November 30, 2007

The magazine with no bylines and anonymous editors feels the dollar panic is unwarranted.

So far, this remains only a fear. Although the dollar has been falling at quite a lick—down 6% against a trade-weighted basket of currencies since August—it has seen no chaotic slump, but a slide interspersed, as this week, with brief rallies. Americans' expectations of future inflation have not yet risen much. Yields on government bonds have fallen: clearly, investors do not yet expect higher premiums for safe American assets. Whether disaster strikes depends on what exactly is driving the dollar down and on how policymakers react.

So IBD changed their interpretation of follow through day. Irrespective of what IBD does on this particular instance, let us look at the logic behind the IBD follow through method for confirming new rally start and see if it makes sense and is it logical. The fundamental hypothesis behind the IBD overall market direction is based on the logic that large investors like mutual funds, pension funds and hedge fund drive the market because of their large size. It uses a price and volume action as a proxy to figure out what these institutions are doing. So when a market is in rally mode, it looks for a possible top when there is a cluster of 5-6 high volume selling days. It calls those days distribution days. It defines distribution day as a day where the market was down and volume was up. When such distribution days are clustered in a short time frame it indicates that the large funds are selling or distributing stocks. So after 5 distribution days it says you should be preferably in cash. Besides that it uses list of market leaders (stocks which had outperformed the market in price and earnings term ) to see the health of the market. If majority of stocks in that list are going down below 50 day MA it describes the market as risky .

Now once a market goes in to correction mode as signaled by number of distribution days , then the next logical step is to see when to get back in to market. For that it uses again a proxy of large speculators buying to confirm possible start of a new rally. How does it do it, by looking at rally attempts. So in a downtrend it looks for a positive day. Once there is a positive day, it looks for second positive day on high volume. The second day should come in between 4 th and 7 th day of the rally attempt otherwise the rally attempt is considered a failure and you start all over again. It has tested the system on last several years of market data and it calls a turn in 80% of the time correctly.

The more important question which is not really been asked is should you follow it and do you have a better system. The IBD system has a context which is most important to understand and that in IBD model of CANSLIM, it buys stocks with primarily two main characteristics 1) those with earnings momentum and 2) price momentum. One of the primary characteristics of such stocks is that they outperform during market rallies and significantly under perform during corrections. So they will double quickly but give up 50% or more of their price gains when the market turns. While high growth is sexy there is a corresponding high risk associated with it. So by staying in cash during the correction phase , you significantly narrow the risk. If you are not trading those kind of stocks, it does not matter and you should not follow it.

A must read book

November 29, 2007

Your Next Great Stock: How to Screen the Market for Tomorrow's Top Performers (
by Jack Hough (Author)

Beg, borrow, or steal this book. I have been reading it since last night and almost through with it. If you want to make money just read this book. Once you read it you might find lot of similarities to many of the ideas behind methods discussed here.This is the most practical book I have read this year so far on investing.

The author details ways to screen for stock likely to move using various researched anomalies. All the screens can be done using Moneycentral. I will have more detailed review later once I finish the last few pages.

If you are considering a Chirstmas gift to a investor or trader, this book will make a nice gift.

Later:
Save your money do not buy

Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital Made a Fortune Investing in the Stock Market

This is the most disappointing book on investing I have read this year. It is just one big rant against Wall Street and Buy and Hold investing with no meat. Pages after pages Revshark goes on and on ranting against the big Wall Street conspiracy against small investor without providing any clear insight on trading or investing. It is a terrible book . Save your money. This Shark cannot write a useful book.
I will have more detailed review later.

Cautiously optimist

While a 900 plus bullish 4% breakouts in Market Monitor is significant, the backdrop to this rally attempt is different from last time where market rallied after reaching extremes of below 200 on 65 days reading intra day. The McClellan Summation Index turned last time from much extreme level than currently it is at. More than that nothing changes the reality that leading stocks have seen widespread reversal and overall market had many days of high volume distribution compared to last turn. So this bounce must be looked at against that backdrop. Seasonal forces might help put together a some sort of scratchy rally for next few weeks, but personally I have low conviction about this rally attempt. Only more sustained buying and the 65 days ratio turning green will have me becoming more optimistic.

Yesterday does not count as follow through day on IBD system, only a follow through day of 1.7% after 4 to 7 days after a rally attempt is valid breakout. The IBD Big Picture is also skeptical of this rally attempt. Unlike that last time it was screaming, buy, buy, buy during correction. The Big Picture read of the market is one of the best read I have seen on the street. It is seldom wrong in its overall readings.

From IBD Big Picture

Wednesday's price gain was one of the biggest of the year for the Nasdaq, an encouraging sign. But one big day doesn't mean much in the grander scheme. The Nasdaq's nine biggest up days of all time all occurred during the bear market of 2000 to 2003.

More recently, the Nasdaq's biggest up day of this year came on Nov. 13 — right before the market started a new leg down.

For now, consider Wednesday to be Day 2 of a rally attempt by the major indexes. We'll need to see more signs of strength among both the broad indexes and leading stocks before the market can take on a more bullish hue.

What it means in my scheme of things is light commitments and very low 5 to 10% profit targets on all methods.

75 Resilient Stocks

November 27, 2007

While the selling was broad based in last few weeks, some stocks have managed to withstand the selling. Such resilient stocks tend to be first to bounce back once a new rally develops. The list also gives you an idea of resilient sectors.

ABAX,Abaxis Inc (Google  Yahoo  Earnings  Chart)
AG,Agco Corp (Google  Yahoo  Earnings  Chart)
ALNY,Alnylam Pharmaceuticals (Google  Yahoo  Earnings  Chart)
ANV,Allied Nevada Gold Corp (Google  Yahoo  Earnings  Chart)
ANW,Aegean Marine Petroleum Network Inc (Google  Yahoo  Earnings  Chart)
APPY,AspenBio Pharma Inc (Google  Yahoo  Earnings  Chart)
ASUR,Forgent Networks (Google  Yahoo  Earnings  Chart)
ATRO,Astronics Corp (Google  Yahoo  Earnings  Chart)
AUXL,Auxilium Pharmaceuticals Inc (Google  Yahoo  Earnings  Chart)
AXYS,Axsys Technologies (Google  Yahoo  Earnings  Chart)
BIDU,Baidu.com Inc (Google  Yahoo  Earnings  Chart)
BIOS,BioScrip Inc (Google  Yahoo  Earnings  Chart)
BITI,Bio-imaging Technologies (Google  Yahoo  Earnings  Chart)
BOOM,Dynamic Materials Corp (Google  Yahoo  Earnings  Chart)
BYI,Bally Technologies Inc (Google  Yahoo  Earnings  Chart)
BZP,Bpz Resources Inc (Google  Yahoo  Earnings  Chart)
CEO,CNOOC Ltd Adr (Google  Yahoo  Earnings  Chart)
CLDA,Clinical Data Inc (Google  Yahoo  Earnings  Chart)
CPLA,Capella Education Company (Google  Yahoo  Earnings  Chart)
CSIQ,Canadian Solar Inc (Google  Yahoo  Earnings  Chart)
DECK,Deckers Outdoor Corp (Google  Yahoo  Earnings  Chart)
DLB,Dolby Laboratories Inc (Google  Yahoo  Earnings  Chart)
DV,Devry Inc (Google  Yahoo  Earnings  Chart)
EHTH,Ehealth Inc (Google  Yahoo  Earnings  Chart)
FFH,Fairfax Financial Holdings (Google  Yahoo  Earnings  Chart)
FLIR,Flir Systems Inc (Google  Yahoo  Earnings  Chart)
FSLR,First Solar Inc (Google  Yahoo  Earnings  Chart)
GHM,Graham Corp (Google  Yahoo  Earnings  Chart)
GLDN,Golden Telecom Inc (Google  Yahoo  Earnings  Chart)
GMO,Idaho General Mines Inc (Google  Yahoo  Earnings  Chart)
GOLD,Randgold Resources Ltd Ads 1:2 (Google  Yahoo  Earnings  Chart)
GVP,Gse Systems Inc (Google  Yahoo  Earnings  Chart)
HDB,HDFC Bank Limited (Google  Yahoo  Earnings  Chart)
HL,Hecla Mining Co (Google  Yahoo  Earnings  Chart)
IDP,Idera Pharmaceuticals Inc (Google  Yahoo  Earnings  Chart)
INP,iPath MSCI India Index ETN (Google  Yahoo  Earnings  Chart)
ISIS,Isis Pharmaceuticals Inc (Google  Yahoo  Earnings  Chart)
ISRG,Intuitive Surgical Inc (Google  Yahoo  Earnings  Chart)
LTRE,Learning Tree Internat (Google  Yahoo  Earnings  Chart)
LUNA,Luna Innovations Inc (Google  Yahoo  Earnings  Chart)
MBT,Mobile Telesys Ojsc Ads (Google  Yahoo  Earnings  Chart)
MLNM,Millennium Pharmaceuticl (Google  Yahoo  Earnings  Chart)
MOS,Mosaic Company (Google  Yahoo  Earnings  Chart)
MTL,Mechel Steel Group OAO ADS (Google  Yahoo  Earnings  Chart)
ONXX,Onyx Pharmaceuticals Inc (Google  Yahoo  Earnings  Chart)
PBR,Petroleo Brasileiro S.A. Petrobras ADS (Google  Yahoo  Earnings  Chart)
PBR.A,Petroleo Brasileiro S.A. Petrobras ADS Class A (Google  Yahoo  Earnings  Chart)
PCLN,Priceline.com Inc (Google  Yahoo  Earnings  Chart)
PODD,Insulet Corporation (Google  Yahoo  Earnings  Chart)
PRGO,Perrigo Co (Google  Yahoo  Earnings  Chart)
PRVT,Private Media Group Inc (Google  Yahoo  Earnings  Chart)
PSEM,Pericom Semiconductor Cp (Google  Yahoo  Earnings  Chart)
PTEC,Phoenix Technologies Ltd (Google  Yahoo  Earnings  Chart)
QSC,Questcor Pharmaceuticals (Google  Yahoo  Earnings  Chart)
RICK,Rick's Caberet Intl (Google  Yahoo  Earnings  Chart)
RIMM,Research In Motion Ltd (Google  Yahoo  Earnings  Chart)
RSTO,Restoration Hardware Inc (Google  Yahoo  Earnings  Chart)
RTP,Rio Tinto Plc Adr (Google  Yahoo  Earnings  Chart)
SCON,Superconductor Tech (Google  Yahoo  Earnings  Chart)
SIGM,Sigma Designs Inc (Google  Yahoo  Earnings  Chart)
SOHU,Sohu.Com Inc (Google  Yahoo  Earnings  Chart)
SPIR,Spire Corp (Google  Yahoo  Earnings  Chart)
SPWR,SunPower Corp (Google  Yahoo  Earnings  Chart)
SQNM,Sequenom Inc (Google  Yahoo  Earnings  Chart)
STP,Suntech Power Holdings Co Ltd (Google  Yahoo  Earnings  Chart)
SXE,Stanley Inc (Google  Yahoo  Earnings  Chart)
SYNA,Synaptics Inc (Google  Yahoo  Earnings  Chart)
TELOZ,Tel Offshore Trust (Google  Yahoo  Earnings  Chart)
TKC,Turkcell Iletisim Hizmetleri ADS (Google  Yahoo  Earnings  Chart)
TRA,Terra Industries Inc (Google  Yahoo  Earnings  Chart)
UTHR,United Therapeutics Corp (Google  Yahoo  Earnings  Chart)
VIP,Vimpel Communication Ads (Google  Yahoo  Earnings  Chart)
VLNC,Valence Technology Inc (Google  Yahoo  Earnings  Chart)
XRA,Exeter Resource Corporation (Google  Yahoo  Earnings  Chart)
ZIXI,Zix Corporation (Google  Yahoo  Earnings  Chart)

Individual investors have advantage

With the market still in correction mode, probability of fresh breakouts leading to rally decreases. When market is in rally mode, you can buy 5 breakouts and 4 will work, but once market turns a breakout has higher probability of resulting in to congestion or reversal. The grater risk in weak market is, if you hold multiple positions, you wake up one day to find all of them have reversed and by the time you get out you would be down 15 to 20%.

The systems like Double Trouble, IBD 200, Episodic Pivots, Virgins are built to take advantage of the momentum phase in market. The Market Monitor is an overall filter on top of these methods. When the Market Monitor is in correction phase, one needs to adjust the trading time frame and risk to suit the new reality.

In my style, I like putting all probabilities behind my trades. When you are in confirmed uptrend the individual market behaves differently. History repeats itself and if you look at historical precedents you will find when leading stocks, after a climax run reverse, it usually is a loud warning sign. When risk is very high, in my book it is prudent to wait out such periods. Individual investors have advantage of flexibility, where you can deploy your cash quickly and get fully invested. Mutual funds and other big investor have to be fully invested or have to move large size and cannot be so flexible. If the market turns in next week, it is not very difficult to get fully invested.

One of the problems with long running bull markets is it conditions people to trade in certain way. When the underlying dynamics change, people are slow to react and continue to trade same way. By the time they realize what is happening, in many cases the account suffers. Flexibility and adaptability is key when market character changes. Methods should adapt to market quickly.

Pre mature bulls get whacked

November 26, 2007

Market acted the way it acts when it is in confirmed correction phase as per Market Monitor. A holiday induced , low volume bounce on Friday had some people excited. For bulk of the day the market struggled to get any traction and finally it sold off hard. That should not surprise anyone tracking the action on Market Monitor. During last correction also there were lot of pre mature bulls calling for a turn before the readings reached turn zones.

When the market is about to turn, the Market Monitor readings will indicate that. At current levels, we are at best likely to have reflex bounces. Many market participants have been spoiled by the last 4-5 years action where such corrections quickly reversed and lead to rallies. Till now this correction is different, it is coming after a blowout phase , where many sectors and stocks had a climax run and then the market reversed.

If you recall when the readings on stocks up 50% plus in month were at extreme levels, not seen in years in October (Oct 5 to Oct 11 on Market Monitor), that was the climax phase. During that phase if you look at my posts, they said such high readings are not sustainable and lead to corrections. That is what happened. The extreme momentum phase resulted in correction. However quickly the correction transformed in to distribution phase.

Unlike normal correction, it had different feel from word go as stocks which had climax run started dropping fast and along with them other stocks started reversing. Breakouts were not having follow through. Remember my posts prior to Cancun trip where I was very uncomfortable with the action and reduced my market exposure to bare minimum. Since then I have been mainly in cash in all my accounts, that include my long term accounts and mutual funds accounts and only taking sporadic short term tactical trades.

When the Market Monitor indicates turn, there will be lot of opportunities to make money. Till then cash is king.

S&P Lagging stocks

These stocks are in bottom 10% by relative strength. Many value investors and bottom fishers like to look at such stocks. During reflex bounce, such beaten down stocks have 1-5 days rallies, which offer good profit opportunities for nimble traders.

ABK,Ambac Financial Group (Google  Yahoo  Earnings  Chart)
BC,Brunswick Corp (Google  Yahoo  Earnings  Chart)
BIG,Big Lots Inc (Google  Yahoo  Earnings  Chart)
BSC,Bear Stearns Companies (Google  Yahoo  Earnings  Chart)
C,Citigroup (Google  Yahoo  Earnings  Chart)
CBG,Cb Richard Ellis Svcs (Google  Yahoo  Earnings  Chart)
CC,Circuit Cty Strs Inc (Google  Yahoo  Earnings  Chart)
CFC,Countrywide Financial (Google  Yahoo  Earnings  Chart)
CIT,Cit Group Cl A (Google  Yahoo  Earnings  Chart)
COF,Capital One Financial Cp (Google  Yahoo  Earnings  Chart)
CTX,Centex Corp (Google  Yahoo  Earnings  Chart)
DDS,Dillard's Inc (Google  Yahoo  Earnings  Chart)
DHI,D.R. Horton Inc (Google  Yahoo  Earnings  Chart)
ETFC,E Trade Financial Corp (Google  Yahoo  Earnings  Chart)
FHN,First Horizon Natl (Google  Yahoo  Earnings  Chart)
FNM,Fannie Mae (Google  Yahoo  Earnings  Chart)
FRE,Freddie Mac (Google  Yahoo  Earnings  Chart)
HAR,Harman Internat Ind Inc (Google  Yahoo  Earnings  Chart)
HBAN,Huntington Bancshares (Google  Yahoo  Earnings  Chart)
JCP,J.C. Penney Company Inc (Google  Yahoo  Earnings  Chart)
KBH,Kb Home (Google  Yahoo  Earnings  Chart)
KEY,Keycorp (Google  Yahoo  Earnings  Chart)
KG,King Pharmaceuticals Inc (Google  Yahoo  Earnings  Chart)
LEN,Lennar Corp Cl A (Google  Yahoo  Earnings  Chart)
LIZ,Liz Claiborne Inc (Google  Yahoo  Earnings  Chart)
LOW,Lowe's Companies Inc (Google  Yahoo  Earnings  Chart)
MBI,Mbia Inc (Google  Yahoo  Earnings  Chart)
MCO,Moody's Corporation (Google  Yahoo  Earnings  Chart)
MER,Merrill Lynch & Co (Google  Yahoo  Earnings  Chart)
MS,Morgan Stanley (Google  Yahoo  Earnings  Chart)
MTG,Mgic Investments Corp (Google  Yahoo  Earnings  Chart)
MU,Micron Technology Inc (Google  Yahoo  Earnings  Chart)
NCC,National City Corp (Google  Yahoo  Earnings  Chart)
ODP,Office Depot Inc (Google  Yahoo  Earnings  Chart)
OMX,Officemax Inc (Google  Yahoo  Earnings  Chart)
PHM,Pulte Homes Inc (Google  Yahoo  Earnings  Chart)
Q,Qwest Cmmnctns Intl Inc (Google  Yahoo  Earnings  Chart)
RSH,Radioshack Corp (Google  Yahoo  Earnings  Chart)
SHLD,Sears Holding Corp (Google  Yahoo  Earnings  Chart)
SNDK,Sandisk Corp (Google  Yahoo  Earnings  Chart)
SOV,Sovereign Bancorp Inc (Google  Yahoo  Earnings  Chart)
TER,Teradyne Inc (Google  Yahoo  Earnings  Chart)
TEX,Terex Corp (Google  Yahoo  Earnings  Chart)
TIN,Temple Inland Inc (Google  Yahoo  Earnings  Chart)
TLAB,Tellabs Inc (Google  Yahoo  Earnings  Chart)
TSN,Tyson Foods Inc (Google  Yahoo  Earnings  Chart)
UIS,Unisys Corp (Google  Yahoo  Earnings  Chart)
WM,Washington Mutual Inc (Google  Yahoo  Earnings  Chart)
XL,Xl Capital Ltd (Google  Yahoo  Earnings  Chart)
ZION,Zions Bancorporation (Google  Yahoo  Earnings  Chart)

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Dollar gets cover treatment