Where are we on the Ray Dalio Economy Curve?

Okay, so it took a while to figure out what Ray Dalio has been speaking about, but as of this morning (11/3), I think I understand.

 NOTE: My source for this opinion is Ray Dalio's 9/19/2017 YouTube video entitled, "Promoting meritocracy, bitcoin, markets and his career" (link) 

The 2008 crash was akin to a crash in the 1930's. In Dalio's "How The Economic Machine Works" video, this happened at the top of one of the curves (I don't know yet whether it was a short debt cycle or based on the long debt cycle). As a result of the 2008 crash, the Fed started printing money like crazy and buying assets (Fed can only buy assets to flood money into the market -- it cannot give money to individuals -- which as a result, created a gross distortion from those "upper class" who were invested in the market, but the rest of the economy presumably did not benefit from this flood of cash).

However, as far as the business cycle was concerned, the Fed's printing of money (and the lowering of interest rates to zero) helped to create a significantly less painful deleveraging. In other words, it lessened the effects of the crash and allowed a "soft landing" or a "beautiful deleveraging," as the video would put it. From there, the Fed continued to keep interest rates at near-zero, and it continued printing and pumping money into the economy. This created the stock market boom we have had from 2008-2017.

As a result of this, the Fed believes they have done their job and now they are looking to tighten monetary policy to get rid of the trillions in assets that they have pumped into the economy (e.g., via bonds, etc.). Dalio thinks this is a huge mistake because a majority of the citizenry (60% of the economy, or "not" the "1%'ers") HAVE NOT BENEFITED FROM THE FED'S PRINTING OF MONEY.

Dalio believes that if the Fed tightens monetary policy, while the economy for the 1%'ers will simply top off the debt cycle (ease off the growth in a healthy way so as not to create a spike in inflation), this will be a disaster for the rest of the US economy. In other words, if the Fed tightens monetary policy, this will create a sharp deleveraging and debt crisis for most Americans (60% of the economy) who will default on their loans and will not be able to live without free-flowing credit. This will cause a sharp crash, social discord, and WAR (who cares with whom; it'll be war and social upheaval).

In sum, Dalio has been going on talk shows and being vocal to the Fed to tell them to hold off tightening monetary policy. Keep the credit flowing, keep the loans flowing. Don't kill the economy by thinking they could tighten monetary policy. Things are not that great for the majority of Americans to think that they could increase interest rates and believe that won't have unintended consequences.

Taking this logic one step further, there is both good news and bad news from Dalio's messages.  You cannot discount that most of America has not yet recovered from the 2008 deleveraging.  This means that if the Fed continues to keep a loose monetary policy (keeping the credit flowing and perhaps even continuing to print cash or do whatever they would do to counter the bad economy for 60% of Americans, this means that there is still much growth to experience in the markets.  On the flip side, continue to pump money into the market, and we'll create a financial bubble yet again.  Perhaps this is why Dalio has said that he sees strong instability in the bond markets over the next 5-10 years (meaning, there is so much money pumped into the bond markets that they are overinflated).

What I do not understand yet, though, is if bonds yields are at historic lows, and if bonds have significant downside risk, what asset class(es) would one invest in to counter a sharp decline in stock prices if the Fed tightens monetary policy (this could cause a significant shrinking of the bond market).

Latest Hornstein Capital Partners newsletter received on 5/11/10.

Below is the lastest e-mail I received on 5/11/10 from Hornstein Capital, a group I trust. Their address is 53 East 34th street, Suite 207, New York, NY 10016.

from: Hornstein Capital Partners
reply-to: edward@hornsteincapital.com
date: Tue, May 11, 2010 at 8:35 PM
subject: May 11, 2010 Market Update

Last time I wrote about two weeks ago I noted:

"I will have a complete in-depth report this weekend. However, I wanted to put out a quick note to state that odds favor we are embarking on our first intermediate correction since January of this year. Distribution days have now piled up on the major indices, and many leading stocks are about as stretched to the upside as I have seen in ages. In addition, many of the emerging and other world markets are breaking important support levels.

This is certainly not a time to panic if one bought leading stocks correctly and one has low cost bases in these stocks, so long as one is prepared to sit through corrections in leading stocks and new bases being built. However, after playing offense aggressively since the February 11 follow-through day, I am now playing some defense, coming off margin, and raising cash to prepare myself to better sit through corrections.

While there are no guarantees in the stock market, the signs are definitely pointing to an intermediate term correction similar to the one we saw in January of this year. This would be healthy given the run the market has had, and allow proper bases to set up again.

Lastly, the GLD (gold etf), which I discussed in my March 28 market update, looks like it is breaking out and ready to challenge its old highs."

By now the entire world is aware of what transpired last week, as this was the quickest 14 percent correction I have ever witnessed! What amazes me even more is the number of pundits and self-proclaimed experts that have come out claiming to have called the meltdown. Of course, many of these same people have been bearish the entire bull market and never called anything, but that does not stop the many bears to come out of hibernation to claim "I CALLED IT I CALLED IT". The fact is nobody called anything, and while I noted the market's clues that we could begin a correction-- never did I think we would have a day like Thursday! In any event, I will not delve too much into Thursday's action and will leave that to others . Instead, I will focus on the aftermath, and what the market is currently telling us.

First and foremost, the distribution days prior to Thursday's meltdown and the meltdown itself—unequivocally caused damage to the bull market. I would gather that many stocks and sectors have seen their highs for some time, and quite possibly for the bull market. As bull markets mature, more stocks and sectors generally go by the wayside and fewer names will lead the way. When the bull market began in March 2009, one could have thrown a dart at any sector or stock and made huge gains. Some 14 months later, the situation is quite different. Now that the bull market has matured, the tape is more split, as certain sectors and stocks continue to act well while others have probably seen their best days for a long while.

One can think back to the end of the 2003-2007 bull market for an illustration of how this process works. The market suffered a series of corrections in 2007 (February-March 2007 and July-August 2007). While the major indices and leading stocks went higher after those corrections, the corrections themselves damaged the broad market and laid the necessary groundwork for the eventually bear market that followed.

For example, the financial stocks topped out during the February 2007 correction, and the semiconductor sector topped out during the August 2007 correction. Nevertheless, the market powered higher in the fall, and leading stocks continued to show great gains until early November 2007. The later stages of a bull market can be very profitable, as we saw in 2007, and most certainly saw in 2000.

The operative question now is whether we are in the later stages of a bull market -- where we may get another rally or two that is more focused and narrow -- or whether the market is starting to roll over for good. For at least a few reasons, the evidence at hand suggests the former.

First, while a few leading stocks have probably topped for this cycle (i.e.- GMCR and PCLN), a fair amount of leaders have held up extremely well despite the market's carnage over the past few weeks. Indeed, leader BIDU did not even approach its 50-day moving average during the selloff, and hit an all time closing high today. Leader AAPL, managed to close above its ten-week moving average last week, and is sitting a few percentage points off all time highs. Leader NFLX may be forming a rare high-tight flag. Other leading stocks that have consolidated and held up well during the sell off include VMW, CMG, DECK, PRGO, CREE, APKT, NFLX, CSTR ,WYNN, VECO, SNDK, DNDN, and VRX. Simply stated, enough leaders are acting constructively to prevent one from turning too bearish on the market just yet. These leaders will hold the key for the market. Unless they break their lows from last week and come under distribution, they are likely to lead the market higher in the coming weeks.

Second, an astute tape reader will note that after Thursday's sell off, Friday's volume in many leading stocks was HIGHER than the volume seen in these stocks on Thursday, yet the stocks did not undercut Thursday's lows (Many actually held firm). This action can be considered reverse churning, and shows that the institutions came into the market to support these leading stocks (i.e.-BIDU, AAPL, NFLX).

Third, studies of past market cycles demonstrate that markets generally do not go from bull to bear overnight. As I described above, markets usually enter a distributional phase, where some leaders continue to work their way higher, while the market indices build broad tops over time. So, even if we have seen our highs in the indices, it likely will take a few months before the market really cracks for good.

Fourth, the Russell 2000, which is our leading index this year, retook its 50-day moving average. This is a positive development, and may be signaling that the rest of the indices are ready to do the same.

Fifth, various sentiments measures have turned as bearish as we saw during the lows of the last bear market. And, when I see CNBC run a special program entitled "markets in turmoil" it tells me the crowd has definitely turned most bearish. This is a positive development for the market, and has allowed it to work off the bullish sentiment we saw at the highs.

In conclusion, the market has attempted a rally, and a follow-through day in the next few days would signal that the uptrend has resumed. I would not be too concerned with the failure of most of the indices at their 50-day moving averages today, as this is normal given the quick snapback of the past two days. Despite all the negatives we hear every day and a few key stocks coming under distribution, there are still enough leading stocks that have held support to prevent an astute speculator from getting too bearish at this point. A follow-through day, coupled with a few leaders like AAPL BIDU PRGO and NFLX making new highs, would tell us the uptrend is resuming. Of course, if these stocks come under distribution again, and the indices break last Thursday's lows, all bets are off.

Finally, as I noted two weeks ago, the GLD was setting up for a move higher. Today the price of gold, along with gold stocks, broke out on huge volume. Both gold prices, and gold stocks are clearly in bull markets, and look poised to move much higher in the coming months.

This email was sent by Hornstein Capital Partners, 53 East 34th street, Suite 207, New York, NY 10016, using Express Email Marketing.

Gil Morales' Newsletter Received on 4/9/10.

Below is the lastest e-mail newsletter I received on 4/9/10 from Gil Morales, another investor I trust. Gil Morales & Company, LLC, can be found at 1925 Century Park East, Suite 1050, Los Angeles, California. More market analysis of the cycle's leading stocks, and Actionable Stock Ideas with specific buy points on their charts, may be found by going to www.GilmoReport.com and subscribing to his twice-weekly updates.

from: Gilmo Report
sender-time: Sent at 10:27 AM (GMT-04:00). Current time there: 11:36 AM. ✆
reply-to: Gilmo Report
date: Fri, Apr 9, 2010 at 10:27 AM
subject: Marder On The Market



April 7, 2010

S&P 500: 1182.44
What, Me Worry!?

“The four most expensive words in investing are ‘This time it’s different.’”

-- Sir John Templeton

The big picture remains that of shares discounting a continued recovery in jobs and incomes for H2, something that the market has been telegraphing for quite some time, all the while confounding the majority. Short-term, the averages look tired. Given that practically none of the individual leaders are offering low-risk entry, a pullback would be a plus for the momentum player as it would create new opportunities in some of the leading lights.

It has been less a case of the market moving up on strong demand than the market rising amid a lack of sellers. The Industrials have not printed a major accumulation day in eight weeks.

[Click for Chart]

As seen above, price has moved sideways for the past 10 days. With that said, there is nothing that says that the market needs to pull back by x% before an overbought posture evens itself out. In other words, expect the unexpected.

By various measures, the market’s level of being technically overbought is rare. For example, the QQQQ has stood above its 10-day moving average for 38 days in a row, the most since the ETF was conceived in early ’99, and well past the previous high of 28 days. We would note that the unexpected is what is worth paying attention to, and in particular, any sort of message that this – the market’s extreme resilience – may be giving. The message is believed to be all about the US economy, i.e. that it will prove stronger in H2 and into ’11 than is commonly expected. By the time this is evident and publicly accepted, further upward revaluation will have taken place.

We have witnessed this many times. The message is never known at the time; this due to the market’s discounting mechanism. And the discounting nature of the market is why general market analysis based on today’s fundamentals alone makes it difficult to stay ahead of the curve and anticipate trends.

Of import has been the buoyant speculative sentiment. One example of this is the slope of the “sentiment curve” since the Feb 5 low as it relates to the performance of an array of securities, each with its own risk factor. So a more conservative issue like the S&P is up 12% since Feb 5, while a step up the risk ladder shows small- and medium-capitalization indices, as well as emerging markets ETFs for China (FXI) and Brazil (EWZ) all in the +17%-to-19% range post-Feb 5. Moving even further up the risk ladder, one passes the Russia ETF (RSX) at +20% since Feb 5. At the top of the ladder sit some of the higher risk names, though with correspondingly higher return potential: the coal (KOL), metals & mining (XME), and steel (SLX) ETFs. These are up 25%-32% since the Feb 5 low.

The above sentiment curve shows that risk-taking is alive and well. This is important because risk-taking goes hand-in-hand with a healthy market. What you want to see are the higher risk segments such as the materials, aggressive growth stocks, recent new issues, etc. perform better than their lower-beta counterparts. If you graphed the securities in the previous paragraph on a chart according to their performance, the slope of the line would be positive. If the slope was negative, the market would be characterized as defensive in nature, and thus, not as healthy.

[Click for Chart]

The above chart of the US small-capitalization market is another reflection of the underlying health of this market. Smaller issues normally peak in advance of the ultimate top in a bull market.

The MSCI Emerging Markets Index ETF (EEM) (below) has been a favorite barometer of the speculative sentiment. It bottomed 3.5 months ahead of the March 2009 beginning of the bull market in US stocks, and actually began outperforming 4.5 months ahead of the March 2009 lows in the US market.

[Click for Chart]

If there has been one concern in this corner, it has been the underperformance of China, which began in late July. The Chinese market has been saddled with investor worries over its overheated property and debt markets, in addition to the Chinese government’s attempt to reign in loan growth. Combine these with other things, including corruption in local government, and China, in our opinion, may well be an accident waiting to happen. Certainly, if there was an asset bubble to be found somewhere, it is more likely to be found here than anywhere else. The good news is that the price behavior for Chinese stocks and materials producers should serve as an early-warning system in advance of anhttps://www.gilmoreport.com/_test/motm/motm040710-05.jpgy dismemberment.

Speaking of which, the iShares FTSE/Xinhua China 25 ETF (FXI) has outperformed the SPX over the last eight days, underscored by similar action in coal, steel, and metal ore producers. As the chart below shows, the price structure of the FXI has lost much of the herky-jerky volatility that it had in the last half of ’09. This, and the two days of major accumulation seen last week, augurs well for a test and eventual breakout of the FXI’s four-month base.

[Click for Chart]

The SPDR Gold Trust ETF (GLD) cleared a technically important level today on fair, but not strong, volume. The view here is that the aggressive momentum player can use a break above the 113.00 level to establish a position, with a 5% stop loss. Longer-term, we continue our long-

[Click for Chart]

standing bullish view on gold due primarily to a belief that the probability of the US government materially reducing its budget deficit is slim – let alone reducing it amid the stiff headwinds of exploding entitlement spending in coming years – as well as an appreciation for history, which has never seen a fiat currency survive.

Leadership
Within the list, broad sector leadership remains, as it has for some time, in consumer discretionary and industrials, while newcomer financial joins the group.

Among the names, the following are considered among the true leaders in the current cycle, are extended in price and therefore do not offer attractive entry, but may be monitored by the intermediate-term speculator for basing behaviour in the weeks to come: Apple (AAPL), Aruba Networks (ARUN), Baidu (BIDU), Clean Energy Fuels (CLNE), Cree (CREE), Express Scripts (ESRX), F5 Networks (FFIV), Finisar (FNSR), Lincare Holdings (LNCR), Lululemon Athletica (LULU), Mellanox Technologies (MLNX), Mylan (MYL), Netflix (NFLX), Netgear (NTGR), Newport (NEWP), Parexel International (PRXL), Perrigo (PRGO), Priceline.com (PCLN), Salix Pharmaceuticals (SLXP), Veeco Instruments (VECO), and Webmd Health (WBMD).

Mercadolibre (MELI). Worth watching. The Latin American version of eBay (EBAY) is technically under mild distribution as it builds a three-month cup. Of note is its quarterly earnings estimates of 51%, 47%, 32%, 20%, 34%, 23%, 21%, and 26% according to First Call. Revenue forecasts are even stronger. Net margins have strengthened in the past two quarters. The stock is nearly ¾ of the way up the right side of its base after rising from about $8 to $55 in the bull market. Not ready yet, but worth watching.

[Click for Chart]

Brigham Exploration (BEXP). Earnings estimates at this oil & gas explorer for the next eight quarters are among the most explosive in the entire market, with triple-digit percentage increases expected, according to First Call. Revenue estimates are for 42%, 224%, 113%, 136%, 135%, 100%, 79%, and 75%, over this period. Fund sponsorship has increased for the past three quarters. BEXP has gone from $1 to $18 in the bull market, breaking out of a five-week base yesterday on volume 68% above average to stand 1.6% above the top of its base.

Cliffs Natural Resources (CLF). Haplessly extended above the top of its most recent base. Has five quarters of fat earnings and revenue estimates ahead of it before its growth rate is expected to slow down. Fund sponsorship has increased steadily for the past year. Does not offer attractive entry at present, but this producer of iron ore is worth watching due to its expected growth rate, high relative strength, and history of being a leader in the materials sector during ’07-’08.


Etcetera

Generally, we do not pay much attention to traditional measures of sentiment, having learned a few lessons along the way in this regard. (To sum, from a purely intermediate-term perspective, price/volume nicely encapsulates everything.) However, by one indication, there are many doubting Thomases sitting on the sidelines, a plus, as it represents potential fuel for the fire.

This indication occurred in the form of a comment to a column that we wrote a few weeks ago for www.marketwatch.com. Of note was not the comment itself, which disagreed with the tone of the column, the column being similar to what was written in this space just a few days previous. Rather, it was the 41 respondents who agreed with the comment out of the 50 respondents who cast their vote. This meant that 82% disagreed with the bullish posture of the column.

This would appear to be a validation of the retail-is-still-on-the-sidelines-licking-their-wounds-from-the-bear-market notion. If correct, this would seem to dovetail nicely with the economic backdrop’s early-recovery stage, the market’s strong technical underpinnings, and the particular point in the cycle at which shares appear to be.

Translation: The view here is that there is plenty of time left for the retail investor to become enamored with this market before the economy peaks and the bull is ready to retire. Were the bull market to have begun three years ago, leading indicators to have peaked six months ago, leadership to be sparse, interest rate hikes to have mowed down the interest-sensitive sector, speculative sentiment to be shot, breakouts to be failure-prone, etc., the story would be quite different.

In summation, intermediate trend, breadth, and leadership are positive, while volume is neutral and the averages are under short-term distribution. Given the latter, as well as the unusual degree of the averages’ overbought posture, some backing and filling is anticipated in the short term. Not surprisingly, in light of the extended nature of the averages, the intermediate-term speculator is faced with a sea of fundamentally sound stocks that are extended above their most recent bases. Therefore, a pullback in shares would be welcomed, as it would reset the price patterns of many stocks, creating new opportunities and better, lower-risk entries.

In the meantime, several ETFs, including GLD, FXI, and XME, are poised for upward revaluation.

Shares’ care-free “what, me worry?” attitude may strike some as off-base, given high unemployment, the potential for higher rates, sovereign credit risk, and other worries du jour. However, to ignore the market’s technical underpinnings, most of which have been quite positive, is to ignore not only the way the market has actually worked since its inception, but also the four most expensive words in investing.

This time it’s different.

Kevin N. Marder

More market analysis of the cycle's leading stocks, and Actionable Stock Ideas with specific buy points on their charts, may be found by going to www.GilmoReport.com and subscribing to our twice-weekly updates.

Gil Morales & Company, LLC ("GMC"), 1925 Century Park East, Suite 1050, Los Angeles, California. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its officers, directors, employees, customers, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. ©2008 Gil Morales & Company, LLC. All rights reserved.

Lastest Hornstein Capital Partners newsletter received 4/11/10.

Below is the lastest e-mail I received on 4/11/10 from Hornstein Capital, a group I trust. Their address is 53 East 34th street, Suite 207, New York, NY 10016.

from: Hornstein Capital Partners
reply-to: edward@hornsteincapital.com
date: Sun, Apr 11, 2010 at 8:12 PM
subject: April 11, 2010 Market Update

Last time I wrote, I discussed how the market began a new uptrend on February 11, and had a secondary follow-through day on March 1. I concluded my thoughts by stating:

In summation, keep focusing on the leading stocks of this rally (AAPL, BIDU, CREE, GMCR, PCLN, AMZN, ISRG, PRGO, CLF, NETL, DECK, AKAM) which, for the most part, are the same leaders I continually outlined in 2009. Remember that most growth leaders have a life cycle of 18-24 months before they top, so it is not surprising that the same growth leaders that emerged in March 2009 continue to lead only one year later. Until these stocks show severe distribution on their weekly charts, or enter into climatic runs, the market likely will remain in bull form.

In the past two weeks, the bull market has gained further strength. While the pundits and pontificating talking heads keep clamoring about impending pullbacks, the market has continued to truck higher, with pullbacks lasting a day or two at best. The leading stocks I noted above have continued to lead as AAPL, BIDU, CREE, PCLN, DECK, and AMZN, have all pushed into new closing high ground for the rally. Other leading stocks have progressed as well such as NFLX, CMG, and WYNN. The weekly charts of these leaders show extremely constructive action as they have pulled back (if at all), in a nice tight constructive fashion with low volume, and ramped further on heavy volume. Some of these stocks have shown extreme accumulative behavior, running up for five, six, seven, or more weeks in a row. When a leading stock runs up for this many weeks in a row, it is a tell-tale sign of institutions clamoring to get stock in that leader. Therefore, when we see a bunch of these leaders I outlined exhibiting this behavior, we know with certainty that there is an ample amount of institutional accumulation in the broad market.

I generally do not bother with various popular measures of market demand out there -- such as MACDs, A-D lines, or various oscillators measuring overbought or oversold levels, or any other measure of supply and demand. I have tried most everything, and have concluded that keeping it simple and focusing on mere price and volume of the major indices and leading stocks is the best and most effective method of making money in the stock market. As William O'Neil states in HOW TO MAKE MONEY IN STOCKS:

"At best, the advance-decline line is a secondary indicator of limited value. If you hear commentators or TV market strategists extolling its virtues bullishly or bearishly, they probably haven't done their homework. No secondary measurements can be as accurate as the major market indexes, so you don't want to get confused and overemphasize the vast array of other technical measures that most people use, usually with lackluster results .... Needless to say, I rarely pay attention to overbought/oversold indicators. What you learn from years of experience is usually more important than the opinions and theories of experts using their many different favorite indicators."

However, all bull markets will exhibit corrective behavior from time to time. As I have constantly underscored, trying to guess or time such a pullback is sheer nonsense, and will cause one to lose positioning in a leading stock only to see it go higher. In fact, I tend to ignore any short-term corrective work the market exhibits, unless a plethora of distribution days show up and leading stocks show clear unequivocal topping signs.

I would suggest that given the strength of leaders, and the fact that we are less than two months removed from the follow-through day, that any short-term 3-5 percent corrections that could occur would simply be a buying opportunity in any leaders as they pull back into support.

With earnings season kicking off this week, we now watch the reaction of the leaders I outlined to their earnings reports for further clues of the rally's duration. One stock that reports this week that I would like to discuss is ISRG.

For almost ten months, I have noted in my reports how this stock has exhibited all the characteristics of a market leader. On July 23, 2009, ISRG gapped up out of a base on earnings (with heavy volume), and this began a major bull move for the stock. Those that bought this leader at that time could have easily held this stock throughout the past nine months -- even through the early 2010 correction -- as the stock never broke its ten-week moving average.

This week the stock broke that line (for one single day), as it dropped below there on heavy volume. Contrary to popular opinion, a break of a ten-week moving average is not an automatic sell signal (if only the market were that easy!) Studies of market leaders of yesteryear tell us that leading stocks can live under their ten-week moving averages for 3-4 weeks and this can act as a mere shakeout of the week hands. Leader BIDU exemplifies this principle, as the stock never lived below its ten-week moving average for more than three weeks since the bull market began. It had some hard shakes under that line from time to time, but always managed to regain that important line after quickly dropping below it from time to time.

Those that bought ISRG correctly months ago could have easily withstood the downside action for a few days to see how the stock finished the week. Indeed, the stock reversed on volume later in the week, and formed an extremely bullish shakeout reversal bar on its weekly chart, which also finished a pattern of three out of four weeks tight. This stock looks ready to take off for another big move, and earnings this Thursday will dictate whether it does or not. Anything can and will happen on earnings, but the action at this point is extremely bullish. A gap down on volume on earnings would obviously change that, but until that happens the stock remains a market leader and looks ready to move higher once again.

Finally, for those that missed it, here is the link to my appearance last Thursday on the Investor's Edge Radio Show.

http://archives.warpradio.com/btr/InvestorsEdge/040818.mp3
This email was sent by Hornstein Capital Partners, 53 East 34th street, Suite 207, New York, NY 10016, using Express Email Marketing. You were added to this list on 12/1/2008.

Hornstein Capital Update

This was an e-mail I received this afternoon from Hornstein Capital, a group I trust. They can be found at http://www.hornsteincapital.com; their address is 53 East 34th street, Suite 207, New York, NY 10016.

In my last missive, I discussed that the market has been in a normal correction that began on June 11. I noted that while there were a few distribution days since June 11, most of them were benign and occurred on relatively low volume. I also noted that the correction was allowing the market's leading stocks to form constructive bases. I summed up my thoughts by stating the following:

"In summary, the leading stocks I outlined above hold the key for the market's next major move. Should they come under distribution and break their ten-week moving averages on heavy volume, the correction we have seen likely will deepen and become much more severe. However, at this point in time, the evidence at hand shows a picture of leading stocks simply forming constructive basing patterns without much distribution. Until this changes, I choose to remain a bull on the market."

While the indices continued to correct throughout the early part of last week, the market found a low on Wednesday, July 8th. The Nasdaq traded down to 1727, but closed at 1747, and put in a positive reversal, as did the other major indices. That day constituted day one of an attempted rally for the market, and for the remainder of last week, the indices held Wednesday's lows. Today, on the fourth day of an attempted rally, the Dow, S and P 500 and Nasdaq all staged technical follow-through days.

Today's action signals that the correction COULD be over and that it is time to start looking to accumulate leading stocks breaking out of bases. Here is an update of how the leading stocks I outlined last week are currently acting.

AAPL- Continues to act well, as the stock found support at its ten-week moving average last week and closed the week at the top of its range, a constructive sign. The stock lifted off today and continues to act quite constructively as it attempts to finish a flattish base. Earnings next week should provide the impetus for a move up, should the company provide earnings the Street likes.

BIDU- Also found support at its ten-week moving average last week, and closed near the top of its range. Like AAPL, the company reports soon, but for now, the flattish base continues to look constructive.

GMCR- The stock has pulled back to its 50-day moving average on low volume. Today, it had a nice shakeout below the 50-day moving average, but managed to close above it, a bullish sign.

AMZN- As I noted last week, the stock was sitting slightly below its 50-day moving average, but volume had been light on the decline. Today, the stock got back above that line on increased volume. Like AAPL, earnings should provide the impetus for a move up, should the company beat.

STEC- Last week, I noted that this could be "the real potential monster stock" and that it "could be forming a bullish high-tight flag." As soon as the market's correction appeared to end today, the stock broke out of a high tight flag on huge volume. While the stock is very extended from its 200-day moving average, it certainly looks like and acts like a monster stock

TSRA- Continues to trade well in a flattish tight base and moved up today, although volume was not huge. Look for a high volume move to new highs.

Star- Looks like a bullish ascending base, as the stock held tight while the market corrected. A huge volume accumulation day could get the stock going again

RVBD- Good looking pullback to its ten-week moving average.

VPRT- Continues to base into earnings

SYNA and CREE- Both of these stocks broke their 50-day moving average on average volume. Sometimes stocks will dip below that moving average on light or average volume to shake out weak holders, only to rip back above the average. Look for a high volume move above the 50-day moving average in the next few days.

The Chinese gaming stocks (NTES, SNDA, CYOU, PWRD) continue to form bases, though they are somewhat wide and loose. NTES looks the most constructive of these four.

In addition, Chinese company CTRP appears to be carving out a constructive double bottom. After coming under massive accumulation in the spring, the stock pulled back in extremely benign volume, and now looks poised for a move higher should the market continue to ramp.

NFLX also retook its 50-day moving average today on good volume. The stock is now attempting to form the right side of what appears to be a cup-like base that started in late April.

Restaurant stocks are attempting to form the right sides of new bases. BWLD and PNRA both found support at their 200-day moving averages and are attempting to get back above their 50-day moving averages. PFCB, DIN, CMG, and YUM, are all forming constructive bases as well.

Other stocks that appear to be forming constructive bases include CPA, FFIV, RAX, SNX, LL, HGG, MVL, CPA, QSII, CERN, ARST, MFE, CML, MR and SWI.

In addition the banking stocks may attempt to move out of recent consolidations. By way of example, GS has formed a bullish double bottom pattern, and a good earnings report tomorrow could lift this stock into new yearly high ground, which should help the broad market. Of course, if the stock comes under distribution on earnings, it likely will impede the broad market's progress.


In summary, today's follow-through day signals that the correction we have witnessed COULD be coming to an end. Should the leaders I outlined gap out of their bases on positive earnings, it will signal that the uptrend is definitely resuming. While the bearish sentiment remains high, and the shorts continue to get run over, I remain a bull on the market until the leading stocks breakdown. At the moment however, they show no signs of doing this.

This email was sent by Hornstein Capital Partners, 53 East 34th street, Suite 207, New York, NY 10016, using Express Email Marketing. You were added to this list as rzcashman@gmail.com on 12/1/2008.

Stay 100% in CASH.

In view of the recent market action, I wanted to share the letter I received from Investor's Business Daily which I felt was a strong message to stay in 100% CASH during tough times as these are.

Dear Investor,

The market outlook is in a correction, and you're probably hearing a lot of bad news with the 500–point drop in the Dow on September 15 – especially in regard to the financial sector.

All of us at IBD understand that it's easy to feel nervous or have questions at a time like this. But we also know that countless individual investors, just like you, have weathered challenging market cycles by following a sound set of buy and sell rules. We can't stress that enough.

In a downturn like this, the best strategy is to remain in cash.

Don't attempt to make new stock purchases, even if you hear a tip about a so–called “great stock,” or notice a stock that seems to buck the market trend.

To help you get through this correction and make sure you're ready when the market inevitably rebounds, we invite you to view our Daily Stock Analysis and Market Wrap videos each trading day. These videos will help you do two of the most important things you can do during a correction: (1) build a powerful watch list, and (2) spot when the downturn has ended and a new market rally has begun.

Daily Stock Analysis:
http://www.investors.com/mediacenter/?mediacategoryid=12

Market Wrap:
http://www.investors.com/mediacenter/?mediacategoryid=14

If you have any questions about the videos, tools at Investors.com or the CAN SLIM Investing System, please call us toll–free at 1–800–664–2013 or e–mail us your questions.

Sincerely,

Kate Stalter
IBD Market Commentator
Investor's Business Daily

Morning Sector Analysis

The DOW ($INDU) is crossing support from early July of around 11,450, and is still below the 50 and 200-day moving averages. This is a bearish sign.

NASDAQ ($COMPQ) is between moving averages. It had a faulty head and shoulders top in May-June followed by a steep decline from June-July. My guess is that this is setting up for a nice short position, but NOT YET. It has just cleared the 50-day line ONCE. According to Gil Morales' book, it must do this 3 MORE TIMES before being considered for a short position. Patience is important here, even for me.

The S&P 500 ($SPX) appears to be basing, and is below the 50 and 200-day moving averages. Nothing to do here except perhaps an aggressive short position if it breaks below 1230, but keep your stops tight because there is resistance all-the-way to 1200.

The Russell 2000 ($RUT) had a follow-through day last week, but has been waning. I'd look for strength above the 200-day moving average (now 724) before considering a bullish position.

GOLD & SILVER ($XAU) is breaking down from a long base between 165-210, and is currently in the 150's. A break below 145 might prompt me to look for another leg down.

HEALTHCARE PAYORS ($HMO) is between 50 and 200-day moving averages. Must break above 1700 before it is a clear buy, although an aggressive entry point can be when/if it clears 1600 with volume.

HEALTHCARE PROVIDERS ($RXH) however has cleared it's moving averages, and should be considered as soon as it breaks above 450. Watch the relative strength though, which is still negative.

BIOTECH ($BTK) -- Nothing to speak above at this point. Although above 50 and 200 day moving averages, if $BTK breaks below 817, short it. Resistance will come in at the 784 level. Consider buying above 868.

DEFENSE ($DFI) -- I'm looking for a breakout from the contracting triangle that began on 8/6.

DISK DRIVE INDEX ($DDX) -- Because of the head and shoulders top in May to June followed by a sell-off, I wouldn't touch this at this point except to look for a short once the stock goes above the 50-MA four (4) times per Gil Morales' shorting book. So far it hasn't even done it once.

OIL ($XOI) looks nasty. Stay away until a better pattern emerges.

PHARMACEUTICALS ($DRG) just broke the 200-day MA. It'll have downside resistance until it breaks at least below 300, and then the 50-day MA. Even then, there's resistance even down until 285. Stay away for now.

SECURITIES BROKER/DEALER ($XBD) looks like it will be a good play to the downside soon. It has just broken the 50-day MA, but is trapped in a contracting traingle with a base around 136.50. Even then, there's that mess from mid-July that makes it worth being cautious until it breaks below 120, but by then, the opportunity might have been missed.

NASDAQ VOLATILITY ($VXN) is low.

OIL ($OIX) at a minimum needs to clear 847 before even being looked at. Even then, must break above moving averages which currently are hovering between 850-900.

OIL SERVICE ($OSX) is looking bad. Consider a short position (although a risky one) upon breaking below 284.

SEMICONDUCTORS ($SOX) is trying to stage a comeback. I would look at this as soon as it breaks above the 50 and 200-day moving averages (currently at 383).

TELECOM ($XTC) is breaking down, and has broken down from a base in May, and another one in June. This is a bearish signal for this group.

HOUSING ($HGX) looks like it is trying to recover, but it still needs more work. It broke above the 50-day moving average, but it still must break above the 200-day MA (now around 135) before the sector should be considered.

BANKING ($BKX) is also starting to look good, but the relative strength is waning. Further, it is still below the 200-day moving average (now a bit above 80), and I wouldn't trust anything until I see a break above that number. However, an aggressive play would be to watch the stock and probe as soon as it breaks above 72 with high volume, but note that there will be overhead resistance.

Stocks Retreat In Late Trade

Click the link below to see the full article. Permission to republish has been granted by Investor's Business Daily.

Stocks Retreat In Late Trade from Investor's Business Daily

IBM strong and steady.

I was watching IBD's analysis of the IBM stock. At the time they made the video, the market had not yet had a follow-through day, but nevertheless, they wanted to analyze IBM to show that once the market turned, that IBM would be a good candidate for a purchase in a new bull market.

This is how Investor's Business Daily (http://www.investors.com) analyzed the stock:

IBM has had good earnings growth and sales acceleration in the past 3 quarters (not 25% per quarter, but more modest which is still good because it's a monster company.) As is characteristic of very large companies, because of the sheer volume traded every day, IBM's stock typically trades in a very tight trading range.

Over the past few months, IBM was finding support above the 10-week moving average. In May, IBM pulled into a base pattern (on heavy volume) as the general underlying market started to drop. Heavy volume indicates that institutional investors are investing in the stock (meaning that they trust the stock) -- this is a good sign, especially in a bear market as we were in until today. The kind of base that IBM has been forming has been a "cup and handle" base with a high handle (which is fine for a cup and handle formation.)

When the stock breaks out of its base, instead of exploding to the upside as a smaller entrepreneurial stock would do, because IBM is a large company, it will likely move into a slower, but steady uptrend.

We had a follow through day today.

This afternoon, something momentous happened today in the stock market -- we had what is called a follow-through day. Generally, a "follow-through day" is what is known as a reversal from one trend into another trend (here, from a bearish downtrend to a bullish uptrend.) A follow-through day happens when in the midst of a bear market (or at any point) the market surges against the trend and closes up. This is the first sign of a possible reversal in the trend. However, the reversal is NOT complete until there is a follow-through a few days later (I believe at least 3-4 minimum because the days immediately after the start of the reversal don't count) where the stock market confirms the initial reversal with a significant increase in the price of the stock (in the case of a bullish reversal) of 1.7% on high volume in the direction of the reversal.

In short, if the market is in a bearish trend and the stock one day jumps, we wait at least 3 days before looking for a follow-through day. The confirmation [that we are no longer in a bearish trend and that for the time being, we are in a bullish uptrend] occurs when the index of choice (or all of them) increase 1.7% each on high volume.

Around 11 or 12 days ago, we had our first sign of a reversal. Now, 11 or 12 days later (more than 3 as you can see), we had our confirmation. The Dow jumped +266.48 points (+2.39%) to $11,397.56; The Nasdaq jumped +55.40 points (+2.45%) to $2,319.62; and the S&P 500 jumped +28.82 points (+2.33%) to $1,263.19. Hence, we have a follow-through day.

Now remember what this means. We now have a reversal where for now, we are no longer in a bearish phase, but we are in a bullish phase which means that the stock market is likely to continue going higher (and consequently so will the stocks based on the relative strength of each sector), BUT REMEMBER! The bullish uptrend can be killed tomorrow with a huge distribution day, or two, or more. This is something to watch out for. All a confirmation day means is that we are now going up. For how long or for how much, we don't yet know. We'll have to just wait, watch, and see. Set stops below your purchases and just be responsible about your investing, knowing that at any day, the bear market can resume.

"Leave it to the Government... Really?" Article

I have pasted below an article by Gary Kaltbaum about his view about what is going on with the markets. I respect his opinions immensely, and so I am honored to be able to paste a copy of the article he wrote earlier today below. -Yechiel

"Congratulations to President Obama for winning the election. I wish him the best of luck as we move forward. What? He isn't? But ABC, CBS, NBC said... covered... oh, never mind!

I really wish I could write just about the technical condition of the market but the miscreants continue to be ethically challenged... and that's being nice.

Merrill Lynch (MER) is now pulling a Lehman Brothers (LEH). Last week, MER reported a measly $5 billion loss but said it did not need to raise capital. Whoops... here comes more financial castration of existing shareholders as MER confesses to billions of more "stuff!"

Here is your latest Paulson "wheel of money" giveaway to destroy our currency and save the miscreants.A look at what the bill would do:

- Give the Treasury Department the power to extend Fannie Mae and Freddie Mac an unspecified line of credit and to buy their stock, if necessary, to prop up the mortgage companies. Yes... let's give Michael Jackson a couple of more kids to babysit! OK, that was harsh.

- Allow qualified homeowners facing foreclosure to apply for lower fixed-rate, 30-year mortgages backed by loan guarantees from the Federal Housing Administration. The original lenders would have to agree to take a loss on their loans. FOR THE HUNDREDTH TIME... THIS DOES NOTHING FOR ANYBODY. Most of these people have no equity and are sitting in a depreciating asset. This continues to be nothing more than rent with debt!

- Create an independent regulator to oversee Fannie Mae and Freddie Mac. The regulator could establish minimum capital requirements for the two companies and limits on their portfolios. It would also have approval power over the pay packages of Fannie Mae and Freddie Mac executives. Oh joy... another regulator who will do nothing more than take a darvocet, a swig of whiskey and do nothing until the problems are already out of hand.

- Provide $3.9 billion in grants to communities with the highest foreclosure rates to buy foreclosed and abandoned properties. And then what do the communities do with those depreciating properties?

- Give about $15 billion in housing tax breaks, including a credit of up to $7,500 for first-time home buyers who bought homes between April 9, 2008, and July 1, 2009. And why do these people deserve this?

- Put a cap of $625,500 on the loans Fannie Mae and Freddie Mac can buy in certain high-priced areas, and a cap in other areas of up to 15 percent above the median home price. Terrific!

- Count any federal infusion for the mortgage giants under t he debt limit, essentially capping how much the government could spend to stabilize the companies without further approval from Congress. As of Tuesday, the national debt that counts toward the limit stood at about $9.5 trillion, roughly $360 billion below the statutory ceiling. "Capping how much the government can spend? Who they trying to kid?

These programs on top of the wildly popular SIV (see ENRON) and all the other nonsense. Needless to say, you know where I stand on all this... and sitting here still amazed this nonsense is going on.

Do not get me started on this short selling laugher. Just a clear manipulation of the markets. Read my past reports. The SEC will definitely definitely definitely extend the time limit on the new short selling rules. Good timing. Enabled MERRILL to raise capital at higher prices...but that is just a coincidence.

Not much has changed. The market's nascent rally hit a wall at logical resistance as many names,especially FINANCIALS) rallied into the declining 50 day moving average and failed so far. I continue to have many problems in this continued bear market. The most important being the clear lack of leadership. As I have mentioned, MEDICALS(especially BIOTECHS) are showing great relative strength but not much more. COMMODITIES just recently topped out leaving not much. If there is any one characteristic of a bull market it is how much leadership the market exhibits. It just ain't happening. But t here is much more.

All major indices remain below short and long-term moving averages.

WORLD MARKETS continue to go for the ride.

The market has still not experienced a follow through day...the most important characteristic that shows up at a start of a new bull move.

Too much embracing of every up day. I am amazed at every up day gets all the bottom callers off their seat even though it is the hundredth time they have called a bottom.

FINANCIALS are still acting poorly. YES... I know they had a bog move off the lows...but hearken back to one of the most important characteristics of a bear market. Bear market rallies are sharp, quick, get people talking, make you feel good, suck you in...and bury you soon after. Bear market sectors usually get the biggest pops. Just remember how strong the bear market rallies were for TECH in 2000-2003.

Shorter term, anything can happen. But again, that is the trees. The forest is everything else...and it is not pretty. I continue to be defensive and only looking for short opportunities as markets rally into logical resistance areas. Markets can bounce higher but I do not believe this bear has used up its last breath.

Disclaimer: The opinions expressed herein are those of the writer and may not reflect those of Wunderlich Securities, Inc. or any of its affiliates. The information herein has been obtained from sources believed to be reliable, but we can not assure its accuracy or completeness. Neither the information or any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results.

-- Gary Kaltbaum is an investment advisor with over 18 years experience, and a Fox News Channel Business Contributor. Gary is the author of The Investors Edge. Mr. Kaltbaum is also the host of the nationally syndicated radio show "Investors Edge" on over 50 radio stations. Gary is also editor and publisher of "Gary Kaltbaum's Trendwatch"... a weekly and monthly technical analysis research report for the institutional investor. If you would like a free trial to Gary's Daily Market Alerts click here or call 888.484.8220 ext. 1."

Still in a bearish trend.

There is a lot going on in the market, especially with government manipulation of the mortgage lenders and the propping up of the financials. I took a short position in Fannie Mae (FNM) when the news broke and I got out when I heard that the government was trying to manipulate the stock. Even though things are starting to look better in banking land, I can't help but to think there are more bombshells waiting for the average investor that will drive the sector lower. Further, while I loved trading in the fertilizers, they topped on or around July 4th, and now they are crashing all over the place, so I'm not exactly sure what to do at this point.

Generally, we are more than 8 days since the initial bullish day and we have yet to see a follow-through. That means that in short, we are still in a BEAR market, at least until we see that follow-through day. There were hints of it last week, but nothing that met Investor's Business Daily's strict discipline of what is and what is not a follow-through day (e.g. up 1.7% on high volume.)

I've been paging through IBD's 100 list with a fine-tooth comb, and I can't help but to think that I'm wasting my time because these stocks are all going against a bearish market trend. Why try to pick the winners when the market will eventually turn them all to losers?

So after reading Stan Weinstein's book again a few months back, I decided that shorting is probably the best thing to do in this market. But, the prospects I chose as shorts kept washing me out. In short, no pun intended, when I would initiate a short position, the stock would quickly reverse on me and would stop out my short position. This was frustrating.

Then I realized that William O'Neil and Gil Morales have a book on shorting stocks. They outline a strict discipline on when to short and when to cover, and how to identify good shorting prospects. For now, I will take a break from my trading until I see more bullish markets, and I will learn his strategies on shorting. While learning, to test my new techniques, I'll paper-trade.

I have completed my scans for the weekend, and in my opinion, there is nothing worth getting excited about. While many sectors may seem to be near highs, the ADX (volatility measurement) seems to be unimpressive. I don't see any sector that actually has the legs to move at this point. Thus, come Monday morning, I don't see anything that warrants a purchase either on the upside or the downside unless the market gets some legs.

DON'T ENTER STOP ORDERS WHEN TRADING OPTIONS.

FRIDAY - STOCK MARKET UPDATE:
As you can tell from the recent market action, now is not a time to be going into the market full-force. After the strong up day a few days back, we are waiting for a bullish confirmation before there is even a chance that this nasty bear market might reverse into a bull.

I've been testing the market with breakouts to the upside, but so far this week nothing has panned out.

TRADING LESSON LEARNED THIS WEEK
A personal lesson can be learned from mistakes this week by setting buy points on my trading software. The problem is that they execute and the stocks or options are purchased the first tick my conditions have been met. The problem with this is that the market will often tick up and then drop a bit and then there I am invested in a position that is down somewhat.

Another lesson I've learned is that while stops are good for stock positions, they are disastrous for option positions. I am starting to believe that with options, especially options that are between $1.50 and $2.00 per contract, it is silly to set a stop because by the time the stop is triggered, while you've lost $100 or more, there is only $50 - $100 more value in your option and you likely have A WHOLE MONTH (or until the expiration of your option) to get the value back. In my opinion, the purpose of a STOP order is so that you don't lose big if the stock decides to drop on you. However, one of the big benefits of trading options in the first place is limited risk, so once the option has gone against you and you have lost much of the value of the stock, it makes no sense to sell at a loss because what you have essentially paid for already with your lost capital is the TIME VALUE of the option. So you might as well just sit and see where it goes, even if to zero.

Short opportunities within the North American Telecom Index ($XTC): TDS, WIN.

During my sector scans this evening, I noticed that there was a lot of activity within the North American Telecom Index ($XTC). The ADX was super high (way above >40) and it seems to have broken down from a base.



However, widening my scope a bit to the daily charts, I noticed that not only did it break down from its current base, but that its current base is a "base below a base" formation.



For me, this breakdown could indicate a short-selling opportunity (or a PUT-buying opportunity) -- tip: remember to set stops as soon as you enter a trade.

Scanning stocks within the sector, I found two candidates which appeared to be ripe for a short sale: Telephone and Data Systems, Inc. (TDS), and Windstream Corp (WIN).

Regarding TDS, the first thing I noticed was that the ADX was above 40 indicating activity within the stock.



Then, the next few things that I noticed were that the stock had a potential double top coupled with the relative strength of the stock weakening, and a negative response from the institutional investors (e.g. selling).



I would say that a break below my trendline should signal a short position.

The second stock within this sector not only showed a volatile stock within a volatile sector with an ADX above 40, but I immediately noticed the formation of a Head & Shoulders pattern which usually occurs at a top before a steep decline. This formation can be seen in the grey box.



Looking at the 10-day chart (at a period of 15 mins), I further saw the formation of a Head & Shoulders position, as well as weak relative strength, and increasingly heavy institutional selling.



What surprised me about this stock is that when I widened the scope of my viewing of the stock, I noticed a few things that almost made me laugh at the confirmation that this is likely a bear stock -- I saw that not only was there the Head & Shoulders pattern I noticed in the 10-day chart, BUT that pattern was really a "base below a base," or literally, a "Head & Shoulders pattern BELOW a Head & Shoulders pattern" which should indicate a very strong price decline is likely underway.



Looking further at this chart, it was exciting for me to see that the larger and first Head & Shoulders pattern came right after an attempted breakout from a 3-month base. That's definitely a negative sign. Further, as a sign that the breakout should not have been given much importance, traders should have noticed that the breakout was on average volume which means that the breakout didn't have much strenth. So, I would consider shorting the stock at this point.

ALL THIS BEING SAID, I took a look at the options available on these two stocks and I was disappointed with what I saw. Because the stocks are likely not traded as much as I would like them to be, the options instruments are not readily available and thus have a wide spread between the buy and sell (or, ask and bid) prices. This is not favorable to me because in the past, I have purchased an instrument with such a wide spread between the bid and ask prices and as a responsible trader, I set my stop based on the market action, but when the stock rose and subsequently moved against me towards my then stop price, it triggered and it sold at the low bid price. So, even though I wasn't wrong on the stock's direction, because there was such a wide spread, I lost anyway even though the stock was technically "up" in my favor.

For this reason, don't invest in options with wide spreads because it could cost you money if your stops are triggered, even if you were right on the stock and it has moved in the direction you believed it would move.

Thus, there will likely be no trades for me tomorrow on these assets.

Market distribution day. Bigtime distribution.

I must say that today was a disaster of a day (modestly calling today a DISTRIBUTION DAY) for the stock market.

The DOW was down, -166.75 points (-1.46%) to $11,215.51;
The NASDAQ was down, -53.51 points (-2.32%) to $2,251.46;
The S&P was down, -23.39 points (-1.82%) to $1,261.52.

Volume on these moves didn't seem so impressive which suggests to me that the move, although a disaster, didn't have much conviction which means they could go either way tomorrow.

What shocked me is how many good and strong stocks were down. Today the bears took pretty much EVERYTHING down and they were merciless at it. I could probably say every fundamentally sound stock I spoke about yesterday was down and it was down BIG. I was even stopped out of my leading gold (GG) position which surprised me because gold is supposed to weather storms like this (although gold stocks do tend to move with the market.)

Anyway, in the morning, I opened up buy positions in CELG and DNA as I said I would yesterday. The stocks moved up a bit, and then traded sideways in a channel for the rest of the day. For me, even though I made literally only $1.02 (yes, I only made a dollar and two cents net profit on these today), I was happy that they held up in such a murderous market. I'm not kidding, today looked like many stocks got slaughtered.

I can only wait until this bear market has passed because it seems as if no sound trading decision seems to work. The shorts keep bouncing when they shouldn't, the longs keep crashing (or shall I say, thrashing) down when they should be breaking out, and nothing seems to be doing (for long) what I think it will do. The headwinds blowing all of these stocks is stronger than I've ever seen them. Let's just hope that I keep my exposure light enough not to be affected any more than I already have been when the crashing continues.

Work-in-progress: Fundamentally sound stocks.

Now applying the principles from William O'Neill's book, I have generated a list of 15 stocks with good fundamental growth which I believe have a good chance of improvement over the coming months.

Without looking at stocks which are not yet moving more than a few cents a day, I have isolated the top stocks so far to be: 1) Apache Corp. (APA), 2) Devon Energy Corp. (DVN), and 3) Amazon.com (AMZN). I'll go into my technical analysis of each.

1) Apache Corp. (APA):


Apache Corp. (APA) appears to be close to breaking out, but I am unsure whether to the upside or the downside. A break above $143.80 would suggest to me that it has broken out to the upside; a break below $135.60 would suggest to me that I have made a mistake and so it would be time to exit the trade at a loss.

2) Devon Energy Corp. (DVN)


Devon Energy Corp. (DVN) appears to have two patterns going at the same time -- an ascending channel, and a base. The ascending channel started two days ago which should give us an idea of how the stock should move within the channel; the buy point would be at $123.30 and the stop would be the bottom trendline within the channel at the time the purchase is made.

3) Amazon.com (AMZN)


Amazon.com (AMZN) has recently been both out of favor with the institutional investors and weak relative to the rest of the market. Yet, under the surface, it has already started making some waves. I am wary of it because it has broken down along with the rest of the market, but I would quickly change my opinion and consider a buy if the stock moved above $84.85, the top for the last three tops and a bottom in December '07. There is possibly room for a few trades above $74.30 as it has broken out of a short-term descending trading channel, albeit without impressive volume which makes such a short term trade considerably more risky (see 10-day 15-min chart).

$BTK AMEX Biotechnology Index, CELG, and DNA.

This one is throwing me through a loop. AMEX Biotechnology Index ($BTK).

I noticed it because tonight while doing my market scans, the ADX on this one was 38 (just below my threshold level of 40 which would interest me.) Yet it's not necessarily the volatility that excites me, but it seems as if there was a trading range (on the 10-day, 15-min chart) that was broken out of today with some momentum. However, that is not what excited me.



What excited me was that I saw a trendline where each previous high formed a descending line which means that the index was moving in a pattern. I couldn't see this pattern until I zoomed out to the 1-year daily chart (below).



I noticed that this declining trendline didn't only repeat in time, but it also repeated in magnitude. I love it when I see hints of fractals in stock market psychology. It makes me wonder whether there is a greater psychology that connects us and leads us in our thinking.

What I saw was that not only were there trendlines which had orders of magnitude in their respective scales, but I smiled when I saw that the larger trendline connected with a smaller trendline almost exactly to form a declining channel. (Not only that, but from April 2008 - June 2008, if you mirror the trendline around the massive trendline from the high in October 2007, you form a pitchfork-looking channel around where the stock moved.) From this, I understood that this index moves not in breakout / breakdowns from bases, but in breakouts / breakdowns from channel progressions.

So, if I were to use this information, I would find a healthy stock within the sector, and I would buy that stock when it and the $BTK broke out of its declining channel, above $748.60. I would set a stop at $736.50 because if you see those long lines on various stock trading days, this index has a tendency to seriously crash and recover all within one trading period. The risk here is that with all these whipsaws, I would likely be taken out by one of them, however, hopefully by then my profit from the underlying stock would be large enough to make the trade successful.

All this being said, I will take a look at a few stocks to see if any are worth investing in. At a glance, it seems as if CELG, BIIB, DNA, AMGN, ILMN, and OSIP are all stocks which would be a safe purchase. Note that only CELG, DNA, and ILMN broke out on the high volume I would find attractive. ILMN makes me nervous because although it broke out nicely, it lost its strength after the breakout. Hence, I will probably make an opening trade on both CELG and DNA with stops right below their breakout areas ($64.90 stop on CELG, and $76.90 stop on DNA).

Follow-up: ADX analysis, $DDX, $INDU, and Gold (GG).

This post is a follow-up to my last post on 7/29/08 where I described how to use the ADX to find active sectors, and how to zero in on various stocks in the sector which have potential both on the long side (betting the stock will go up) and on the short side (betting they will go down).

Interestingly enough, on Monday, the volatility (activity) as tracked through the ADX on all three sectors dropped which made the sectors not worth investing in. If I were in a position based on my Sunday research, I would probably look to close the position, hopefully for a profit.

Before the trading session on Monday, I looked at the stocks within the various sectors. The Dow ($INDU) was just too big to focus into a few stocks so I passed on looking for shorts, especially because they are so difficult to time. As for the AMEX Disk Drive Index ($DDX), I looked at the few stocks in that group, but I noticed that none of them were moving more than a few cents each day -- that is not the kind of movement I need to make a profitable trade. In short, in order for a trade to be worth one's time, I learned that one should choose stocks that historically move at least $1.50 or more in one trading day. Because these stocks were moving less than $0.70 each, it wasn't worth my time and so I passed.

This brings me to the PHLX Gold and Silver Sector Index ($XAU). While the ADX dropped a bit, I saw the index move up closer to a breakout point above the range it has been trading in. I purchased a leading gold stock (GG), and on Monday, it broke out even though the ADX was no longer supporting high volatility moves [note that the breakout in the $XAU ended up being a FAKEOUT. In Japanese stock language, the name for what the $XAU did was called "man go to roof and fall off cliff." I'm actually not kidding! So, needless to say, I was cautious to make sure my stock (which follows the index) didn't also fakeout, but the stock stayed above the trading range which was a good sign.]

It's interesting to note the similarities between the movement in the $XAU and in the GG stock. I've pasted both pictures below.





If you'll notice, I had my initial stop at $46.30, right before the stock broke out. I'm not exactly sure why I chose that point, but I believe that I wanted to give the stock a chance to correct a bit before taking off again, and in the past I had a tendency to set the stops too close to the stock which means that I would get stopped out, and then as soon as my stop was taken out by the stock, it would turn around and go in the direction I initially thought it would. This was and still is a tough lesson to figure out how to prevent this from happening, however the risk is that the stock will tomorrow fall back below my stop and I will have lost the tiny profit I made today.

In my honest opinion, a 2-day base is no base at all, so any stop at this point is arbitrary. With the volatility of the stock dropping like a rock as it did, tonight, I'll probably set the stop right below the gap up this past morning and see what the stock does from there. My guess is that the stop will be taken out around 10am tomorrow morning giving me a small loss. Let's see what happens.

I also mentioned EMC and SNDK. Because of the drop in volatility, I decided not to trade either stock. As you can see from the stock below, EMC dipped below the 2-day trading range (which is not a reliable base which should be in existence for weeks, not for days) and then slivered back up to the bottom of the trading range. Had I invested (and if I followed my own advice and shorted this stock, my trigger of $14.45 would have been set off, I would have entered this trade this morning, and I would have ended the day in a small loss.) That being said, I stayed away from this stock because of the volatility, even though it might end up going down as I suggested it might. The chart is below.



Lastly, I mentioned SNDK. Had I shorted this stock as I suggested, my buy signal would have triggered at $18.85 and the stock would have been in a profit. However, this trade never happened because the ADX (volatility) fell Monday morning to a point which I didn't feel that the stock would have been worth the trade.

ADX sector scan -- Dow Jones & Gold.

As far as I understand, the ADX indicator shows market volatility (higher ADX = more volatile stock or sector; lower ADX = less volatile stock or sector). I learned some time ago that one should use the ADX to forecast stock breakouts or breakdowns, but it can also be used to indicate possibly healthy price movement in a stock (up or down.) It should also be used when scanning the sectors to find stocks. Using the 10 day, 15 minute chart is a good time frame to look at when doing scans. ADX lines that are above 40 and are above both the +/- DG lines are what we are looking for.

While scanning the sectors, most sectors seem to be uninteresting or spent, meaning that if anything was to happen, it already happened. However, three sectors show some momentum under the surface -- Gold, the Dow, and the AMEX Disk Drive Index.



First of all the Dow looks terrible. It is below pretty much every major moving average, and it has some major work to do before I would even consider buying stocks in this index. Prudently, if it broke above $11,950 (or even higher to give it some cushion for a fake-out,) I'd give it a second look. On the downside, a break below $11,250 would give me some reason to look at the stocks for further downside testing.

I have learned that shorting a stock is very difficult because it is not easy to get the timing right. Stan Weinstein teaches to just flip his risk-management teachings for bull markets to understand how to sell stocks short (or to buy puts), however William O'Neill and many others say it is much more complicated than that, and your chances of losing money on a short are much higher than when the stock is going up for the sole reason that the timing is just difficult to understand and to master. All this being said, NEVER SHORT STOCKS WITHOUT A STRICT DISCIPLINE AS TO WHEN YOU WILL SHORT AND WHEN YOU WILL COVER because if a short bounces up and you haven't already put in the 60-day GTC STOP order to the upside, you can wind up losing a lot of money fast.



As for gold stocks, it appears to me that a break above $197 on high volume would signal that it's time to start buying gold and silver. The index is above its averages, and the ADX is at 51, which suggests to me that people are ready to start buying in this sector. From a quick scan, I believe the leading stocks are GG, ABX, and PAAS when it comes to buying gold.



As for the AMEX Disk Drive Index ($DDX), this one was a tough one to understand. It appears to me that there is high volatility, and that a break below $109 might be just enough to push it over the edge (and possibly off a cliff.)

I did some analysis on the underlying stocks, and some of them have very low volatility, so I passed on considering them. Other stocks were choppy and so I didn't trust the movement. Others were too low a price, or had their RSI (relative strength) too high which means that I don't want to be shorting a strong stock. My logic is that just as one should buy the strongest of the strongest, similarly, one should sell short the weakest of the weakest, albeit the weakest with the highest volatility.

Of the remaining stocks, I found the two candidates for a short sale were EMC and SNDK. While they both are stocks under $20, we are looking for a short sale and not a purchase, so in theory the stock can go as low as zero.



Regarding EMC, I would consider a short at $14.45 with a stop (cover) at $15.25. The reason for this is that even though it is trading in a downtrend channel, there is still a base (a trading range) where it is trading.



As per SNDK, I am not so excited about a trade with this stock, I would consider a short at $18.85 with a stop (cover) at $20.60. There is a more focused trading range, but you always want to give the stocks some room to bounce and wiggle.

All in all, I wouldn't be comfortable making any sort of trade unless the ADX rose above 40. Further, I would hesitate with SNDK because average traded shares (volume) is ~297K, slightly below my threshold discipline of 300K shares.

On final review, however, I noticed that the price movement of the stocks in this sector have not been more than 70 cents in one day. I learned that a proper trade should be a healthy stock moving either up or down on high volume, but with a dollar amount of at least $1.50 to $2.00. Anything beyond that is not worth the trade or the risk. Thus, I suppose the disk drive sector so far is not yet the place investing dollars should enter.

X: Technical analysis suggests that the stock may have trouble going higher.

Created when X was $186.88

US Steel's RSI (a measure of relative strength among other stocks) has hit a ceiling these past few days and hasn't trended above it, and the PVT seems to be guiding lower which suggests to me that institutional investors are selling shares of X, not buying more. TODAY, I don't see any reason why this stock would be a good purchase.

I would wait for a high volume breakout above $195 (actually, $196 to give some cushion for fake-outs) before buying this stock.