hold short-term rates at 5.25% next week, and keep most of its previous statement intact.
With all the aforementioned good news, you might be wondering why the stock market “panicked” in late July. Well, as usual, it was a bit complicated. The sell-off started on fears that merger mania was over after high-yield bonds for Chrysler and British pharmacy chain Alliance Boots found that there were no buyers (BTW, Chrysler ultimately found a buyer). As a result, the media recklessly declared that funding for private equity deals was getting cut off, and opined that merger mania in the U.S. and around the world was over.
Frankly, this was a major overreaction. Even though private equity deals will likely slow (not end), quality mergers and acquisitions will continue, due to decade low price-to-earnings ratios, exceptionally strong balance sheets, rebounding corporate earnings, improving economic growth, and lower bond yields for quality bonds, like U.S. Treasuries.
The short-term outlook for the stock market is more volatility. We thought the Dow would test 13,000 this week, but insider buying was too strong. Nonetheless, we must be on alert for a subsequent “retest” of the recent lows. This process may take a few weeks, so if you have some cash to invest, we would invest 50% of it now, and then the balance in late August, just before many Wall Street traders and their European counterparts resurface and go back to work. Within the next few weeks, you will likely see the best buying opportunity for the rest of the year.
However, we recommend that you stay away from value stocks. There has already been a big shift away from value stocks to growth this year. This transition is likely to accelerate now that most of the subprime-related stocks are in the value indices. Today, the Russell 2000 Value Index plummeted 4.07%.
During the late July sell-off, stock mutual funds were hit with substantial outflows, so naturally some of the weakness was feeding on itself. In other words, it appears that the stock market was melting down a lot on forced selling pressure, as stock mutual funds redemptions escalated and fund managers were forced to sell to raise cash.
Without a doubt, much of the negatively-biased financial news media in the U.S. are being blamed for the negative tone that has been spreading around the world.
“Fear and ignorance seem to be gripping retail investors these days,” said Charles Biderman, the chief executive of TrimTabs. Mr. Biderman added, “This is a complete panic by individual investors. They just don't know what's going on.”
The fact of the matter is that we are still in the early stages of a great rally in growth stocks that will likely last for the next few years. The late July stock market sell-off was caused by Wall Street’s seasonal summer shenanigans and high-yield paranoia.
The bottom line is you will have one last chance this year to buy great growth stocks at bargain prices, so take advantage of it.
If you don’t have additional money to add to the market, hang in there.

Stock Market Detective (SMD) said...

The Market Monitor you can see a change on all these days 7/19/07 thru 8/3/07.A crude method but still can see the changes from day to day. Its a good tool to use!
Its easy to see if the spring gets stretched on the upside or downside.

The numbers get larger on the downside as we get to 8/3/07 and we are getting near washout stages very soon. The NYSE new lows is not seeing this... it see's half the number's new lows of 7/26/07. 394 NL vs. 809 NL.

Adam said...

You have this appearing on the 65 day ratio:Levels below 200 bullish, start of new rally zone
Levels below 200 , caution, rally reversal zone

Can you explain this? How come the bullish # has to be below 200 for a rally commencing signal? Should it not be other way?

Jack said...


Dittos to your post. Let some-else pick up this "falling knife" before buying any dips. Traders are gonna get "crushed" if they don't pay attention to the indicators and news of the day.

Your market monitor tool is an excellent indicator of market direction.

IMHO: the only thing that might help this market will be on Tuesday with the "Fed Speak" if they give some "Dovish" comments might rally the market some 400 pts at least that is what Jon Najarian said on Fast Money on Friday.

Enjoy your vacation time in India

PS. How do you pronounce your name "phonically"?

Joe said...


In Market Monitor, I did not see a <200 on the 65 days baerish side. Yet you became bearish in time before the recent correction. How do you do that?

Thanks, Joerg

Pradeep Bonde said...

By calculating the number of stocks up 25% plus in 65 days from the high and number of stocks down 25% plus from high in 65 days.

Stock which withstand selling can make good buy candidate once they breakout post selling is over.
Navellier might be right, market might go up from here by end of year, but the question is , is this the time to buy. By buying too quickly, one may not remain solvent by the time the market turns.
Market might remain in down mode for another few months or week and ten set up for a rally post that period for rest of the year.Most probably rally will start in anticipation of earnings season or post earnings.
I am hoping it starts post my holidays.

When 65% bullish numbers are at or around 200, most selling has happened and market rebounds. It is extreme level of bearishness. Rallies which start at those levels are very ferocious.



There are two indicators 65 days bull/bear is one. The other is month 50% plus, when it goes above 20 it indicates reversal in next few days.
Besides that any day with 300 plus on bullish or bearish side on 4% plus is significant, it indicates change of market character. Correction started with 635 stocks down 4% plus.
Even if one missed that by 3 rd day of correction the 65 days ratio was in bearish territory.
there was ample time to get out then, but everyone as confidently advising dip buying.

Joe said...

Pradeep, Thanks a lot for your answer and being so helpful.


mrstrader said...

Jack, I believe Najarian "bet" (i.e. with real money) that the Fed will ease in an emergency on Monday and explain the move at the Tuesday meeting by which time the market will have rallied 400 points.I am willing to stand to the side to see if he collects on his bet.

S said...

Thanks Pradeep. Enjoy your vacation !