The Downtrend Continues?

@ 5:03 pm

“Want to know how to make a small fortune in the stock market?
Start with a large fortune!”

I thought you would probably want me to back off of the strategy discussion (see yesterday’s post) and to return to my take on the market.   A number of people have written to me about going short.   This interest, together with the skepticism about the market’s rally in the media cause me to pause, just a little.   However, I do not reverse direction until my market indicators start to change. So, I wait, mainly in cash and put options in my IRA.   (I did sell my one small long position, MHS–I got tired of holding anything at odds with the general market trend.) The attached chart (click on it to enlarge) Irxx shows the consistent rising trend in short term interest rates that started in May, 2004. (I have asked the TC2005 support staff at Worden.com to tell me the basis for this index, and will report back on their answer.) The Fed’s persistent pressure on rates is one of the obstacles to a rising market.   Historically, in its fear of inflation, the Fed typically misjudges how much to put on the brakes and eventually brings the market and the economy to a screeching halt.   (In spite of this track record, traders tend to delude themselves into thinking that this time will be different and we will get a “soft landing.”) This short term interest rate index has been hugging its rising 10 week moving average for months, and just bounced off of the average to a new high, after a few weeks of a plateau.   This renewed rise is not a good omen.   A consistent reversal in this index will probably foreshadow a subsequent bottom in the market–but not immediately.   So, we will keep an eye on this index.

IBD’s Monday edition published a put/call ratio of   .86.   This means that 86 puts were traded for every 100 calls.   (Puts are options that gain when the underlying security falls; calls gain as a security rises.   In other words, puts are bets by option traders that a security will fall, calls are bets on a rise.   Did I imply that people are gambling?)   This ratio is a contrarian indicator, which means that it typically predicts the opposite type of   market movement than would be expected from the trades.   If an extremely high number of option traders are bearish (buying more   puts than calls) then the market often tends to rise, at least short term.   People are most scared at bottoms and overly optimistic at tops.   Most of the time, traders are more bullish than bearish and the p/c ratio is below .80.   When it stays above .80 for a while and gets above 1.0, the market usually is in store for a bounce.   The current ratio is not at an extreme.   However, if it breaks 1.0 this week it may signal short term   strength in the market.   If the P/C ratio   starts to trend lower in this depressing environment, say below .60, watch out below!

I am short some housing stocks.   It is rare that I find so many companies in an industry with the charts looking so sick.   Here are a few, in no special order:   RYL,OHB,LR,LEN,MDC,MHO,DHOM,WCI,SPF,DHI.   I did not run out of ugly symbols, but you get the picture.   Even   lofty NVR appears to have broken its uptrend on a number of large volume declines.   Is it too late to sell these?   Who knows, but the current trend is obvious to me.   Could insiders possibly be showing us something about the future of housing?   Watch behavior,   not words.

I hope you have a good trading day tomorrow.   The trend is your friend.

WishingWealth 10 day successful new high index:   4/22 19;   4/21   28;   4/20   12 (for definition, see Madness post)

Let’s Talk Strategy

@ 11:18 am

“it is utterly useless for us on the outside, who buy and sell comparatively small blocks of stock, to conjecture about what “they” are doing.   We cannot know what the insiders intend to do, but we can see their orders on the tape when they execute them.   That is why my plea is for everyone of us to have no mere opinions of his own, but to allow the actions of the market to tell him what is passing.”
(Humphrey B. Neill, Tape Reading & Market Tactics, 1931, New York: B.C. Forbes Publishing Company; 14th printing, 2003, Vermont: Fraser Publishing Company)

When Nicolas Darvas was interviewed by Time Magazine in the early 60’s and it came out that he made almost 2 million dollars in the market in 18 months (while he was dancing around the world!), he noted that he read and reread Neill’s book (along with Gerald Loeb’s).   Neill’s book has been reprinted many times and I happened to find it on the shelf of my local Barnes and Noble store.   Neill dedicates his book, “to my losses, with a deep appreciation for the experience and knowledge which each loss has brought me.”

Read more

The 10,000 Bounce

@ 11:27 pm

"Just when you think you have the key to the market, someone changes the locks."

So Dow 10,000 held.  This number means so much to people that had it simply given way quickly, we probably would have been hit with a climactic sell-off that would have ended the decline.  But we did not.  The Dow had fallen from 10,507.97 to 10012.36 in only 6 days.  Does a 200 point rally nullify a 500 point decline?  Is this a bottom? 

To me, little has changed. The market is still in a down trend.  The Dow would have to close 300 points higher for me to start to consider the bull case. Yes, even in spite of Yahoo and Google, the exceptions that prove the rule. I did not stop out of MHS, my lone holding, today.  The  new high index I described yesterday climbed from 12 to 28, still a paltry number of stocks that traded at new highs 10 days ago and closed higher today than 10 days ago.  After earnings season is over there will likely be a lull during which traders will focus again on inflation, recession, deficits and the Fed.

I have been using the term bear market–and this habit is dangerous.  It is much safer to say that the market is in a down trend.  Once I choose to use terms like bull or bear market it influences my judgment and it leads to predictions.  For example, if one labels the market as a bear it implies that it should last a certain amount of time that bear markets typically last and end in a certain way.  One tends to marry a scenario.  I may hang onto this scenario in order to be right (ego again).  Ever get so attached to a story  that you can’t observe what is actually happening?  It happens all of the time in the market.  People say things like, we should have a consolidation period followed by a rise or fall,or the market needs to rest.  The talking heads do this every day when they pontificate about what should unfold.  (So did I, when I said above that the market will enter a lull post-earnings.)

But I try not to predict.  I analyze the current market trend.  Are we rising, declining or stable or is it impossible to discern.    Right now, I believe  the trend is still down.   I never know how long the trend will last.  When my rules and indicators suggest a turn, I can turn on a dime and slowly wade back into the market on the long side. There is plenty of time to catch the real rockets after they have left the launch pad.  More on strategy this weekend.

Please continue to send me your questions and comments.  I value your support.