“Profits always take care of themselves but losses never do. ” The speculator has to insure himself against considerable losses by taking the first small loss. In so doing, he keeps his account in order so that at some future time, when he has a constructive idea, he will be in a position to go into another deal, taking on the same amount of stock as he had when he was wrong.” –Jesse Livermore
“Trading is a waiting game. You sit, you wait, and you make a lot of money all at once. Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between.” — Michael Covel
The Big Wave Trading Portfolio is under a SELL signal and is taking action on a day by day basis. Big Wave Trading is currently going short stocks that have had speculative run ups in the recent months that have reversed on very heavy volume. Big Wave Trading is also using inverse ETFs to take a short position in the retirement accounts. Big Wave Trading still sits on a high level of cash and is ready to put it to work as signals generate from what appears to be a coming market sell off. While we reserve no bias as to the market at any time, our models are extremely bearish with internals and externals that make up this model giving us very clear “warning” signals.
This warning signal is a potential large market pullback. This is based off of several time, price, and volume indicators and actual action of leading, speculative, and defensive stocks. The big surprise about this is that the signals are so bearish yet we remain near recent highs in the stock market. We do not see this as strength and instead see this as a last ditch effort by bulls to hold up the tape via a very few select stocks. The leaders are clear: CMG PCLN and AAPL. Their extended to parabolic runs from 2009 to now are very clear on an arithmetic long-term weekly or monthly chart. The recent price and volume action is showing distribution.
The action on these leading stocks on top of the accumulation in inverse ETFs, the distribution in the indexes and ETFs, the breakdowns on large volume in CANSLIM quality stocks, and the void of new longs showing up in my scans make it very clear where the next big move is going to be. When will it happen? There is not one individual on the planet Earth that can answer that question. The sad thing is many people still believe there are people that can do this. They can not. No human, robot, or other entity can predict the future. It can’t be done period.
Our portfolio recently was forced to go from SELL to NEUTRAL to SELL to NEUTRAL back to SELL over the past two weeks due to our cut losses being hit off the SELL signal. There is always a safety net. For the first time in real time, since using this methodology following 50+ years of backtesting, we had a BUY or SELL signal not change despite our cut loss being hit. Our second SELL signal was hit with a cut loss via our cut loss/safety strategy. However, the model did not switch from SELL. It was a discretionary decision based on my part to cut our losses to protect against a further melt up on low volume. The fact we are back into a SELL signal proves that the model knows more than I know. That is always comforting to know.
In past studies, having three signals generated like this in a row has not happened (the market is always doing something knew!). However, when backtesting BUY to NEUTRAL to BUY or SELL to NEUTRAL to SELL signals over a one to two week time frame, the second signal was true over 85% of the time. Our speculative guess (and that is all that it is at this current point) is that having three in a row like we just went through is an even higher odd event. We will know soon enough.
Bottom line, the most important attribute of our model is that it keeps us on the correct side of the market. If the market continues to breakdown, we will press our position on the short side. If the market does not break down, it is going to be a few weeks to months before these very broken charts are going to be able to fix themselves and thus even if we re-enter a BUY signal chances of being able to put funds to work in any significant way appear thin (unless we have a HUGE volume 5% up day–that would obviously change the models mind). However, if we do enter a new BUY signal you can be 100% sure our operations on the short side will end.
Another note on the current market, the DJIA is now leading the Nasdaq RS wise and Utilities, Consumer Staples, Tobacco, and Aerospace/Defense stocks and groups are showing up in my stock and ETF scans. We have almost total confirmation that the old saying “sell in May and go away” will be of more value than “buy the Facebook (FB) IPO on opening day.” One last reminder, Big Wave Trading never holds on to a losing position. If we go short or long any position and it does not move in our direction immediately, we begin selling. No questions ask. We don’t care about being wrong or right. That is for losers. We just want to win. To win big you are going to lose a lot. Those are the hard cold facts. Get used to it or find another passion. If this isn’t your passion, find someone whose it is.
Top Current Shorts – Percent Gain – Date of Signal
SWHC – 80% – 1/3/12
AVD – 69% – 1/10/12
LQDT – 46% – 2/1/12
CPWM – 32% – 3/13/12
EPAM – 31% – 3/8/12
ULTA – 29% – 1/13/12
MNST – 26% – 1/13/12
SUNH – 25% – 3/9/12
Top Current Shorts – Percent Gain – Date of Signal
PRXI – 35% – 3/30/12
BVSN – 34% – 3/16/12
WZE – 30% – 4/10/12
SINO – 25% – 4/12/12