The past 6 trading days have been wild. For four days the Nasdaq rallied. It then made a key reversal on Thursday only to give up all of last week’s gains in one day on Friday. After the close talking heads on CNBC blamed the drop on allegations of accounting “issues” at IBM and NVDA. Remember on Wednesday James Cramer told all of the viewers of CNBC that the accounting issues would no longer effect the market?
In reality the market did not drop because of accounting issues, but because the buyers ran out of buying power on Thursday. The sellers are now in control of the market. They have been since January the 9th and will probably remain in control for the next 4-6 weeks.
I must confess I was surprised by the four-day rally. Although the rally was incredibly weak, coming on light volume and dismal internals, it was an unusual one. It brought the kind of hope and desperate optimism that is usually seen at market tops. The rally caused the VIX to plunge and the VXN to trade down to a 52 week low. According to the VXN the market is more overbought then it has been in years! To put things another way, according to these indicators people were more optimistic about the market this week than they were at the summer top.
And I saw evidence of this beyond these indicators. For one thing everyone on TV was super optimistic. What is more I called a broker on Wednesday who told me that he had a flurry of people calling to buy tech stocks. Apparently they became convinced that the 4-day rally was evidence that the market correction was over and the market would now go up to make a new high. This broker had more buy calls on Wednesday then he has had in several months.
And of course these people were buying the junk tech stocks. According to the AmeritradeIndex(http://ameritradeindex.com) Ameritraders bought tech stocks like mad too last week. And they are buying the worst tech stocks imaginable: SUNW, LU, WCOM, JNPR, NVDA, JDSU, CSCO, and BRCM. In fact if I wanted to make a portfolio of the worst stocks you could buy they would be in it. Even on Friday, after the market rally had clearly broken down, the Ameritraders were doing more buying than selling. No, let me rephrase that. They were buying like addicted gamblers who double down in order to break even.
Is it just me or does it seem like people are going crazy again? Think about it. All of the tech stocks I just mentioned have been falling since March of 2000. That is almost 2 years! Odds are that the Ameritraders and gullabulls who bought these stocks last week have already lost money on them at some point over the past 2 years. Some of these people have lost a lot of money on them and every rally these stocks have made has failed. Yet everyone seems to want to try to chase them again! It is almost as if people have learned nothing.
People who bought last week were not basing their investment decisions on fundamentals, charts, or anything. Fundamentally there is no reason to buy these stocks. Their earnings are in collapse and they have insane valuations. Nor is there a reason to buy them based on charts. Most of them are in broad declines and none of them have even put in a technical high volume panic bottom in their current intermediate term drops that would indicate an intermediate term counter rally.
The way I see it the only thing they based their buy decisions on was hope and greed. People are still overly bullish on the market and believe all of the hype from analysts and talking heads that the economy and market are going to boom like 1999 at the end of the year.
Whatever the case they are more afraid of missing out on buying these stocks and seeing them go up then they are of buying them and losing money. That is why they are taking stupid risks. Like buying a stock like NVDA right after it announces that it is under investigation for accounting fraud or a stock like JNPR that crashes after it announces that it is losing market share and basically just says right out that our earnings and revenue that has been declining for 2 years is going to get worse. Greed is ruling the gullabulls and making them crazy.
As I said earlier they aren’t buying because of fundamentals or charts. What they are really reacting too is the price movement of the market. Even though the market is in a downtrend they don’t believe it. So every time there is an up day they get excited and run out to buy, thinking that a green day is the start of something big. And when you get 4 green days in a row it is enough to drive people crazy with greed.
The gullabulls get exicted and buy and then watch TV and look for any bit of positive news – a positive piece of economic data, news that a company has beat “pro-forma” earnings estimates, or an exited analyst - as confirmation that they have made the right decision. And if they are wrong everyone else is so they can at least take enjoyment out of the knowledge that they are following the crowd. That’s why bullish sentiment got out of whack on Wednesday.
There will be a time to buy. Keep your powder dry. When General Washington liberated the American colonies from the British East India Company and the Royal Crown he would line up his army and tell them to shoot once they saw the whites of the eyes of the enemy. He didn’t spend up all of his bullets when the enemy was off in the distance. Likewise keep some money on the sidelines to use when the gullabulls disappear from the market. Wait until the crowd panics in fear. The VIX/VXN will rise and you’ll see nervousness on CNBC. Fund managers who come on will look shook up, haggard, and tired. They will be stripped of their overconfidence.
Until then the downtrend will remain and this will be a shorters market. I have placed most of my stops on my short sale positions to break even or near break even and will revaluate all of my positions in a few days. I will cover ones near support or that aren’t falling as fast as the rest of the market.
From timingwallstreet.com |
