Thoughts, Trading

IBD Just Changed Market Outlook to “Market in Correction”

All 3 indices (S&P 500, DJ, Nasdaq) have erased the gains made since the QE3 announcement on September 13, 2012.

On September 13, 2012, stock markets spiked up after the QE3 was announced during the trading day. The markets climbed further the following day on September 14, 2012, and then its all downhill since then for surprisingly, almost a month.

As of the close of the markets on October 8, 2012 (Monday), IBD tracked 5 distribution days on S&P and NYSE, and 3 for Nasdaq, and showed a market outlook of “Confirmed Uptrend”. It was surprising that the outlook was kept at “Confirmed Uptrend” for so long when there were so many distribution days, and the market generally wasn’t acting well — there were a few consecutive days where the market opened trying to go up, but was quickly sold down.

After markets closed on Tuesday, S&P and NYSE chalked up 6 distribution days, 4 for Nasdaq, and the market outlook changed to “Uptrend Under Pressure”. While the major indices didn’t show significant damage, many small-cap growth stocks were clobbered, with losses of 2.5-5% being typically. There was the bad news about the IMF lowering growth forecasts and the market took the chance to dive lower. It is definitely not a good sign that bad news was met with selling.

After markets closed on Wednesday, S&P and NYSE chalked up 7 distribution days, 5 for Nasdaq, and the market outlook changed to “Market In Correction”. Dow was down 128 points. IBD’s recommendation now is not to not to buy stocks, protect gains, raise cash, and build a watch list of stocks for the next uptrend.

IBD will usually change a “Confirmed Uptrend” status to a “Uptrend Under Pressure” after 6 distribution days, and change to a “Market in Correction” at the 7th distribution day or later.

I have not been able ascertain if this sell-off so far is real selling or just a shake-out. So far from my own chart review, I have not yet seen any real distribution. Some stocks are still spiking on good news, and going up at a magnitude that seems too high for it to be a downturn. Most growth stocks have not yet experienced any real damage. AAPL has just managed to find support and appears to be holding up well.

So while the market condition is definitely shaky, I am not yet convinced that the major selling is here until I see some real distribution.

[Afternote on IBD’s method of spotting market tops: IBD tracks a bunch of leading stocks, and will not call a prolonged bear market until 80-85% of the leading stocks have clearly topped. They also had a set of “Super Seven” stocks (AAPL, BIDU, PCLN, GMCR, NFLX, LULU, CMG) which they pay close attention to because they should hold up the longest, because institutional investors should hold on to them for as long as possible thinking that the fundamentals are good and they have the best chance to weather the storm.

Nonetheless, when the leading stocks get a major break from the peak, most of the time the stock has topped and on average will correct 72%. When institutional investors get around to selling the highest quality leading stocks from the current bull cycle, the uptrend is likely over.]



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