Man, I should write for CBS Marketwatch and make some REAL money... here is an article I found that says exactly what we have been saying the past 2 weeks.
PLEASE READ THE ARTICLE>>>VERY INFORMATIVE AND SENSIBLE.
Actually I never even thought about that 1 part about put-call ratio... going against the tide...just another way to guage overenthusiasm
Man, i think these guys are reading the thread and copying off me for their articles...
cbs.marketwatch.com
A yellow light
Look both ways before crossing Street
By Kevin N. Marder, CBS MarketWatch
Last Update: 10:40 AM ET Jan 28, 1999
Recently, I've said that distribution (professional selling) in the major
averages and a breakdown in the leading stocks would turn me negative
on the market.
The big averages have shown some slight distribution, but nothing out of
the ordinary for a market that has risen so far, so fast since Oct. 8.
As for the leading stocks, they've definitely shown some signs of wear, but
nothing extraordinary. When we think of the market's leaders since Oct.
8, excluding the Internets, the first names that come to mind might be
IBM, Microsoft, Sun, Cisco, and other large-cap technology issues.
These are leadership stocks not because the companies are stalwarts of
American industry, but because the shares showed some of the best tape
action coming out of the gate in October. They led the rest of the market
up.
These large-cap leaders often prove to be the market's sacred cows. In
other words, when the general market begins an intermediate-term
pullback, money managers tend to sell these shares last.
A good example of this was the July 20-Sept. 1 bear market. Dell and
Cisco, two clear leaders, didn't come under serious pressure until Aug. 26
-- just several days before the climax of the selloff. Watching their
behavior at the exclusion of other leaders, then, wouldn't have given you
an early warning on the selling to come.
So, whenever possible, I like to monitor the action of the current cycle's
speculative growth stock leaders -- in addition to the large-cap bellwether
issues. There are times, however, when growth stocks, especially younger
issues with torrid earnings growth, are out of favor for months on end.
Fortunately, this isn't one of those times, since there is a good roster of
aggressive growers whose behavior we can dissect.
In particular, there are two things that I'll be looking for in the action of the
market leaders in the weeks to come. I'll call them "the breakdown" and
the "failed breakout."
The breakdown
The typical winning stock begins its ascent off a bottom, rises 20 percent
to 30 percent, and then builds a base, or sideways period of
consolidation. It then advances until profit-taking again slows the advance.
It forms another base to digest its gains. Often, by the time a stock has
built three or four bases, with runups in between, it loses steam and pulls
back deeply. The problem is that the stock's success has become too
obvious to too many people.
I'm using the 20 percent-to-30 percent figure as an approximate advance
between bases. Plenty of winners run much further before they need to
take a breather and base. The Internets are obvious examples of stocks
that double and triple in price before building a base for a further run.
In the chart above, BellSouth shares break down out of their base on
volume more than double their norm. Luckily, BellSouth isn't a leader.
The failed breakout
The second type of faulty behavior in the leaders will occur when a stock
breaks out of a base and fails to follow through to the upside. Within
days, and sometimes even on the same day that it breaks out, the stock
will dive back into the base, often on heavy volume.
The failed breakout doesn't necessarily mean that a stock is headed for a
sharp plunge. It merely indicates that it needs to "put in some time," as
tape readers like to say. This means it needs to build another base, which
serves to take people's attention away from it.
Those Internets
As for the Internets, the situation is very similar to what I described in my
Dec. 1 column. The key reversal day of Jan. 12 corresponds to the key
reversal day of Nov. 30. In its inimitable manner, the market is rendering
its verdict on the stocks: Some of the Internets are forming bases as they
regroup before another move higher, while others are essentially "done"
for the time being.
Thus, each Web stock is marching to the beat of its own drummer and a
blanket statement of "they'll outperform" or "they'll lag" doesn't apply as it
did in some of the moves of 1998.
What's important to remember is that as a group makes an extended
advance over a period of months or years, fewer and fewer stocks
participate in each ensuing rally. Such is the case with the 'Nets; this was
evident in the late December-early January rise. Then, the group's move
was much narrower than the October-November runup.
Breadth
A lot of people are concerned with the lackluster breadth of the market's
advance off the Oct. 8 lows. I don't like it either. Common sense tells us
that a healthy advance occurs when a large number of issues participate in
the rally. This means that the odds of a stock in your portfolio becoming a
winner increase.
But the intermediate-term speculator who buys stocks based on tape
action shouldn't have been worried about the market's
nothing-to-write-home-about breadth for this reason:
Growth stock after growth stock broke out of bases -- and on huge
volume -- in late October. This is the most bullish thing the market can
do and normally occurs at the outset of any serious market move.
As I wrote Nov. 3 (The Days of Speculators' Lives), "The current U.S.
stock market is what the intermediate-term speculator lives for --
and offers more opportunities than at any time since the first week of
May 1997."
In essence, then, the lukewarm breadth didn't matter to the sophisticated
speculator who places a premium on the message of the tape -- there
were plenty of opportunities for intermediate-term gain, a good number
outside of the Internet-related group.
The biggest gains, the "easy money" if you will, normally occur in the first
three months or so following a major market bottom. This is when there is
the most disbelief concerning the legitimacy of the new advance. This is
also when dynamic new leaders tend to first show their hand -- stocks
whose names are unfamiliar to many investors.
But that was then. And this is now.
The problem now is that the original leaders coming out of the Oct. 8 lows
-- names like Aware, Genesis, Metromedia, New Era, RF Micro, and the
list goes on -- have rocketed 200 percent, 300 percent, 400 percent, and
more.
Their runups have left them materially "extended" above their most recent
bases and in dire need of a rest. This has left the aggressive
intermediate-term speculator, who focuses on moves of several weeks to
several months, with precious little in the way of stocks offering attractive
entry points. The market's leaders are simply too extended, most Internet
issues included.
My other big concern
My other concern is sentiment. Not breadth.
I don't follow many sentiment indicators, preferring to let the market tell its
own story.
But two of the three sentiment gauges that I do follow are flashing red
lights. The Investor's Intelligence survey shows that 60.7 percent of
investment advisors are bullish. This is the highest level since Aug. 28,
1987 -- just three days after the Dow peaked en route to a 36 percent
drop in the following eight weeks.
And the CBOE put-to-call option ratio shows the most optimism in a
number of years -- another red flag since options players are normally on
the wrong side of the tape at key market turning points.
In sum, the vast majority of the market's leaders are technically extended
and don't offer attractive entry points for the aggressive intermediate-term
speculator who likes to buy stocks based on an analysis of the tape.
Thus, his opportunities for initiating new positions are limited for the first
time since early October.
The market's extreme bullish sentiment, spotty breadth, rich valuations,
and extended prices make the decision to hold a big hunk of cash an easy
one for the speculator.
In my opinion, the market's green light has been replaced by the yellow. A
move back to green would only occur if the leaders are able to build new
bases, a process taking weeks, not days. And the yellow will fade to red
only if the major averages come under serious distribution and the leaders
break down in earnest.
Indeed, the confluence of the leaders' extended price charts and the
market's extreme bullish sentiment comforted one East Coast hedge fund
operator in his decision to sit on a pile of cash.
He remarked: "It's a beautiful thing, the way you can see the extended
charts of many growth stocks line right up with the overextension in bullish
sentiment. The technicals match the fundamentals quite nic |
