Thursday, April 24, 2008

State of the Market - 4/24/08

Quite a crazy day in the stock market today. A few disappointing outlooks from Amazon and Apple caused futures to be lower, but the market actually opened slightly higher. The first hour or so was some of the most choppy and whipsaw-type trading I’ve seen in a while, with the market going up, then down, then up, then down. There was a lot of movement in a lot of stocks but I didn’t feel comfortable putting any trades on at that point due to the choppiness. Then, around 10:50, the market just took off, shooting straight up until lunchtime in a stunning fashion, with the Nasdaq gaining 50 points in a little more than an hour. This took the Nasdaq past the last levels of resistance and to its highest point since January. The afternoon stayed strong for the most part. The gains came on higher volume, as well, although I did not like the way the market closed, with the Nasdaq giving up almost 20 points in the last hour of trading. Nothing is easy with this market I guess.

Technically, the Dow and S&P 500 have cleared their downtrend lines and have the 200 day moving average to deal with next. The Nasdaq is right at its downtrend line and still needs to bust through it, but also has the 200 day moving average ahead. I'll try to put the index charts up later tonight. I am not even going to attempt to predict where we head from here, but things look bullish and until we get evidence to the contrary, I have to trade that way accordingly.

I’ve been mentioning for a week or so that all of the commodity stocks were very extended and in dire need of a pullback. That pullback looks like it started yesterday, and it definitely continued today. To be honest, I expected a more powerful, blow-off type top in some of these names before they crashed lower, but we didn’t really get that. I didn’t expect them to just die out right here, even though there were very extended. Both the energy and agriculture stocks got blown up today, and you would assume that this means their recent runs are now over. However, I remember at least twice this year when I thought the exact same thing, and it never materialized, so who knows? There are a lot of dip buyers out there just waiting to get in these stocks, so the “top” in these could take a few more weeks. Some energy stocks finished off of their lows for the day, but the ags didn’t and the charts look rather ugly in many cases now. Look at NEU. This was a company that supposedly blew away their earnings but totally crashed today. Looking at a chart like this tells me maybe, just maybe, this might be the top for commodities. Let’s see if the Fed does the right thing and holds rates, which really could be cause these stocks to head lower.

The one thing I really didn’t like about today was that the solars, which looked in many cases to be setting up possible bases, got hit as well today and now look a little more questionable as possible market leaders. This high-growth, new-technology type of group is exactly what I look for in terms of making big gains, so it is unfortunate to see them have trouble on a nice day for the overall market. I was hoping for CSIQ to setup a handle and although volume was not heavy today, the action makes the chart a little uglier than it was.

The question now becomes, if indeed the commodities have topped(I don’t know if they have or not), where does all the money that poured into them late now move to? Where will the new leaders come from? If this market is to continue to move higher from here, we have to get some new sectors working and working quickly. Semiconductors and some tech names have done well recently, but I still see no new exciting stocks from these sectors popping up in my scans. What I do see is mostly just older stocks that were leaders in the 2003-2007 bull market. That is not the recipe for a powerful, stock market rally that can lead to nice-sized gains for individual investors. I think it is possible to play this possible rotation with some ultra ETF’s in the form of USD and UYG, but I wish I could play individual stocks instead.

As for my trading, I decided, based on the morning bounce, to take a chance on a pullback in GENC and got in around $26.75. I sold out later in the day for a 5.3% loss. I was also looking at FEED on its pullback but waited and then it was too extended, so I went with GENC. If you look at the charts now, I definitely chose the wrong one. Sometimes you’ll have that. I thought this was a very strong stock with very strong fundamentals and a great looking chart, and I thought it might be worth a shot as it pulled back to its 9 day moving average and the previous high it broke above last week. I made a mistake by hesitating on FEED, and I definitely lost my discipline on this and just should have waited until the end of the day. I also did not sell immediately when it headed lower. Being such a thin stock made it difficult to set a stop loss and keep it. I need to be better disciplined, especially in this market.

WSCI is looking good so far and if it can close above $15 tomorrow, it should take a spot near the top of the IBD 100. I noticed someone searched the site as to when to sell a stock like WSCI. Well, I did some research on similar “99/99” stocks as I like to call them and came to a few conclusions. In general, these stocks tend to pop after their debut in the IBD 100 but often that pop last no more than one to two days. They then often pull back sharply, often to the 20 day moving average. Typically, after this first violent pullback that I am sure scares a lot of late buyers out of their position, the stock starts to climb again. As it gains momentum, the 9 day moving average usually becomes the key support level through its climb. If you have the nerves and the patience to sit through the entire climb, one possible way to tell when to sell is to watch how far the stock is above its 50 day moving average. I saw that often these stocks top out soon after they are 100% or more above their 50 day moving average. Often a break of the 20 day moving average is a sell sign as well. I put a few charts below that can give you a better idea of what I am talking about. These examples are very similar to WSCI in that they had no analyst coverage, had very low floats, and moved very quickly.

ERSNGSCharts from Telechart2007, Courtesy of Worden Brothers, Inc.

Not all of these “99/99” stocks work. If you look at BOLT (formerly BTJ), it went much lower after making its debut on the IBD 100. I got frozen when this happened and ended up taking a much larger loss than I should have with this stock. It is important to set stops and keep them just in case WSCI doesn’t work out the way you might hope it does. If it closes above $15 tomorrow, I may be looking to take profits early next week on at least some of my position and then reentering on the first violent pullback.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

To wrap up, today was another good day for the bulls but there are still things that worry me overall. The leaders that have held this market up for so long now look like they could be topping, which is not a problem if other sectors are ready to step in and take over a leadership role for the overall market. That's a big "if" right now, however, and I don't see a ton of stocks rising to the surface saying they are ready to be the new leaders of this market. I really wish I could get long in more stocks, but even today, in my early scans, I see very little to excite me. I am still a bull here, but I am also still very cautious. With the short interest in this market, it would not surprise me to see the market continue higher. But I have my finger on the sell button just in case, because leadership has to emerge for the market to make a significant move higher. Perhaps I will find some new stocks after I run my final scans - if I do, I'll post some later on tonight. Microsoft earnings are tonight so we'll see how the market reacts to them. With a good report, maybe tech can get going here. Best of luck.


bhh said...

I really appreciate these daily summaries. Thank you for taking the time to post these on a regular basis and share your insight.

Mac said...

Thanks for the kind words. Hope you keep reading. Feel free to leave questions or comments anytime.