Tuesday, July 31, 2007

Topping Action

This is what topping action looks like. One day/week the market makes you panic, the next day/week the market makes you feel all warm and cozy.

When I talk about topping, I'm never really sure how long it will last or how long the resulting correction from it will last either. But I do know one thing is for sure, this is not the time to be overly exposed to equities.

If you still have stocks acting well, then by all means hang onto to them, but keep a close eye out for any new or additional sell signals. If you're in cash, then just wait.

Even if the market were to follow through into a new rally this week, we would most likely be several weeks away from seeing a mass amount of breakouts develop. And any initial leadership would be narrow and limited in it's ability to carry the overall market higher. There was too much damage done during last weeks sell off to recover quickly from.

Good luck.

Sunday, July 29, 2007


Just read about anything and anyone who was bullish is now in panic mode. Even Cramer is looking for another DOW down 1000 point days. This will be interesting to see how it plays out. Or how fast it plays out.

The 90's changed the typical length of intermediate bull and bear markets. Are we potentially seeing the same thing starting with February? Obviously this isn't a call to blindly buy, but something to keep an eye out for, just in case it is.

Everyone is trying to do the smart thing, run for the exit as soon as trouble brews, but as we know, that's impossible for all of us to be that smart. The market can't work that way, that would mean we are in an efficient market that is always priced exactly right. So something is not right here. Either there is more retail participation then we know of or the smart money is really wrong. I doubt the latter is it, but we've seen some strange things in the last year.

Also, keep in mind that there is no uptick rule anymore. If I were still a day trader, I would have spent Friday relentlessly selling into the sell off to make a stock or two look really really bad. Day traders made alot of money in the early part of this decade doing the same thing with bullets which the SEC banned in 2004. But now without the uptick rule, as long as the shares can be borrowed, you can relentlessly sell on every down tick and keep pressure on a stock (basically bullets without the cost). Combine that with futures and ETF (which just another derivative product I've argued is going to screw the market at some point) selling and you have the perfect recipe for a CRASH (if not now, eventually).

Don't forget, you've got the perfect opportunity to analyze your past trades and learn from them. So you're a better investor in the next rally.

For now, stay in cash, and wait for the right opportunity.

Thursday, July 26, 2007

Bullish Theory While Currently Bearish

Looking back about as far as IBD shows, only once did the market not follow through to the downside over the next week after such a big drop. Only the February romp was followed by an up week. That's the bad news.

But if this is just a continuation of the August 15, 2006 rally (this just theory, relax, but I believe it's possible, and we'll only prove it in hindsight) then this could just be another quick deep violent correction in the march higher. In the 2003 rally, the market experienced 8 pullbacks/corrections of 5% or more over anywhere from 2 - 5 weeks with the longest coming in the beginning and middle of the move. The deepest was 7.6% right in the middle of the move. The move came obviously after the 2000 - 2002 Bear Market, but the correction that preceded the move was 17.6% after the October 2002 Rally. The current rally that started on August 15, 2006 was preceded by a 15.3% correction. Both periods experienced extremely negative news; Iraq, al-quaeda, jobless recovery, high unemployment, coming out of a crash, deficits, etc...; this time; high oil prices, inflation, credit crunch, interest rates, terrorism, Iraq, Iran, al-quaeda, etc... You get the point. 1991 was another similar year of all out bad news and lasted about 1 1/2 years into 1992. 1995 - 1996 years the market moved for 1 1/2 years after the 1994 Bear. Which was preceded by the same type of up and down no progress market of 1992, 1993, & 1994 after the 1991 Rally, like we saw in 2004, 2005, 2006 rallies after the 2003 Rally.

So if the average length of a rally after a major correction/bear is about 1 1/2 years and my theory is true, then we are only in the middle of the move with the best to come. So the leaders that survive this current pullback/correction should be the big winners of this Macro Bull Market. We could continue to rally through the 1st quarter of next year with a few more pullback/corrections to go. But some stocks and sectors have topped (which is great for bear market short sellers, as it will take at least 5 months to setup the shorts), and the new and some former leading sectors are setting up and in a holding period for the next leg up. This would also work into my China Olympics Topping Theory, where the Chinese will slowdown and pound their chest more once they don't need to impress the world and keep it happy, right after the Olympics or World Expo.

We'll see, it would be great if I'm right, otherwise back to the drawing board.

I accept comments.


Right now you should definitely be out of any stock that you are down on or barely made any money on. You can hang onto stocks that you have a cushion on only if they have superb fundamentals and great technical action (i.e. barely correcting considering the big down days and showed good volume on the run up with most new highs coming on higher volume). And don't forget to analyze your past trades and keep an eye on the market, you never know when we could turn higher, it only takes 4 days(I stole this one, IBD).