Thursday, July 26, 2007

IBD100 Strikes Again

The value of monitoring leading stocks was revealed in spades on Thursday.

Stocks with the very best fundamentals function like an early warning system for the stock market. Until they sell off in heavy volume, a rally almost always keeps moving higher. As a proxy for this leadership group, I've used the IBD100 since May 2003.

On Tuesday, the NASDAQ fell -1.9%, but the IBD100 went into a freefall. The index tumbled -3.7%, 96 of 100 stocks closed lower, and 54 stocks saw heavy selling. This was highly unusual behavior, and a sign to raise cash.

On Wednesday, the broader market recovered, but the IBD100 kept falling. The selling stayed heavy, and by Wednesday's close, 69 different stocks had seen distribution on one or both days. The IBD100 was now off -4.4% in just 13 hours, and the number of stocks trading below their 20-day had tripled to 62. This was not a good sign.

On Thursday, the meltdown finally spread to the broader market, and stocks had their worst day in five months. NASDAQ volume ballooned 38%, and a stunning 87% of all stocks closed lower. Internals were a mess (see charts), and New Lows flattened New Highs a jaw-dropping 1119 to 105 -- a ratio greater than 10-to-1.

Making matters worse, the IBD100 continued falling hard. The index shed another -3.5% -- nearly twice the NASDAQ's slide -- and 93 of 100 stocks closed lower. 60 stocks printed distribution -- a three-day high -- and stocks below their 20-day increased to 78 -- up from 21 just three days earlier.

After such a big selloff, is it time to buy?

Traders profit mightily from this type of action. Also, Adam at Daily Options Report notes a Dr. Brett discussion of improved odds after extremes of new lows. However, it's important to recognize that the market itself is showing no signs that it's reached a bottom. In fact, all of the indexes have ruptured and confirmed below their 50-day, and the RUT is below it's 200-day. This market has a lot of work to do, and it's going to take some time.

Consider as well that the SPX is down just -4.7% from its high, and the NASDAQ fell farther on Tuesday than it did today. Soon the market will bounce, but the odds favor more downside ahead. The economic environment is offering little stability, so it's time to be patient.

Bargain hunting and short-covering drove stocks well up off their lows, but the NASDAQ remains a messy piece of business. Swim at your own risk.

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The best thing about selloffs is that they show the market's true colors. What doesn't fall is a big clue about the market's next move. Of the ten market sectors, Thursday's best performer comes as no surprise: Technology.

As a slaughter ensued, the Tech Ratio surged to a 3 1/2-year high.

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Not only was the NASDAQ the day's best performer, QQQQ bounced off its 50-day to close down just 0.9%. Tech will see more selling, but it's essential to note what institutional investors are buying during a bloodbath.

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The most troubling chart on Thursday was arguably the Cyclical Index. If investors are bailing on the cyclicals during a global expansion, serious weakness is afoot.

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If you believe the cyclicals are headed lower, then an inverse ETF play is the Basic Materials inverse, SMN (it's thinly traded -- at least until today). Also, if you think large cap will outperform small, subprime woes haven't peaked and real estate hasn't bottomed, then consider TWM, SKF and SRS. Below are all four, and they will likely prove better performers than QID.

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Finally, a flight to puts produced a Sell signal for the TOF Ratio.

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The biggest take-away is to not get in a rush on the long side. As the Financials fell through their 50-day five sessions ago, a number of pundits said they were "nibbling" on bank stocks. Well, that was 5% ago.

On a lighter note, the gag about Boone Pickens marrying Becky Quick has taken on a life of its own. The story was picked up by, who ran it by the Fashionistas with very catty results. It's become Jane Wells vs. Becky Quick, which suits me just fine - lol.

See everyone tomorrow.




Anonymous said...

David - How do you monitor the IBD 100? Every week I put the current portfolio into Yahoo and can very easily see the daily change. But how do you figure the internals (# of distribution days, # of stocks trading below 20 day MA)? Do you just go one by one through the charts or do you have software to figure this out?


dk said...

Hi anon...It's a hand-crafted process - lol. I build the portfolio in a tracker, but also as a Stockcharts list. The SC list allows me to gather detailed data, though it's captured by hand.

Anonymous said...

OK thanks. I find your recent posts about the behavior of the IBD 100 very interesting. I'm always looking for an overall Market indicator. I usually can make big moves over weeks or months in a bull market but unfortunately give back 30-50% of the gains in a very short period of time when the market turns viciously on the IBD stocks. I'm always looking for a "Take some profits signal" that is somewhat reliable. I find it a very thin line between "Let your profits run" and "Take some profits".I notice you wrote the other day "WITHOUT FAIL" on your IBD 100 posts about when they fall hard the market soon follows. Is it safe to say that when you see one of these down days (what happened 7/24) you quickly raise serious amounts of cash? Do you sell most of your holdings? What types do you hold on to? Also, you mentioned that the China meltdown on 2/27 did not have such violent IBD 100 declines, but I don't see in the archives posts on that day. Can you post performance figures for that day so I can see how the IBD 100 performed on that day? sorry for such a long post, but your material is fascinatiNG to me. - JL

SAM said...


I came across your blog a couple of weeks ago and I find it very good. I have been watching the ratio of the Russell 1000 Growth Index to the Russell 1000 Value Index here in July. It has broken through it's downtrend line going back to 2003. It is well below the mean ratio of .9568 (going back to inception). I think this mixes well with your comments about the strength of biotech, etc. in recent days. This bodes well for the market if the ratio gains further traction.

Appreciate your work.

dk said...

JL...glad you enjoy the posts. I was ultra busy on a project back in Feb and wasn't posting then. However, the IBD100 had a horrendous day on Feb 27, down 5.8% on similar internals and distribution. However, unlike this selloff, there was scant follow-through. Right on cue, the market recovered at the 200-day and matched to new highs. This time has been different.

Regarding trades, I eat my own cooking. If you read between the lines, it's pretty clear what I'm up to. I watch volume very closely, and hold pullbacks in stocks if their volume is light, but (usually) sell on any distribution. Because of this, I was in 55% cash by Tuesday's close, opening trades in SKF and TWM as well. On Thursday's selloff my main portfolio ticked up 0.5%, reflecting the hedge. It's up today as well.

Hope this helps.

Sam...I too have noticed the shift from value to growth, which plays into the strength in tech that can be seen everywhere. After a 7-year hiatus, the next leadership cycle could easily prove to be technology.

Deborah said...

Good post...

I don't do the chart stuff although I am interested in learning more about it. I study the financial reports, but I think the chart stuff is probably good for telling you better entry and exits when you do find something you like.

Bullish Jim said...

Great analysis, dk.

I've noticed that the IBD 100 is basically a sector in and of itself. These stocks, which represent every imaginable industry, often have a tendency to move in tandem regardless of what their individual market sectors are doing. It's obviously partially due to the stocks all being high beta but that's not the whole story by any means. When a lot of these stocks bounce, they will obviously be a very good place to be. That said the bloodshed may not be over for them.

beam said...

A good proxy of IBD 100 is PowerShare DWA technical leaders portfolio PDP. This is a momentum index. Look at the following chart. Notice during March connection, it didn't close down 10MA. But this time it broke down both 10MA and 200MA quickly.

beam said...


Please change 200MA to 50MA in my previous post. Thanks.

dk said... sounds heretical to say now, but I invested for almost ten years without studying charts. I was a fundamentally-based investor, and only became interested in TA in the 90's. Fundamentals can take you a long way as an investor...but TA helps too!

bullish jim...yes, stocks with superb fundamentals tend to trade in similar ways...hard to say what's going to happen with this group if the pullback continues...

beam...thanks for the info on PDP. It's an interesting proxy for leadership, and as I'm sure you know tracks the Dorsey-Wright Technical Leaders Index. Here's a pdf of the Dorsey-Wright component stocks, which is a good watchlist. Lots of differences with the IBD100 though. Nice mention, beam...thanks.