Fed induced volatility

• Fed decision days tend to be volatile and more so in bear market. Yesterday was classic example of that.
• The market had a full up and down cycle within hours of the decision.
• Normally the real impact of Fed decision manifests itself by 3rd day.
• With lot of stimulus in pipeline , it should impact the market positively in the long run.
• However in the short run, this market is still tricky.
• When leaders breakdown severely, like we have seen in past few days, it is not easy to put together a rally. It takes time. Plus the old leaders are not necessarily going to come back, a new leadership will emerge. The new leadership becomes apparent only after the selling phase stabilizes.
• As of now in this market the fast selling phase ended on 1/23/2008 with a 900 plus day. Since then market has attempted to put together a small rally, now we will see if the market holds up well. As of now it is the line in sand. A long side way move or a volatile range might be better for the longevity of next bull phase. However markets do not always act as per expectations.
• The bottom-line is that this market phase as indicated by Market Monitor is not ideal for growth or momentum based strategies on long side if your holding periods are more than few hours or days.
• Bear markets are essential. In fact they are very good for growth investors. From the gloom of bear market when a new bull market starts, you find several straight up growth stock rockets.

America Still Works

Newspapers and popular bloggers make a career out of scaring the shit out of you. Bearishness always sells. It is more popular. It can always be packaged as more intellectual stuff or as contrariness.
The average person is also more attracted to bearishness and negativity because it allows them to justify their lack of achievement in life. The common hypothesis which is sold by the pessimist is that America is doomed and there is no way the problems in America can be solved.
Here is a real contrarian take on America. A bullish argument for America.

America Still Works

Anyone who reads the serious press about the condition of the US might be excused for believing that the country is headed towards a series of deep crises. This impression is exacerbated by economic slowdown and by the presidential primaries, in which candidates announce bold plans to rescue the country from disaster. But even in more normal times there are three ubiquitous myths about America that make the country seem weaker and more chaotic than it really is. The first myth, which is mainly a conservative one, is that racial and ethnic rivalries are tearing America apart. The second myth, which is mainly a liberal one, is that America will soon be overwhelmed by religious fundamentalists. The third myth, an economic one beloved of centrists, is that the retirement of the baby boomers will bankrupt the country because of runaway social security entitlement costs.

America does, of course, have many problems, such as spiralling healthcare costs and a decline in social mobility. Yet the truth is that apart from the temporary frictions caused by current immigration from Latin America, the US is more integrated than ever. Racial and cultural diversity is in long-term decline, as a result of the success of the melting pot in merging groups through assimilation and intermarriage—and many of the country's infamous social pathologies, from violent crime to teenage drug use, are also seeing improvements. Americans are far more religious than Europeans, but the "religious right" is concentrated among white southern Protestants. And there is no genuine long-term entitlement problem in the US. The US suffers from healthcare cost inflation, a problem that will be solved one way or another in the near future, long before it cripples the economy as a whole. And the long-term costs of social security, America's public pension programme, could be met by moderate benefit cuts or a moderate growth in the US government share of GDP. With a linguistically united, increasingly racially mixed supermajority and a solvent system of middle-class entitlements, the US will remain first among equals for generations to come, even in a multipolar world with several great powers.

Home Builders and home improvement retailers lead the bounce

Market Monitor: Bearish

• A low volume bounce after Friday negativity saved the day.
• Retail and banks are the major beneficiary of the bounce so far. Residential construction is the number two performing industry on monthly basis followed by home improvement stores at number 3. Such laggard sectors are not going to lead the market higher for long.
• All these rallies in interest sensitive sectors are likely to fail in few days or week as the actual news of Fed rate cuts arrive.
• This is what IBD has to say about the market

The market has scored gains in three of the past four sessions, snapping a long losing streak that whacked stocks for much of January. A few medical and energy stocks have rebounded, moving back above key support lines such as the 50-day moving average.

With that said, it's too early to get excited about such a short, modest run. The broad market indexes are still on pace for one of their worst months ever. Leading stocks have been battered. Few institutional-quality stocks have formed anything resembling a proper base.

Above all, the market remains in a clear correction. In that climate, it's best to stay on the sidelines and conserve your cash. Monitor the market from a distance, without fretting over potential trades.

A severe bear market will be better

Market Monitor: Bearish

• Two days of rally attempt petered out on Friday. Even a catalyst like good earnings from Microsoft could not get the market to rally. Sellers hit the tape from word go.
• This is typical of bear market rallies. They tempt you to disappoint. Those who keep playing such rallies at some stage get whipsawed so many times that they lose confidence. Also when you start playing for small moves, it becomes part of you and when the market turns for real and big moves emerge , you are still conditioned by bear market to capture small moves.Besides that your account slowly bleeds. So at least in my scheme of things, sideline is best strategy till we see enough proof of a turn.
• This week will have even more volatility as the Fed decision on interest rate is due on Wednesday.
• Once this bearish trend ends there will be lot of opportunities. In fact it will be very good, if this bearish trend persist for another 6 to 9 months and this correction becomes deeper. After that kind of phase, when markets rally, it is the easiest money you can ever make. However the market may not necessarily follow the ideal script and go down much from this level.
  

Waiting for leadership

• This bounce is only for extremely nimble and short term traders. Day to day action is choppy and news driven.
• Breakouts are happening on gaps and are prone to next day reversal. Several examples of that you will find from Episodic Pivots (EP) breakouts in last two days.
• When market dipped in July- August period, leading stocks were not badly damaged and hence when the market rebounded they could rally. Many sectors like Solar, Shipping, Fertilizers, Agricultural Machinery etc had mild corrections during that phase and they bounced back vigorously post correction. As against that currently most of the leading stocks are down more than 25% from recent high. Many have reversed their trends and are unlikely to revisit their old high.
• So till new leadership emerges bounces will be for mostly day trades and extremely short term trades. It will take time for the leadership sectors and stocks to set up.

Reflex Bounce

• It was a impressive reflex bounce. With readings of 900 plus on long side. There is a high probability that this bounce might last for few weeks. Too early to say it is the bottom, and such big moves are common in bear markets. But in the short run for nimble traders there will be opportunities in heavily shorted stocks.
• We were witnessing 300 plus days for many weeks on downside. Lot of selling is out of the way. Against that backdrop when market did not go down much in reaction to the worldwide selloff, it seemed like sellers were not aggressive and short sellers were covering positions. Lot of what has gone up yesterday is beaten down, heavily shorted stuff.
• For a meaningful rally to develop and a bull market to start you need to see leadership group emerge. They are unlikely to emerge from sectors in which almost all stocks are trading around their 52 week lows. From a leadership perspective Medical/biotech is still best positioned. If you look at the top 30 stocks in MDT scan , they are mostly biotech and medical stocks.
• A rally here will allow trapped longs to escape and create good shorting opportunities in the long run if it fails after few weeks.

Muddled Action

Market Monitor: Bearish

• As expected it was a wild action. The panic was averted by significant interest rate cut by Fed. However we still had lot of selling and we had 5th consecutive 300 plus day on downside.
• Because there was no high volume capitulation, the muddle continues and there is no clear washout of sellers.
• Bulk of the buying was concentrated in heavily shorted sectors and interest rate sensitive sectors. Any bull move up is not going to be lead by such laggard sectors.
• Any rally here will offer trapped longs another opportunity to reduce their exposure and will be good for putting in new shorts.
• We are now officially in bear market in some indices with 20% plus down move, so any rally is shorting opportunity till proven otherwise.
• The moves will be volatile and capital preservation is number one priority.

Methodology trumps the market

There is lot of blame game going around today. It is human tendency to blame others and government and policy makers for the market action. But that view misses the crux of trading. As I have said before the most important starting point for successful trading is methodology and methodology trumps markets.
Market is ever changing. Market is not predictable. Market is complex. Market offers too many choices. Market is not controllable. But methods are controllable. Methods can be constant irrespective of the market situations. Methods are under traders control. Your trading mix is completely controllable and that is the key to profitability.
If you have a well defined market direction determining system, you would not be long in this market or would have had some downside protection. Putting together such system well in advance and thinking through all elements of trading ahead of time is what methodology like Market Monitor is all about.
Staying in the game is extremely critical in the speculation game. If you stay in the game you can convert your small stakes in to millions.

Market Roundup

Market Monitor: Bearish

• It will be a tricky day on Tuesday after such a major carnage in the worldwide markets.
• There will be some Fed reaction and possible emergency cut.
• So it will be volatile session.
• Because of Market Monitor being bearish for many weeks now, the only open positions are short positions, so it will not be a bad day for those following our methodology.
• The entire objective of Market Monitor is to avoid such risky periods and only trade good periods on long side.
• Existing shorts will do very well. But protecting open profits on them will be the key.
• Many times the key thing during such time is holding on to nerves.

• There will be lot of noise, I remember coming in to September 11 week I was heavily short and then when the market opened post many days of closure, there were all kinds of people on TV saying it is time to buy. Buffett was on CNBC saying he will be a buyer and so on. They were saying there will a patriotic rally and so on. What happened was market sold off hard for few days and then it rallied. Those who listened to all the CNBC bullshit and bought on first day were left holding the bag.
• So unless you have to trade or know what you are doing, you should stay out .
• Even if the market turns, it will not be one day rally, there will be many opportunities down the road.
  

Market Roundup

Market Monitor= Bearish

• Another day with 500 plus stocks down 4% plus.
• With series of 300 plus days in last 15 days, we still are not at extreme levels on most indicators.
• Only 11 stocks are down 50% plus so far.
• The only indicator reaching near bullish level is the # of stocks up >100% in 260days
• In a typical bear market pattern we see green open which gets sold.
• With lot of selling in last 3 session if we open lower day and continue lower, we may reach a short term capitulation stage. Which does not seem to be happening, going by the likely up open today.
  

Market Roundup

Market Monitor: Bearish

• One of those crazy days. 300 stocks up 400 down.
• Today morning before market open it looked like we will have one of those big down day. The Chinese market was down around 5%, Europe was all red and stage was set for a panic low in our market. But that scene never materialized.
• So again we have a bounce without the sellers getting washed out. Which makes it prone to failure.
• Unless you are trading on minutes or hourly time frame and very nimble, there is not much on the long side.
• Those looking for long opportunities should look in to the retail sector which seems to be having a deadcat bounce after digesting lot of bad news.

Sector Trends
All the leading sectors are now toast. Sectors which have been leading the market for 2-3 years have all turned bearish and only defensive sectors are now in top 20 sectors. Farm, fertilizer, energy and some metal sectors were the last to break down. The only sector with action currently is the defensive Medical sector. That is not the kind of sector likely to make big moves.

Market Roundup

Market Monitor: Bearish

• Monday rally was never a convincing one and so Tuesday's action was no surprise
• A 600 plus downside day has lot of sectors getting affected.
• The big down day has also triggered a worldwide sell off and a hint of panic. So in a very shorter timeframe there will again be a bounce. Orderly sell offs are good. Panicky ones tend to reverse.
• While selling continues, none of the readings on Market Monitor are anywhere close to extreme. If you see other things like The Worden T2108 or T 2118, they are hardly budging, so a divergence is developing.
• Same thing is visible on 65 days ratio where inspite of selling it continues to trade around 400 levels on positive side.
• Which again indicates the panic today might resolve to upside in shorter time frames. Which makes chasing shorts here a bit risky.
• While this action continues cash, sideline or holiday are the best options.

Sector Trends
The solar sector got cooked yesterday and the Fertilizer sector had failed breakouts or ugly pullbacks on some stocks. The only sector with action currently is the defensive Medical sector. When you see Funeral Services in top 30 sector list , you know the state of the market.

Blogger Sentiment

This poll consistently gets it wrong. Participants change. Some show their votes, some do not, but one thing remains constant, it seldom gets it right on market direction.

Market Roundup

Market Monitor: Bearish

• Market continues to be in bearish territory based on all Market Monitor indicators.
• The bounce on Monday failed to cross 300 plus barrier. Any serious turn in this downtrend will start with a 300 plus day. It will probably be most likely 500 plus day.
• If you see a day like that then you can be reasonably confident of counter trend rally lasting few weeks.
• Volume on this bounce day was low, another negative.
• Overall nothing in Market Monitor, McClellan Summation Index, and Worden T 2108 as of now indicate a turn.
• This bounce will help for shorts as some of them will have weak rallies and will be shortable at those levels.
• For medium term and longer term traders this market is not worth risking capital till there is a clear buy signal on Market Monitor.
• For those who want to trade managing overall risk becomes critical , if you risk too much a whipsaw may lead to large loss. So keeping risk below 2-3% might be better as that level of loss is easily recoverable.
• Most of the readings on MM have not yet reached extreme, which indicates likelihood of more downside and failure of any bounce at this level.

Sector Trends:

Let us take a closer look at some of the sector trends clearly visible currently on both long and short side.
Sectors where breakouts are still concentrated in our sector tracking methods are:

Medical
Energy
Fertilizers
The Solar Energy stocks are the next set of stock likely to breakout. So if you are quick and nimble keep the stocks like FSLR, STP, SPWR, JASO, SOLF on your watchlist and buy intraday if they breakout. You might be able to catch 10 to 20% moves that way.

Farm Machinery is another group witnessing good action. Top 5 stocks in that group based on earnings plus momentum are ARTW, LNN, DE, CNH, ALG.

Medical Groups dominate the top 20 group list now. Medical group breakouts are the only breakouts which have had some follow through in last 10 -15 days. Medical group is a typical defensive group and it tends to do well in bear markets.
Energy stocks have had sporadic breakouts, but follow through is lacking and most seems to be heading in to bases.
Yesterday I said that the fertilizers stocks have recent good earnings, but most of them have stalled at this level. However in case of a bounce they may be first to bounce back. They bounced back smartly yesterday.

If you want to play during bear market on long side, focus on top 10 sectors in IBD sector list or the top 5. Plus you need to be nimble to enter intraday. Due to higher volatility when stocks breakout during such time, they sometime have large one day moves but no follow through. So buying next day is mostly late.

More books for growth investors Part 1

In my previous post I talked about two books on growth investing for those interested in becoming growth investor. While those two books provide you with template for trading growth stocks, there are many more books on growth investing. If you are serious about making money, you can go through these books as they offer other ways of trading growth stocks.

Frank Cappiello's New Guide to Finding the Next Superstock

There are stocks and then there are super stocks, there is a stock market and there is a super stock market. And they barely know each other. That is the central premise of Frank Cappiello's book on growth investing. Super stock according to him is a stock of small growing company which will beat the market significantly. His book was published before O'Neil book. It also gives a approach to trading growth stocks.
All the things he finds about growth stock are more or less same as what the CANSLIM approach emphasizes in stock selection. He found 9 characteristics common to super stocks.

1. Small to medium size
2. Rising unit sales volume
3. Rising pretax profit margins
4. Above average and improving return of shareholders' equity
5. Strong earnings per share growth relative to other stocks
6. A low payout ratio with rising dividends
7. Low debt ratio
8. Low institutional holdings
9. Increasing price earnings multiple

The Little Book That Makes You Rich- A proven market beating formula for growth investing

Louis Navellier in his book gives a formula for beating the market using growth investing. There are many flavors of growth investing and this book presents one of the approach to selecting growth stocks for investing purpose.

At the heart of the Navellier system are eight variables he has found useful in selecting growth stocks. They are:

1. Earnings revisions
2. Earnings surprises
3. Sales Growth
4. Profit Margin Expansion
5. Free cash flow
6. Earnings Growth
7. Earnings Momentum
8. ROE


These factors are very similar to CANSLIM factors. Obviously he has added more nuances to it, but at the end it is similar to IBD approach. The book leaves many details out and so you will have to rely on the accompanying website to replicate exactly the authors ranking.

Finding the Next Starbucks- How to identify and invest in the hot stocks of tomorrow

This is another recent book on growth investing about which I wrote many months ago.

Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow by Michael Moe, is a new book on investing in growth stocks. This weekend over few Starbucks lattes I finished reading this book. CANSLIM strategy retold is one line summary of this book.

The author describes in detail his firms methodology to identify and invest in stars of tomorrow- the fastest growing, most innovative companies in the world. The idea like in any growth investing is to find small, unknown companies , with lots of growth potential ahead of them. If you find and invest in such company early, you benefit when the company is discovered and the opportunity becomes widely recognised. The author gives examples of companies like Starbucks, Apollo Group, Dell, and so on to illustrate his point.

The central premise of the author based on his analysis of past data is that in the short run variety of factors influence stock price- geopolitical events, funds flow, interest rates and so on. But in the long run only one thing influences stock price- Earnings Growth. In the long run, a company's price will be 100% correlated with its earning growth. Earning growth drives stock price. That is the central message of the book.

One of the pitfalls of growth investing is for every Starbucks, you have 10 or even 1000 duds which do not live up to expectations. The author offers an elaborate methodology to try and identify such stocks. That is where the book varies a bit from the CANSLIM method popularised by William O'Neil. This is where the book also loses its focus and makes the CANSLIM method needlessly complicated.

Many of the items on the laundry list of checklist to find tomorrow's winners is nice sounding rhetorical word plays:
1 Be right on fundamentals
2 Be proactive, not reactive
3 Be rigorous , but do not have rigor mortis
4 When wrong, admit it
5 The cockroach theory
6 Investment ideas are about information and insight
7 4 P (people, product, potential and predictability)
8 Use 5 independent sources for each stock you invest in
9 Find 3 main reason for a stock to move up or down
10 Be passionate about investing, but dispassionate about the investment

Many of these things sound nice but are not really actionable. To further complicate the effort, the author proposes a framework for identifying megatrends. Hind sight is a very wonderful thing all the megatrends identified by the author suffer from this bias. Plus the question to be asked is , is it at all necessary. If earnings drive price then that is what you should track. A large part of the book is devoted to these megatrends..

All in all the book basically is a variation of the CANSLIM style investing concept. It tries to improve on it and in the process makes it more complicated. The book would have benefited a lot from good editing to make it crisper.

The author has a website where he offers free newsletter and research on growth investing.

Monster Stocks- How they set up, run up, top and make you money

It is basically another take on growth investing. Much of the book is rehash of CANSLIM method. However I still recommend it for growth investor as the lessons from this book will come in handy once this bear market gets over. The real monster moves happen after a bear market. After the 2000-2002 bear maret when market started rallying after start of Iraq war, there were over 500 stocks up 200% plus in less than a year. If you go back and look at the stocks from that period you would see several straight vertical moves with very few corrections on individual stocks. A period like that can be incredibly profitable for DT, IBD 200 and EP methods.

Here is a gist of the book.

• A monster stock is basically a stock that doubles in price in 4 to 18 months. Many of them will go up 3, 4 ,5 or 10 times plus in short time periods.
• If you want monster returns, you should know how to identify and handle the next monster stock.
• Book covers some monster stocks that appeared in last 10 years (1997-2007)
• Monster stocks are growth companies, most trade on Nasdaq, have new and innovative products and above average earnings and sales growth . When they catch the attention of big money investors, the huge demand from these players leads to them making monster moves in short time frames.
• Each major up move in overall market leads to emergence of such monster stocks.
• Eventually all such stocks top and often the top in such stocks coincides with new downturn in overall market.
  
  Recognize a monster stock at right time, sit with it for right amount of time and then sell it at correct time. That in short is the way to monster returns.
  "It only takes a few monster stock, if you handle them correctly, to improve your life financially" Jim Roppel.
  

Market Monitor

Market Monitor: Bearish

• Market continues to be in bearish territory based on all Market Monitor indicators.
  
• Wednesday and Thursday was the only small bounce in this down move so far.
• Friday witnessed yet another 300 plus down day. The volume however was low.
• For medium term and longer term traders this market is not worth risking capital till there is a clear buy signal on Market Monitor.
• Most of the readings on MM have not yet reached extreme, which indicates likelihood of more downside and failure of any bounce at this level.
  

Sector Trends:
Let us take a closer look at some of the sector trends clearly visible currently on both long and short side.
Sectors where breakouts are still concentrated in our sector tracking methods are:
Energy
Fertilizers
The Solar Energy stocks have given up their number one ranking and Fertilizer stocks are now number one sector. The speculative stocks in Solar Sector have had reversals while those with stellar fundamentals continue to hold well.
Medical Groups dominate the top 20 group list now. Medical group breakouts are the only breakouts which have had some follow through in last 10 -15 days. Medical group is a typical defensive group and it tends to do well in bear markets.
Energy stocks have had sporadic breakouts, but follow through is lacking and most seems to be heading in to bases.
The fertilizers stocks have recent good earnings, but most of them have stalled at this level. However in case of a bounce they may be first to bounce back.
52-Week Lows
Bases on stocks making 52 week high the top 6 Friday sectors were:

1. Medical
2. Energy
3. Mining
4. Finance
5. Consumer
6. Retail

Looking at this data over 1-2 weeks gives you better picture of sector trends. As I have previously explained in my post "How to trade Sectors" this kind of tracking is more actionable way to track sectors than typical ranking list. I will be adding a sector tracking spreadsheet to Market Monitor page.
Concentrating your buys in top 2-3 sector from this ensures that you get in to sector before it starts moving in the sector ranking table.

Groups With The Greatest % Of Stocks Making New Highs

1. Oil and gas US royalty
   
2. Tobacco
3. Metal ores gold and silver
   

This tracking gives you another read on sector trends which you do not get by tracking the sector list. Again you have to look at 10 to 15 days data on it to identify new sectors taking on leadership in the market.

52-Week Lows

1. Retail
2. Semi
3. Banks
4. Business Services
5. Medical
6. Computer Software

This list is useful to prioritize short entries. Stocks from these sectors have higher probability of making good shorts. You will notice umber of shorts appearing in EP are from these sectors currently.
Some sectors with large number of stocks like Medical and Retail can often show in both list. However the trend in retail stocks is predominantly down in recent months.

Which book

One of the most often asked question by new traders is which book do I recommend. One of the problem new traders have is even if you find the best book to make money, you may not realize it at your current stage of market understanding. There has to be a sufficient market understanding before you can choose and freeze on a style of investing. The task is not made easy as books on investing offer range of advise which seems believable and plausible.

Most people also start their journey in to profitable trading from the wrong end. They start with charts and indicators. Charts and indicators are about tactics not strategy. If you have a basic proven strategy to make money based on what works in market then you use tactics to improve on it or time buy, sell decision. If you start your journey to trading profitability from the technical analysis endpoint you make it harder to reach your destination.

On a medium and longer term time horizon there are only three basic strategies which work growth investing, value investing and contrarian investing. In short to medium term investing (1 to 60 days) momentum based strategies work best. For a medium duration ( few weeks to few months) traders looking for big returns growth and contrarian strategies do better than value based strategies. In the long run (2-5 years plus holding periods) value based strategies are best. One of the great benefits of value investing is it is extremely tax efficient.

If you understand this basic framework, you will stop wasting time and effort on things with low probability of success. Once you get convinced that these are the only three basic apprpach you will use tactics like technical analysis, charts patterns to make these strategies work. Not the other way round. You will also not try and straddle styles.

If you are trying to grow a small account aggressively , you have not much choice but to choose growth/ momentum based strategies. So once you make a choice of fundamentally trading a growth or momentum strategy you look for a the best approach to make it profitable. If that is your chosen strategy then I can suggest just two books for you to make money.

24 Essential Lessons for Investment Success by William O'Neil
Out of all the books by O'Neil, this is the best and very practical. Many people try and find little success with CANSLIM and there is no shortage of people claiming it does not work. Which is like saying growth investing does not work.

One of the reason for that is CANSLIM approach is like the Russian matryoshka dolls. There are several rules within rules and most beginners do not understand the intricate set of rules and more importantly logic behind each of those small nuances involved. For that you have to read the book several times and try and understand these intricacies.

The American Association of Individual Investors has screens based on various methods. You will find CANSLIM performs amongst top strategies over long period of time. (even though their interpretation of CANSLIM is slightly faulty)

The other thing is the rules in CANSLIM are what worked for Mr O'Neil. So it has many of the things which are person specific. Your challenge is to understand the method and customise it for yourself and make it work for you. None of the rules in it are absolute. You have to take that as one possible template to trade and develop your own approach.
What is good about the book is it gives you a ready made template on how to trade growth stocks.

The Hedge fund edge by Mark Boucher

This is another book which offers you a complete template for trading growth stocks. It goes in to significant details about methodology. It gives a set of detailed rules for trading growth investing on both longer and shorter time frames. Again it gives you a complete ready to use trading template to integrate various aspects like overall economy, financial trends, technical trends , chart patterns etc in to one integrated approach . It basically builds on CANSLIM kind of methodology and finds a different way to reach profitability goal.
The trick again is to use the template and develop your own set of workable method.

Same thing applies to anyone trying to trade IBD 200, DT, EP or any other growth/ momentum method. You have to use my set of rules as just a template and develop your own approach. What worked for me may not work as it is for you.

Market Roundup

Market Monitor: Bearish

It looked like we will have 9 straight days of losses. We were heading for another 500 plus down day. Then the reflex bounce arrived. The turnaround was what I have been expecting for last few days. Lot of selling in last few weeks has resulted in washout in some sectors and this resulted in rebound. But it still ended up as down day. Again market has rebounded without reaching extreme levels on Market Monitor so any bounce which will develop has high probability of failure.

However this bounce might be playable to long side for nimble traders. Market is not out of trouble, so playing such moves means settling for small 5 to 10% profit targets. Willingness to cut losses short if things don't work. A focus on leading sectors is important. We know Energy and Medical are leading sectors and bulk of breakouts in that sector have higher probability of follow through than others. For extremely small duration traders oversold bounce might also work. But overall the move will be volatile and caution is the key word. For those with longer term holding horizon this market is not the market for building such positions as yet. Cash and sideline is the best strategy for them.

After few days of such bounce if the market fails then we will find good shorts also.

Market Monitor

Market Monitor: Bearish

• Selling pressure was intense after the morning bounce failed
• Recent leaders are under pressure and one by one they are breaking down
• New sector leadership is emerging. It is mostly defensive sectors
• More selling will lead to washout and attempt at another bounce.
• Reflex bounce is very strong probability
• Currently in reversal anticipation mode. Looking for follow through day or MM signal

Sector Focus:

• Medical
• Energy

The selling will probably stop before earnings season and if bearish phase has to follow on, it will happen post earnings.

Historical sector tendencies

When looking at sector one needs to look at some historical sector tendencies. Lot of people are attracted to wrong kind of sectors. Gold and silver is one classic example of it. Lot of gold bugs are not interested in making money. They are more interested in being part of the gold buying cult and have various absurd theories. They can keep wishing for gold standard, but in our lifetime the probability of that happening is low.

As per IBD study of biggest winners, drugs and medical, computer, technology, software, specialty retail, and leisure and entertainment groups have provided more big winners historically than other sectors. Industries like auto, steel, aluminum, airlines, railroads, copper and buildings are cyclical industries. They tend to make shorter runs when they make their moves. Only in very special conditions, these are likely to produce big winners. Shortages, price spikes, wars, infrastructure building phases are some circumstances under which these stocks can make big moves.

Some sectors make moves during bear markets because of the nature of their business. But they may not produce big winners.

Now this information is very useful , when we look at Episodic Pivot (EP) candidates or other candidates from IBD 200 or Double Trouble. Given a choice of EP's , it is better to go for stocks in sectors with historical tendencies of producing big winners.

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

Very funny and accurate review of Invest Like A Shark. I don't know how it survived on Amazon site. Amazon never published my negative review. Most of the positive review on this book look very suspicious. Some are obviously by friends and employees.

Don't insult a Shark,
January 6, 2008
By Joe (madison, wi United States) - See all my reviews
I found the book in a store in the airport and bought it on impulse because of the title. Big Mistake! The book is pretty much a waste of your money and a book on the actual fish (sharks) might be more interesting. There is no practical advice and nothing new but only some common sense platitudes and behavioral notions that are better covered in many other much more erudite books on this subject. Maybe if sharks could invest they might find the book amusing.

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Reflex Bounce

The intense downward pressure we have witnessed in last six session has set us up for a reflex bounce and initiating shorts in such environment is not an ideal short strategy. Such panics tend to resolve in to bounces.

Henry Clews wrote in Twenty-Eight Years in Wall Street (1887):

But few gain sufficient experience in Wall Street to command success until they reach that period of life in which they have one foot in the grave. When this time comes, these old veterans of the Street usually spend long intervals of repose at their comfortable homes, and in times of panic, which recur sometimes oftener than once a year, these old fellows will be seen in Wall Street, hobbling down on their canes to their brokers’ offices.

Then they always buy good stocks to the extent of their bank balances, which they have been permitted to accumulate for just such an emergency. The panic usually rages until enough of these cash purchases of stock is made to afford a big “rake in.” When the panic has spent its force, these old fellows, who have been resting judiciously on their oars in expectation of the inevitable event, which usually returns with the regularity of the seasons, quickly realize, deposit their profits with their bankers, or the overplus thereof, after purchasing more real estate that is on the up grade, for permanent investment, and retire for another season to the quietude of their splendid homes and the bosoms of their happy families.

Go where the oil is

The energy sectors has been attracting buy interest in current market conditions. The high oil price is a clear catalyst for the sector move. So while the overall market might not be very attractive some sectors are where the action is.


Energy stocks witnessing buy interest yesterday.
BTJ,Bolt Technology Corp (Google  Yahoo  Earnings  Chart) 
CAM,Cameron International Corp (Google  Yahoo  Earnings  Chart) 
DPTR,Delta Petroleum Corp (Google  Yahoo  Earnings  Chart) 
DVR,Cal Dive Intl Inc (Google  Yahoo  Earnings  Chart) 
ENT,Enterra Energy Corp (Google  Yahoo  Earnings  Chart) 
FTI,Fmc Technologies (Google  Yahoo  Earnings  Chart) 
GST,Gastar Exploration Inc (Google  Yahoo  Earnings  Chart) 
IFNY,Infinity Energy Resources Inc (Google  Yahoo  Earnings  Chart) 
NGS,Natural Gas Svcs Grp Inc (Google  Yahoo  Earnings  Chart) 
NXY,Nexen Inc (Google  Yahoo  Earnings  Chart) 
OII,Oceaneering Internat (Google  Yahoo  Earnings  Chart) 
OIS,Oil States Intl (Google  Yahoo  Earnings  Chart) 
OMNI,Omni Energy Services Cp (Google  Yahoo  Earnings  Chart) 
SCU,Storm Cat Energy Corp (Google  Yahoo  Earnings  Chart) 
SNG,Canadian Superior Energy Inc (Google  Yahoo  Earnings  Chart) 
SPN,Superior Energy Svcs Inc (Google  Yahoo  Earnings  Chart) 
TGC,Tengasco Incorporated (Google  Yahoo  Earnings  Chart) 
TTI,Tetra Technologies Inc (Google  Yahoo  Earnings  Chart) 
WHT,Westside Energy Corp (Google  Yahoo  Earnings  Chart) 
XTO,Xto Energy Inc (Google  Yahoo  Earnings  Chart) 


Lot of opportunities in this list for profitable trading.

Gold shines

Not at all surprised by the bearish action yesterday

If you were following the Market Monitor methodology, you were already ahead of the market in anticipating a rally failure and on 26 th December you had a clear signal of possible rally failure.

The 65 days ratio is bearish. We still have small pocket of momentum. Leading stocks like GOOG, AAPL, GS, BIDU, ICE, etc had down day. The bearish move on all indexes today means the IBD number of distribution days model is firmly in bearish territory on all indices. All have 5 plus distribution days. If you see the IBD Big Picture today, it is also telling the same thing.

January is often an uncertain time for the market. Given that history, along with 299 stocks down 4% plus was almost a 300 day. The small rally in last 10 days has given back all its gain. stocks’ recent jitters, it’s a good idea to switch to a conservative approach. Avoid new buys. Cut losses short. If you own a leading stock that’s starting to waver, consider taking partial profits.

Implication of this for IBD 200 and DT is , chances of follow through post breakouts are low and the swing size is smaller. So one needs to have very low per trade profit expectations or stay on sideline till things improve.Market conditions are not ideal for any aggressive position building. Everything indicates high risk zone. Selling often feeds on itself and even the strongest sectors and stocks can quickly give up 10 to 20% in matter of day or two.

But this market has time and again recovered from such selling. So current hypothesis still is that the market is essentially been stuck in a small range for last 4-5 weeks. A 300 plus positive day on Market Monitor here might change this view. Ideally a 500 plus day on 4% breakout would be ideal. Any 300 plus day on downside will accelerate selling. But a reflex bounce in a day or two is a possibility.

One sector which attracted buy interest yesterday was Gold. It was a broad based breakout in the sector. Some of the gold stocks worth looking at are :

ABX,Barrick Gold Corp (Google  Yahoo  Earnings  Chart) 
AU,Anglogold Ashanti Ltd (Google  Yahoo  Earnings  Chart) 
AUY,Yamana Gold Inc (Google  Yahoo  Earnings  Chart) 
AZK,Aurizon Mines Ltd (Google  Yahoo  Earnings  Chart) 
BQI,Oilsands Quest Inc (Google  Yahoo  Earnings  Chart) 
BVN,Compania De Minas Buena (Google  Yahoo  Earnings  Chart) 
CGR,Claude Resources Inc (Google  Yahoo  Earnings  Chart) 
EGO,El Dorado Gold Corp (Google  Yahoo  Earnings  Chart) 
EXK,Endeavour Silver Corp (Google  Yahoo  Earnings  Chart) 
GBN,Great Basin Gold (Google  Yahoo  Earnings  Chart) 
GFI,Gold Fields Ltd Adr (Google  Yahoo  Earnings  Chart) 
GG,Goldcorp Inc (Google  Yahoo  Earnings  Chart) 
GRS,Gammon Lake Resources (Google  Yahoo  Earnings  Chart) 
GRZ,Gold Reserve Inc (Google  Yahoo  Earnings  Chart) 
GSS,Golden Star Resources (Google  Yahoo  Earnings  Chart) 
HMY,Harmony Gold Mining Co (Google  Yahoo  Earnings  Chart) 
IAG,Iamgold Corp (Google  Yahoo  Earnings  Chart) 
KGC,Kinross Gold Corp (Google  Yahoo  Earnings  Chart) 
KRY,Crystallex Internat Corp (Google  Yahoo  Earnings  Chart) 
LIHR,Lihir Gold` Limited ADS (Google  Yahoo  Earnings  Chart) 
MFN,Minefinders Corp (Google  Yahoo  Earnings  Chart) 
MGN,Mines Management Inc (Google  Yahoo  Earnings  Chart) 
NEM,Newmont Mining Corp (Google  Yahoo  Earnings  Chart) 
PAAS,Pan Amer Silver Cp (Google  Yahoo  Earnings  Chart) 
PVR,Penn Va Resource Partners Lp (Google  Yahoo  Earnings  Chart) 
RGLD,Royal Gold Inc (Google  Yahoo  Earnings  Chart) 
RIC,Richmont Mines Inc (Google  Yahoo  Earnings  Chart) 
SLW,Silver Wheaton Corp (Google  Yahoo  Earnings  Chart) 
SSRI,Silver Standard Resource (Google  Yahoo  Earnings  Chart) 
VGZ,Vista Gold Corp (Google  Yahoo  Earnings  Chart) 

Market Monitor

The Market Monitor is currently in bearish mode. The bounce from 18th December onward, quickly has given back most of the gain. 65 days ratio is negative. A narrower set of stock are leading the market.

If you are watching IBD market direction system, it has 5 distribution days on Nasdaq currently and 4 distribution days on other indexes. As per IBD model after 5 distribution days in one of the index the market rolls over. Accordingly they advise cash as primary position under such circumstances. But many times IBD uses other factors besides its distribution days methodology to call end to rally.

So overall it is a tricky market. It has essentially been stuck in a small range for last 4-5 weeks. Implication of this for those trading IBD 200 and Double Trouble is ,that the chances of follow through post breakouts are low and the swing size is smaller. So one needs to have very low per trade profit expectations or stay on sideline till things improve. Market conditions are not ideal for any aggressive position building.

A 300 plus positive day here might change this view. Ideally a 500 plus day on 4% breakout would be ideal. Any 300 plus day on downside will lead to accelerated selling.