Tuesday, August 18, 2009

IBD Surprise

I must admit that I was suprised, almost shocked really, to open my IBD this morning and see the words "Market In Correction". I felt this way not because I disagree with the call necessarily, although I do think it is premature, but because of the language in the "The Big Picture" over the last week. It is hard to be critical of IBD. Just buying and shorting the Qs on their market calls since Jan, 2008 would have yielded a total return close to 90%, which is beyond the expectations of the vast majority of traders and advisors. Yet, I do think they do their readers a disservice at times with the market commentary. If this were only a recent issue, I would not comment, but I have seen this over and over again since becoming a subscriber in 1999. I want to share my observation with you because in my first two years of trading, this type of language in their market commentary really screwed with my returns.

Over the last few days I have read the following:

Tuesday August 11 - "Hey, even Lance Armstrong takes a breather once in while. After four weeks of healthy advances, the market paused Monday. It wasn't the kind of high-volume, worrisome decline that occurred a couple of times last week. Monday's losses took place in quiet trading, and indexes closed in the upper half of the day's trading ranges."

Wednesday August 12 - "Volume was up on both major exchanges. Yet the hurdle for Tuesday's distribution day was rather low. Monday's trade was the slowest in two weeks for the NYSE composite and the slowest in about four weeks for the Nasdaq. Reports for Tuesday were upbeat for the most part."

Thursday August 13 - "Still, the weakish finale did little damage to the picture. The indexes all closed near the day's highs... One would think that a solid broad-market gain in higher volume would make for a slew of leaders doing the same. But only a handful of leaders made a splash Wednesday."

Friday August 14 - "Stocks zigged up at the open Thursday, then zagged into the red before reversing to notch moderate gains. While the news of the day carried a disappointing tint, the market quickly digested the negatives and pressed higher. The major indexes closed near session highs."

Monday August 17 - "In an odd way, the market showed bullishly tight trading last week even as it ended its win streak Friday and added a distribution day. That tight action and the appearance of the Nasdaq's chart itself, were suggestive of sideways action more that an index in decline. But this was a distribution day deserving an asterisk. Is the market's uptrend under pressure? Not yet, but another distribution day or two under clearer circumstances might be enough to turn the market's light from green to yellow."

Tuesday August 18 - "Trade rose on the NYSE, and dipped on the Nasdaq. That gave the S&P 500 a fifth distribution day. Losses were harsh among many leading issues. Thus, the outlook in IBD's Market Pulse now shows the market in correction."

I have highlighted in green the statements that appear to me as market cheerleading and unnecessarily positive. Such comments, in my opinion, might encourage less experienced traders to continue buying and increasing market exposure. The statements in magenta are indicative of statements that offer a cautionary note. These have been few and far between. The statement in red from today is the first to be outright negative.

In order to be able to use IBDs commentary successfully, the reader must learn to read between the lines. They do not come right out and say, "Hey folks, things are little dicey here. Maybe you should hold off on new purchases until the picture clears up." Rather, we get "One would think that a solid broad-market gain in higher volume would make for a slew of leaders doing the same. But only a handful of leaders made a splash Wednesday." Oftentimes, this last type of statement is as close as IBD will come to putting up the caution sign. Clearly, there is a desire on IBDs part to avoid moving the market before making a call. Readers should be aware that William O'Neill manages positions in the market that his paper is commenting on. I am not in any way suggesting that their is any impropriety here, but I would sure like to know if Mr. O'Neill as selling out of positions over the last two weeks even as his paper was comparing the market to Lance Armstrong.

At the end of July I urged caution as a market correction into mid-August was becoming increasingly likely. I indicated that Iwould not be adding new positions until after August 14 while continuing to manage my current positions. In fact, I did add one new long position, but it was a partial position for a swing trade and not an intermediate term trade. I have also added one short position.

My whole point is that without clearer language in IBD that provides more direction on when to increase, hold or decrease market exposure, many traders may have been caught with their pants down yesterday.


dave said...

I just realized yesterday that my canary-in-the-coal mines, my lead husky $SOX is out of sync with SMH, XSD, PSI, IGW, & USD, vis-a-vis their June highs.

$SOX is indicating more weakness dropping below its June highs & breakout. SMH, XSD, PSI, IGW, USD, are all showing relatively more strength considerably above their June highs & breakouts.

This makes me a little distrustful of the weakness indicated in $SOX.

I wonder if this difference betw $SOX & the semi's ETFs is only due to composition of their holdings. If so which is a truer depiction of the sector ... $SOX or the ETFs ??

Craig, any thoughts ?


dave said...

Find it interesting that after QQQQ spending most of the afternoon > 20E that it closed .01 under the 20E which btw has rolled over & is now curving downward.


dave said...

"Clearly, there is a desire on IBDs part to avoid moving the market before making a call."

Don't you think that it's more like they don't want to go too far out on a limb ?

An old observation has been that the less one says, the more others will fill in the blanks & give one credit for something that they are not or did not say.


Anonymous said...

Yes, I have noticed that about the SMH and SOX before as well. I have generally watched the SMH. I don't have a watchlist with SOX components, so I will have to work on that, but I am not too worried about it yet as the SOX has almost always been weaker than the SMH. For now, I am sticking with the SMH.

Anonymous said...

The rally in the Qs today was very weak and clearly an upward correction. I think there is a good chance that the Qs will test the 50ema if they close below Monday's low.

I use primarily use the 6 and 12 emas for short term work. The 6 crossed down the 12 Monday, but both remain above the 25, which is a short term neutral condition with in my ema studies.

Intermediate term is still bullish as the 12 > 25 > 50.

Anonymous said...

That is a good point on IBD. They had a TV ad earlier this year showing how that called the market in correction in early Sept 08 and then market in uptrend in Nov 08. They conveniently left out the whipsaw that occurred in Sept 08 with an uptrend call on the 19th? followed by a correction call on the 20th?

The more vague they are the broader the claims they can make later.

But in particular, I like consistency. In may they never called the Market In Correction even though the dist. days got as high as 6. They called it Uptrend Under Pressure. At the moment, I don't see a lot of difference here, so why jump the gun. This reminds me of Sept 08 except in reverse, but maybe I'm wrong.

Regardless of their commentary, their methodology is about as good as it gets for intermediate term market calls, particularly when you consider the cost is less than $200 a year.

When I start seeing them mentioned on CNBC, I'll it's time to move on.

dave said...

"For now, I am sticking with the SMH." I have always preferred tracking the vehicle that could actually be traded ST (over the index) but reverse LT. I was just alarmed because of the glaring difference betw $SOX/SMH which i had never noticed before.

"The more vague they are the broader the claims they can make later." Exactly. Smart politicians know this very well.

dave said...

Today's opening surprises me & enhances Laundry's view which i thought was going to be wrong. The overnight & pre-mkt DJI action did not surprise me because yesterday's rally looked like the end of an abc 2nd wave & therefore i was looking for 3rd wave damage today & tomorrow.

dave said...

Kinda weird. Couldn't take out Monday's lows & then stalled below yesterday's high. May be range bound thru end of the week.