A Historical Week On Wall Street

This week was a historical week on Wall Street.  Within the first few minutes of trading Monday morning the Dow Jones was down 1,000 points and the SP500 -5%.  There was panic in the air; we had hundreds of mini flash crashes in stocks and ETF's.  The QQQ after the open was down 17%. Many Good Til Cancel stop orders were hit at levels way below where they were set.  I heard of one situation in which the broker had a stop for GE at $23 and was executed a shade below $20.  To throw salt to the wound, the stock comes back immediately and closes at $23.87.

Real money and confidence were lost in the market this week.  Investors pulled a record $29.5 billion from equity funds in the week up to August 26.  What used to take weeks to months to play out will probably take days to weeks now.  With all the real-time information, easy access to accounts, and social media, investors can now panic in real time.  And panic happens in both directions.  Many investors spend their day reading 25 blogs a day which pulls them in 17 different directions.  The focus should be tuning out the noise.

I'm not much of a writer; I spend most of my day trying to make money for my clients.  However, during volatile times I do feel a need to do more.  This past week over 450k people read these posts that I feel were very valuable during the week. 

Don't Try To Avoid The Unavoidable

8 Soft Facts You Should Know About Shorting

The History Of Crashes

Keep This In Mind Before You Jump Off The Ledge

Is The End Near

Every Time I want Out They Pull Me Back In

The Most Important Charts In The World Right Now

Dow Up 620 Points

Dow Futures Up 200 Points, Now What

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The Beginning Of A Substantial Move Higher

I’m always intrigued by huge bases because generally a prolonged period of contraction leads to an extended period of expansion.  By far this is my favorite set up.  No one has a better "basing" definition than Stan Weinstein, author of Secrets For Profiting In Bull and Bear Markets.  

The Basing Area: "After XYZ has been declining for several months, it eventually will lose downside momentum and start to trend sideways.  What's actually taking place is that buyers and sellers are starting to move into equilibrium, whereas previously the sellers were far stronger, which is why the stock had plummeted. Volume will usually lessen--dry up--as a base forms.  But often volume will start to expand late stage 1, even though prices remain little changed.  This is an indication that dumping of the stock by disgruntled owners is no longer driving down the price.  The buyers who are moving in to take the stock off their hands are not demanding any significant price concession".

Today we are going to focus on Emcore ($EMKR).  Emcore right now is sitting on top of a 4 1/2 year base after breaking it in the week of 7/31/15.  All this while the market has been under severe pressure.  If and when some market pressure is relieved it should bode well for $EMKR.  Typically you see bases ranging from 6 to 9 months long, a 4 1/2 year base is massive and one we should pay close attention to.

Relative to its sector, the Semiconductors, the stock has shown incredible relative strength as well.

Here is where the story gets juicy.  Emcore's market cap is about $176 million dollars and roughly $141 million dollars in cash.  They also $458 million in NOL'S (Net Operating Losses).  In addition, the company just bought $45 million dollars worth of its stock, equal to roughly 25% of its market cap.  This makes it an ideal activist situation.

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A Magical Base

Vocaltec Communications ($CALL) is now trading above an 8-month base that has kept the stock between $6.75 and roughly $8.50. This is after being in a relentless downtrend since March of 2014, that probably wiped out a lot of holders. I’m always intrigued by huge bases because normally a prolonged period of contraction leads to a prolonged period of expansion. The base tells you that the buyers and sellers have found an equilibrium.  Slowly but surely as the stock continues to trade sideways, the buyers start to take control.  By the time the finally breaks-out to the upside, it usually does it with a whole new set of stock-holders.

Vocaltec now is trading above its intermediate and long term moving averages (50 and 200-day moving averages), something it has not done since April of 2014 (character change).  As you can see from the chart below the 50-day moving average acted as resistance for months, every time the price hit the 50-day moving average it was turned down.

These type of bases, after they break, tend to lead to decent moves to the upside.  Just recently $CALL broke above its 8-month base, retested the top of the base by pulling back, now the stock is back above the base (successful retest).  At current levels, CALL is offering a decent risk reward ratio if one were to put a stop at $7.80, our first target is $10.50.

My name is Frank Zorrilla, a Registered Advisor in the State of New York.
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Previous Articles about bases;

ZGNX BASE

VHC BASE

COH BASE

HZNP BASE

PVA BASE

QSII BASE

Dow Futures Up 200 Points, Now What

As I write this the Dow Futures are up 210 points, the Dow has now rallied 1,000 points in a few hours from the low it registered Monday when a few were calling for a replay of 1987.  A thousand points seem a little dramatic, but percentage wise is 6.7%, nothing to sneeze at.

The market has become extremely volatile, until the volatility subsides you have to be careful chasing huge rallies and selling huge sell-offs.  I still believe that the current situation is playing out just like the summer of 2011 did, which I explained HERE.

If we continue to follow the 2011 playbook, then expect more volatility, a few retest of the recent low, with the ultimate low coming in October.  I'm following the 2011 playbook loosely.  Every year and situation is different.

My only piece of advice is not to panic on the way up, nor, on the way down.

2011 Road Map

My name is Frank Zorrilla, a Registered Advisor in the State of New York.
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Yeah I Said It, Dow Up 620 Points

The Dow Jones closed up 620 points.

What used to take weeks to months to play out will probably take days to weeks now.  With all the real-time information, easy access to accounts, and social media, investors can now panic in real time.  And panic happens in both directions.

Keep calm, it is not over.

My name is Frank Zorrilla, a Registered Advisor in the State of New York.
Getting Started Is Easy

The Most Important Charts In The World Right Now

Is The End Near

Keep This In Mind Before You Jump Off The Ledge

The History Of Crashes

8 Facts About Shorting

Don't Try To Avoid The Unavoidable

The Most Important Charts In The World Right Now

Sentiment plays an enormous role when it comes to investing, when people throw in the towel and panic you can forget about studies, stats, history, etc., everything takes a back seat.  Unfortunately, decisions are made by the mass when they reach a point when they can no longer take the pain. That is normally at the tail end of the move.  When this happens, it takes them a long time to trust the market again.  The charts below help you visualize what all investors go through.

By no means do I want you to look at these charts and say; "I'm going to hold my stock portfolio to the very end, it will come back."  A majority of stocks don't come back, indices do. “The Russell 3000 index measures the performance of the largest 3000 U.S. companies, 98% of the investable U.S. equity market.  40% of the stocks had a negative return over their lifetime, 20% of stocks lost nearly all of their value, 10% of stocks recorded huge wins over 500%.  80% of the gains are a function of 20% of the stocks. --The Ivy Portfolio

• You need to learn how to live to fight another day.
• Acceptance is key to a long-term investing career.  You will be wrong, accept that fact.
• Don't fall in love with individual stocks, they are nothing but pieces of paper.
• I need to liquidate has no idea who "a good company" is.  When panic sets in, the good companies go down the same waste line as the bad ones.
• I know you heard this one before; "The market will stay irrational longer than you can stay solvent."

I need you to realize that there is a light at the end of the tunnel, crisis investing:

My name is Frank Zorrilla, a Registered Advisor in the State of New York.
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Every Time I Want Out They Pull Me Back In

If you wanted an out, then the market is giving you a gift today.  Dow futures are up 600 points and the 1987 crash callers are now changing their tune.  We are not out the woods yet, the reaction we see today is an example of what the market does; it goes up AND down, not up OR down. Nothing goes down in a straight line or up in a straight line.  A lot of people panicked at the open, sold and lost some real money. These will be the same people that will shy away from the market for a long time because they felt robbed, violated, etc..  But the real story is that they did not have a plan. Instead, they followed the word of a blogger or bloggers that have no idea what their particular needs are.

Now is a good time to prune your stocktwits/Twitter followers and your blog reader.  Get rid of the fear mongers, conspiracy theorist, etc.

Start to think about what you will do if the market revisits yesterday's close.  I believe that there is a good chance that will happen between now and October.

Is The End Near

Keep This In Mind Before You Jump Off The Ledge

The History Of Crashes

8 Facts About Shorting

Don't Try To Avoid The Unavoidable

Getting Started Is Easy

Is The End Near

Every year is different, the dynamics of the market are always changing. However, we can look at previous years and situations to get clues on how to go about what is going on currently. Today is not 1987, a day when the Dow Jones lost 20% plus for the day.  A better comparison might be 2010 and 2011, the latter to be more precise.

2010

 2011

From 7/25/2011 to 8/8/2011 the SPY lost 16% in 11 trading days, the Nasdaq 100 lost 15%, and the Russell 2000 lost 21.6%. In the last five trading days, the SPY on a closing basis has lost 9.7%.  The Nasdaq 100 -11%, and the Russell 2000 8.4%, but it's off 14% from its high on 6/23.  In 2011, the markets got ugly real quick, individual stocks were crushed.

On 7/25/2011 61% of all stocks were trading above their 40-day moving average, by 8/8/11 that number was down to 2%, a complete washout, today that number stands at 7%.

At the same time, (7/25/2011) 1,119 stocks were up 13% or more in the last 34 days versus 481.  By, 8/8/11 those figures were 98 to 3,693, the selling was palpable, today's figures are 271 up 13% or more in the last 34 days versus 2,568 that are down.  Another down opening and we will be close to the 2011 figures that will probably be a low as far as the breadth numbers are concerned.  While the breadth numbers might bottom on a down opening tomorrow, the indices are sure to a hit a new low in the future with the ultimate low probably in October.

2011 +13%, -13% figures.

The amount of stocks above their 20-day moving average bottomed at 2% in 2011, today's reading ended at 6.51%. Low readings usually lead to short term bounces. Also, notice the higher high in October while the SP500 hit a new low.

To conclude:

• A breadth low is a down opening away.
• The first index low will not be the last, the ultimate bottom might be in October, in which you will notice the positive divergences.
• The current oversold levels will make shorting tough, expect vicious rallies to be faded, sell-offs that will be bought, look at the 2011 chart.
• The 2011 playbook would be ideal oppose to a drawn out multi-month correction.

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fzorrilla@zorcapital.com   @Zortrades
Breadth Stats courtesy of Pradeep Bonde

Keep This In Mind Before You Jump Off The Ledge

Stay calm, don't panic, if you didn't have a plan coming into this carnage then there is nothing you can do now to change what just happened. Stay away from all the fear mongers, or that this is 1987 all over again, etc.  In 1987, the market was down 24% in one day, we are down 3.5% as I write this. Stocks returned over 400% in the 80's all people talk about is 1987, hat tip, Ben Carlson.

When you look back at all the previous corrections you can focus on what happened when the correction was occurring, the few painful days/months or what happened years later, don't be short sighted. Take this correction as an opportunity to get a plan together for the future.  There are no fool-proof investing plans; you will encounter good times and bad times.

Here are some posts that will help you get through this period;

History Of Crashes

Don't Try To Avoid The Unavoidable

8 Soft Facts About Shorting

Getting Started Is Easy

fzorrilla@zorcapital.com   @Zortrades

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The History Of Crashes

"The higher the VIX, the higher the clicks"--Phil Pearlman.  Nowadays you will never get more hits on a blog post than when you write one about crashes.  Fear sells; if you can get a once in a lifetime crash call correct you will be immortalized for years regardless if you get everything wrong afterward.  Remember, Elaine Garzarelli, Marc Faber, Nouriel Roubini, Meridith Whitney, Hussman, Peter Schiff, etc.

Here are a few things to remember;

1. The market goes up and down not up or down.
2. Corrections and outright bear markets are painful.
3. Big money is made after corrections, the bigger the better, live to fight another day but embrace corrections.
4. Indices have a tendency to come back, stocks are a different story, most don't make it.
5. When you look at the charts below you can focus on how scary the sell-offs were, or you can look to the right and focus on what happened afterward.
6. The biggest rallies happen during bear markets, be very careful shorting in the hole.
7. The first low after a rapid sell-off is usually not the last low.
8. A retest of the first low happen often; the retest normally forms a new low along with some positive divergences, i.e., less 52-week lows, etc...
9. Many lows are made in the month of October.
10. Every sell-off, 1987, 1990, 1994, 2001, 2007, all felt like the end of the world.  The media made it seem that way, today Twitter will make it feel like an apocalypse.

Below are annotated charts of the SP500 during corrective/bear market periods.

1987

 1990

 1994

 1997

 1998

 2001

 2002

 2008

 2010

 2011

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fzorrilla@zorcapital.com   @Zortrades

8 Soft Facts You Should Know About Shorting

Over the last couple of years every time the market pulled back a little it seems the majority of people believe, act, and brace themselves for the next big crash.  All you have to do is look at how the $VIX spikes with the littlest of pullbacks. Many immediately want to go out there and short to capitalize in the inevitable decent pullback that at one point we are going to experience.  However, shorting is very tough game, a game that has gotten even tougher after 2009, and if one wanted to venture on that side of the field then you should be aware of some rules, stats, and facts.

The biggest rallies happen in corrective/bear markets, exactly when bears should be making a killing. The minute you get over confident that this is the end of the world you get a simple 3-5 days dead cat bounce that wipes you out. If we are truly in a bear market that bounce will fade and lead to lower prices.

Over the last 35 years, the average intra-year decline in the SP500 is roughly 14%, a little less since 2009.  Despite the 14% intra-year decline, the SP500 has closed positive 27 out of the 35 years, 77% of the time. 

Michael Steinhardt one of the pioneers in the hedge fund industry once said that he probably has shorted more stocks than anyone else and when he looks back cumulatively at all his shorts he probably broke even on them.

Here are some of the rules I have when it comes to shorting;

1. Don’t short oversold markets, the market has a history of bailing out the bulls, not the bears. Currently we are oversold, and you might hear that oversold can become more oversold, but the odds always favor a dead cat bounce than an outright crash.

2. Don’t short an index or a stock that is already down multiple days in a row, indices tend to mean revert. Take a look at this stat chart of the outcome of the SP500 after 4 consecutive down closes.

3. Every now and then you might get lucky shorting an oversold market that becomes more oversold and stays oversold, but the distance between every now and then is huge. Don’t do it.

4. Do not short a stock that is down multiple days in a row, wait for the bounce (3-5 days) then short preferably with some of the moving averages above the price of the stock.

5. Do not overstay your welcome on the short side, again, the biggest rallies happen in bear corrective markets.

6. Shorting is very enticing due to the fact 6 months worth of gains in a stock could easily be wiped out in a matter of a month, look at the oil names, biotechs, and  the SP500 in the last 5 days. However, all the stats are against you so do it selectively and at the right time.  In the last 89 years, stocks have closed down 20% or more 6 times, 6.7%.  35 out the 89 years stocks delivered 20%+ returns, 39.3%.

7. Shorting a fundamental story is different than shorting something technically.

8. Shorting the so-called “leaders” that have broken down tends to be very profitable, focus on those. There is a stat that states that 80% of the biggest winners at one point lose 50% of their gains and 50% of them lose 80% of their gains.

The bottom line is that you have to be more selective and diligent with your timing when it comes to shorting versus going long.

Getting Started Is Easy

fzorrilla@zorcapital.com   @Zortrades

Don't Try To Avoid The Unavoidable

There's absolutely no reason why you should try to avoid the unavoidable.  Losses, draw-downs, are part of the game, they happen on a consistent basis.  You can do all the research, all the work humanly possible and you still cannot avoid losses and draw-downs. Stop wasting your time trying to do it.  That does not mean you ride everything down, take your losses, live to fight another day, but don't waste your valuable time trying to find the perfect system that tries to avoid the unavoidable. "Buy green, sell red, we never lost money," etc... is all a fantasy

In case you forgot, the average intra-year pullback in the SP500 since 1980 has been roughly 14%, a little less since 2009.  Despite the 14% intra-year decline, the SP500 has closed positive 27 out 34 years, 79%.  Draw-downs are painful but unavoidable, means to an end. The market is doing what it is supposed to do, go up AND down not up OR down, stay thirsty.

David Tepper;

Believe it or not, Tepper attributes his success to these drawdowns. He has been quoted as saying that his fund’s returns are “consistently inconsistent.” And that “it’s one of the cornerstones of our success.” Every year he lost 20% or more, he came back with at least a 60% return the following year (in two of those years, 100% plus).

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fzorrilla@zorcapital.com   @Zortrades

The Dow Is Down 230 Points And Everyone Is Freaking Out

The Dow Jones as I write this is down 232 points, people are freaking out, you can see that by the surge in inflows into money market funds.

Internally the market has been dying slowly, the lower the price, the lower the market capitalization, the bigger the hit. h/t Michael Batnick

High Price SP500 stocks have done better. h/t Ryan Detrick

The stocks within every SP500 sector has had a significant pullback from their 52 week high while the index itself is still a stone throw away from its high. h/t Chad Gassaway.

Currently only 8% of the SP500 stocks are trading above their 3 day moving average, 10% are above their 5 day moving average, this has led to short term bounces.  Short term bounces don't have to be played, but they can be taken as an opportunity to lighten up if you wish.  For the most part the market gives a choice to sell on the way up or on the way down.

The SP500 is now flat for the year, 2057 is year to date break-even, it has been a magnet and a level that has acted as support.  If we break 2057 and stay below we can have an air pocket situation.

Stocks down 25% or more in the last month stands at 211, spikes above 200 have led to bounces.

With 10 recent distribution days and today possibly being number 11, chances are high that Investors Business Daily will change its market pulse from "uptrend under pressure" to "market in correction". This has been viewed as contrarian signal lately.

So far what has held up the best is finally getting hit a little today $AMZN $GOOGL $NFLX.

Stay Tuned, Everybody is workin' for weekend.

Getting Started Is Easy

fzorrilla@zorcapital.com   @Zortrades

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The Market Dilemma That Is Driving Everyone Nuts

I have been in the finance industry for 18 years, I spent 13 years as a Series 7 broker, I have many friends on the street that I talk to regularly.  I also have a presence on Wall Street 2.0 which is twitter/stocktwits.  I believe that the people I follow on the social media front are smarter than my broker friends when it comes to the market (that does not mean they are better at investing/trading/making money). However, my broker friends are actually involved in the business, moving money around while some from the Wall Street 2.0 are not.  As of right now they're pretty much at opposite ends. The brokers are saying "all my stocks are getting crushed", while the bloggers are pointing at how the SP500 cumulative advance decline line is near highs and there is absolutely no reason to complain. According to Urban Carmel 75% of the total U.S. market cap are represented by the SP500, so it does a good job representing the market.  On the other hand the Russell 3000 consists of 98% of the investable U.S. equity market.

The bloggers are pointing out the chart below.  Advance-Decline Percent is a breadth indicator that measures the percentage of Net Advances.  AD Percent = (Advances Less Declines) / Total Issues.  As you can see it is trading near highs chugging right along with SP500.

The brokers that I'm talking to are probably not involved with too many SP500 names. Their universe is normally the smaller names. Regardless, they might be on to something. Currently we have 1,306 stocks down 13% or more in the last 34 days versus 706 that are up 13% or more in the last 34 days. We also have 879 stocks down 25% or more in the last 65 days compared to 352 that are up 25% or more. As you can see from the charts below, the amount of stocks trending lower has been rising in the last couple of months while the ones trending higher have been on a decline. This may be the reason why brokers are complaining that their stocks are getting crushed.

Russell 2000 versus stocks up or down 13% or more in the last 34 days.

Russell 2000 versus stocks up or down 25% or more in the last 65 days.

If you take the above breadth analysis and only include SP500 stocks that will give you 61 SP500 names down 13% or more in the last 34 days versus 45 that are up 13% or more in the last 45 days. In addition you have 32 SP500 names down 25% or more in the last 65 days versus 8 that are up 25% or more in the last 65 days.

You can debate this 9 ways to Sunday. I would like for you, the reader to leave a comment telling us if your actual portfolio feels more like the SP500 and the advance decline line or more like the Russell 2000 and the number of stocks down or 13% or more in the last 34 days.  You can simply reply blogger or broker and we will get the point.

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fzorrilla@zorcapital.com   @Zortrades

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The Top Stocks Within The Top 20 Industries

According to studies done by Investor Business Daily the majority of the “leading” stocks are usually in leading industries.  Their studies show that “37% of a stock’s price movement is directly tied to the performance of the industry group the stock is in. Another 12% is due to strength in its overall sector; Therefore, roughly half of a stock’s move is driven by the strength of it’s respective group”.

One of the ways to take advantage of this is by focusing on the stocks that are in the top 20 best performing industries in the last quarter.  

In green are the industries that are new to the top 20 this week.

There’s roughly 561 names within these 20 groups. To narrow down the list we only included stocks that have traded at least on average 100,000 shares daily for the last 20 days.  Then we narrowed down the list further by screening for stocks that are not extended in the short term, that took us down to 116 names. Out of those 116 names only 6 have a decent risk reward ratio for swing trades based on their chart pattern. Today the market will again narrow down the list further for me since I will only look to get involved in the names that trade above their previous day high.  

Below are the names that I believe are set up technically (the way I view charts) for 1-20 day swing trades.

$RAI $PCLN $ISLE $PENN $JAH $FB

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fzorrilla@zorcapital.com   @Zortrades

Some Positives Among The Carnage

The market has been under pressure lately, specifically many individual common stocks.  However, these few stocks have held up relatively well and more importantly the charts right here, right now, look very enticing.  If some pressure is relieved from the market these stocks should immediately jump out the gate.

$AGN $AMGN $BLDR $DENN $DPS $HSIC $ISLE $JAH $MBLY $RH $PRGO.

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fzorrilla@zorcapital.com   @Zortrades