Last edited by nickola.pazderic; 02-28-2012 at 10:33 AM.
http://www.tigeruniversity.com/mp3/SCR010512.mp3
Link to a short radio interview of Ed Hornstein by Kate Stalter, formerly of IBD. The interview starts about two thirds of the way through.
A New Year has dawned upon the market, but not much has changed since late last
year. For the reasons I describe below, I continue to play this market
defensively until I see more characteristics indicative of a bull market move.
First and foremost, an examination of historical follow-through days shows that
the market's recent follow-through should be treated with caution.
We know that no bull market begins without a follow-through day and that around
two thirds of follow-through days lead to bull moves. However, what we also
know is that over 85 percent of successful follow-through days have occurred
BEFORE day 17 of an attempted rally. The December 20, 2011 follow-through day
occurred ON day 17 of an attempted rally. At the outset, the odds of this
follow-through day leading to a large bull market move are somewhat diminished
to begin with.
Of course, later follow-days have occasionally worked. On August 15, 2006 the
major indices flashed a 21st day follow-through day that led to a giant bull
market for growth stocks. Even after that follow-through, the "fat pitch" for
the growth investor did not kick into gear until almost five weeks after the
follow-through day when former leader RIMM (on its earnings report on September
29, 2006) gapped out of a base on stellar volume. That one stock was the "go"
sign for growth investors, and thereafter a plethora of other growth stocks
staged powerful breakouts. Prior to the RIMM breakout, growth stocks were
meandering around and simply base-building -- other than a few select stocks
such as MA and CPA which broke out around the August 15th follow-through day.
In any event, even when a delayed follow-through day in 2006 worked, growth
investors were rewarded only if they exhibited patience and waited for the "fat
pitch" around ten weeks after the market bottomed and five weeks after the
delayed follow-through day. As I describe below, we have not entered a sweet
spot for growth investors, which means that plowing into this market is anything
but a prudent approach.
Second, most strong markets follow-through very quickly off their lows (usually
as early as days 4-7 of attempted rallies), and display more then a few
breakouts in growth leaders around the time of the follow-through day.
For example, during the days surrounding the market's March 17, 2003 follow
through-day (which unofficially ended the 2000-2002 bear market), leaders CME,
AMZN, CRDN, GRMN, and YHOO broke out of basing patterns and began their price
accelerations on heavy volume. A similar phenomena occurred on September 1,
2010, when the market-followed through on the fourth day of a rally attempt, and
leaders CMG, SINA, AAPL, AMZN, NFLX, RVBD, and PCLN all broke out of bases in
the days surrounding market's follow-through.
The key concept here is that successful follow-through days generally contain
growth stocks moving into new highs around the time of the follow-through day,
leaving anyone but the quick and astute speculator far behind.
Focusing on the current market, there were virtually no stocks breaking out on
good volume around the December follow-through day. Instead, defensive areas
have provided leadership such as food and beverage stocks, utility stocks,
consumer staple stocks, and tobacco companies such as MCD, PG, WMT, MRK, KFT,
PFE, AMGN, PM, CVS, ABT, UNH, HUM, AEP, NEE. Indeed, the IBD growth indices
have outright lagged the general market indices and defensive names. Bull
markets generally show the opposite trait.
Third, three months removed from the market's October bottom, leadership is
virtually nonexistent (with a few recent exceptions that I describe below). This
is further underscored by the paltry number of 52-week highs in the market. If
you remove the various close-end funds from the new high list, it continues to
look nothing like what it should from an important market bottom. Until the list
expands considerably, caution is warranted for the intermediate speculator.
Fourth, bull markets generally begin with healthy skepticism and negative news.
While the news generally has been negative for the past few months, sentiment is
anything but negative. Indeed, the latest reading from the AAII recorded one of
the lowest prints for bearish sentiment in the past few years. Only 17 percent
of respondents had a bearish view of the market environment, and almost 50
percent of respondents are bullish (which is one the highest levels in almost
one year).
The high level of bullishness and low level of bearishness flies directly in the
face of people that believe that the market "has to" rally because everyone is
so negative. First, the market never has to do anything at all. Second, with
the level of bears at historic lows (at least as read by the AAII), it suggests
that most people have not treated this rally with healthy skepticism. Throw in
the steep sell-off in the VIX, (although it still is not very low by historic
measures) and clearly there are higher levels of complacency and bullishness
than one would generally want to see at the outset of a new bull market.
Fifth, an examination of s and p 500's monthly chart shows that its 12-month
moving average has almost always contained every bull and bear market going back
to 1994. From 1994-2000 the s and p only closed two months below its 12-month
moving average. In 2002-2002, the 12-month moving average contained the entire
bear market. The moving average also contained the entire 2003-2007 bull
market, and the ensuing bear market from 2008-2009, as well as the 2009-2011
bull market (with a quick closing undercut in the summer of 2010). Presently,
the s and p is just shy of its 12-month moving average, so this should be
watched closely. A failure at this level would bode ill for the bulls, however
a monthly close above this level would be extremely bullish.
Lastly, January historically has been one of the trickiest and sloppiest months
to get a read on trends, as the market's action can usually best be described as
"Jell-o moving on the plate". The first week of January 2012 has been no
exception. In addition, markets often run up in early January only to roll over
hard later in the month or early in February. January can often give false
senses of hope to the bulls, so some caution is certainly prudent until earnings
season kicks into gear later this month which should give us a better read on
the intermediate and longer term trends of the market.
Despite the reasons to maintain a defensive posture at the moment, there have
been some positive developments in the market during the past few weeks.
First, most of the major indices have retaken their longer term 200-day moving
averages. The longer these indices stay above these levels, the more likely the
200-day moving averages can become support instead of resistance.
Second, while new highs and breakouts remain lacking as a whole, there have been
a few areas starting to assert themselves in recent days such as medical stocks
(ALXN, SLXP, CBST, CNC, ISRG, BIIB, JAZZ), and oil stocks (SNP, ATLS, CLR,
AREX). In addition, a few growth leaders broke out recently and held their
breakouts such as GOOG, ISRG, and SCSS. While it remains a rather narrow tape
for leadership and new highs, it has expanded a bit in the past week few weeks.
Finally, an increasing number of stocks have tightened up in their basing
patterns and/or climbed the right sides of potential bases such as LULU, NUAN,
LQDT, CFX, TYL, PNRA, BWLD, CMG, WFM, AAPL, SYNA, MELI, KLAC, NKIE, UA, COH,
MELI, SNDK, QCOM, DE, MON, JBL, INTC, IGT, and SLAB). If some of these stocks
can stage breakouts on volume in the coming weeks, it should bode well for an
improved market environment.
In sum, a defensive posture and a decent amount of cash reserves remain the best
bet for the intermediate speculator at the present time. In spite of the fact
that the indices continue their assent higher in the short-term, the evidence at
hand suggests that the market lacks power, leadership, and many other
characteristics of a healthy bull market move. If things change (WHICH THEY CAN
IN A MATTER OF DAYS), I will provide a timely market update.
This email was sent by Edward Hornstein, 60 east 42nd street, suite 1144, ny,
NY 10165, using Express Email Marketing.
Tom Preston on of the smartest minds in the option business - I believe double PhD's and a successful pit trader for decades wrote I think a great article on the VIX.
http://www.thinkmoney-digital.com/th...inter2012#pg12
Enjoy the weekend,
Ernst
For members in the NYC area, this event is coming up:
http://www.moneyshow.com/tradeshow/n.../traders_expo/
Understanding the Link Between Volatility and Compound Returns :
http://cssanalytics.wordpress.com/20...pound-returns/
http://www.chartmill.com/documentati...+Curve+Control
The truth is a once working system (ok if it’s not merely based on a technical arbitrage) never dies. It merely runs in and out of synch with the market.
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