Put Options

GMI: 0; IBD 100 growth stocks decimated

@ 12:01 am

Another losing day with the GMI firmly stuck at zero.  Gmi0606 There were only 17 new highs and 136 new lows in my universe of 4,000 stocks.  The longer term moving averages are now starting to weaken.  The GMI-L fell to 44 and the GMI-S is now at zero.  The extreme weakness in the short term indicators is now spreading to the longer term indicators.  If this weakness in the longer term indicators continues we may find the markets  in a significant  down trend……………..

The IBD 100 stocks have been decimated and are underperforming my larger universe of almost 4,000 stocks.  Ibd0606 34% of the stocks in my universe rose on Tuesday, compared with 19% of the IBD 100 stocks.  There were zero new highs in the IBD 100 stocks and <1% in my universe of stocks.  More stocks in my universe closed above their 10 day averages (35% vs. 32%) and their 30 day averages (25% vs. 20%).  Note that the wide majority of both groups of stocks have closed below their average closing prices of the last 10 and 30 days.  Only about one fifth of both groups of stocks are in a short term up-trend.  Furthermore, more stocks in my universe are within 5% of a new low (13%) than a new high (10%).  The IBD 100 stocks still have the edge in closing above their longer term 10 week and 30 week averages, but the gap has narrowed for the 10 week average (34% vs. 28%).  Of most significance, only 17% of the IBD 100 stocks published in the list on 5/15 closed higher on Tuesday than they closed on 5/15, compared with 32% of my universe of stocks…

When the premier IBD 100 growth stocks cannot hold up, the market is in a lot of trouble.  I hope that most of my readers went to cash or short when the GMI fell to +1 on 5/14.  Using the GMI indicators, I have avoided all significant market declines since 1995.  It is now time for me to wait on the sidelines, mainly in cash until the GMI strengthens.  I do own some put options in my IRA which have appreciated nicely during this decline.  I highly recommend O’Neil’s brief book on selling short……

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

GMI: 0; IBD 100 stocks shine; Waiting for confirmation of up-trend

@ 10:22 pm

Well, we finally got the long awaited bounce.  While the GMI remains at zero, some of my indicators strengthened Thursday.  Gmi0525 A lot of stocks advanced– 74% of the Nasdaq 100 stocks rose, along with 82% of the S&P 500 stocks and 90% of the Dow 30 stocks.  The last time we had percentages like this was January 3.  The interesting thing is that 95% of the IBD 100 stocks (as of 5/15) advanced.  IBD 100 stocks had been among those most battered during this decline. It is therefore noteworthy that people bought the growth stocks yesterday.  We will continue to monitor the IBD 100 stocks for a resurgence of growth stocks, but with the IBD growth mutual fund Index below its 50 day average, I am not ready to buy these stocks.  When these super managers can’t make money in growth stocks, neither can I.

In spite of this strength Thursday, there were only 36 new highs and 30 new lows in my universe of 4,000 stocks.  My TC2005 scan of the 4,000 stocks yielded 160 "Submarine" stocks but only 10 "Rocket" stocks.  Only 8% of the 4,000 stocks are now in a short term up trend and only 27% closed above their longer term 10 week  averages.  For now, these indicators have bouncedoff of their extreme lows.  Still, only 21% of the Nasdaq 100 stocks closed above their critical 30 day averages and only 12% of stocks are within 5% of a new high.  There were again very few successful 10 day new highs.  Only 9% of the 209 stocks that hit a new high ten days ago closed higher on Thursday than they closed ten days ago.  Buying stocks at new highs has, thus, been a losing proposition.  On the other hand, shorting stocks at new lows 10 days ago would have been profitable in 58% of the cases.  Thursday was the eleventh day (D-11) in the current QQQQ short term down trend. 

Putting this all together, I remain largely in cash, while holding puts on a few stocks in my IRA.  It will take a few more days for me to determine whether this is a dead cat bounce or the beginning of a meaningful up-trend.  I am reluctant to buy more puts now.  This is because the put/call ratios and letters from readers suggest a lot of retail interest in put options.  When that happens we usually get at least a bounce–the market does not usually accommodate the bets of option players.

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

GMI: +1; Indicators weaken more; some submarines

@ 12:01 am

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.