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Joshua "MauiTrader" Hayes is CEO, President and founder of Big Wave Trading Inc., a Maui, Hawaii-based stock market advisory service. Hayes is a well-respected stock trader who combines fundamentals, technicals, psychology and money management to trade professionally for his personal,... More
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  • The Current Rally Is Coming To An End 17 comments
    Apr 23, 2012 2:05 PM | about stocks: AAPL, CMG, PCLN

    Do you know what I love about fundamental analysis? Not much. Do you know why? Because they are not useful in a game where emotions make up the individuals decision to buy and more importantly sell. Fundamental analysis relies on one's ability to opine on the viability of facts and observations. Investing based off an opinion is never a wise way to invest.

    You might think you are buying a stock because you "believe" in its future potential. More often than not, the truth is, you are buying the stock because you "feel" it should move higher. If that stock breaks down, begins to sell off, and you can't handle the loss anymore, you end up selling out of "fear" that it might go lower. In reality this is what happens more often than not. You would like to think that you did it because all of a sudden you think the fundamentals are bad. But you did not. It was fear that made you sell.

    The decision to sell stocks is almost never about fundamentals. It is about emotions. That is the cold hard truth. The biggest problem with fundamental analysis is that it is 100% useless when looking for a top in the stock market. The truth is fundamentals are always the best at a top. Think of March 2000, think of October 2007, and think of now.

    I have been trading stocks for a living since 1996. During this time, I have watched many smart fundamental investors make some very educated investment decisions. I have also watched these smart individuals lose money during every single bear market as they "believed" in their fundamentals.

    The truth is the stock market does not care about fundamentals the majority of the time. The stock market can be an irrational beast that is completely dependent on basic weak human emotions. These emotions almost always cause investors to buy stocks near a top and sell near a bottom. There is only one way to eliminate these emotions and that is by learning how the stock market actually works via price history.

    If you do this, you can see that there are real patterns that show up every year, every decade, and every generation. This is because the market is made up of human emotions. Human emotions never change and never will. Humans will always do irrational and just plain stupid things. We will never figure out how to fully control our emotions. As long as that is the case, a select few savvy individual investors will always be around to make money off of these emotions that show up in price and volume patterns.

    I hear a lot of people talking about how Apple (NASDAQ:AAPL) and Priceline.com (NASDAQ:PCLN) is going to $1000 and Chipotle Mexican Grill (NYSE:CMG) is going to $600. I am here to tell you that while they may one day in the future, it does not appear it is going to be by this summer.

    The truth is these stocks and this market is trying to top. I want to make it clear, however, that if I am wrong and we do move higher, I will simply cut my losses on the short side and buy the stocks leading the market higher. I am a trend follower. If I buy something and it moves higher I ride the wave higher. If I buy something and it moves lower, I am out. If I short something and it moves lower I ride the wave lower. If I short something and it moves higher, I am out. No questions asked.

    I don't make it a habit to lose money. This is the only way to play the game. Any other form of playing this game where you do not cut your losses quickly will one day leave you with the ultimate loss. Your final loss. This is what market corrections do to those that do not use a cut loss strategy.

    Before we look at why this market is topping, I will remind you one more time that fundamentals were the best at the March 2000 top and October 2007 top. The stock market tops and heads lower before the numbers do. It always has.

    Remember Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), and Qualcomm (NASDAQ:QCOM) in 2000? Remember Baidu (NASDAQ:BIDU), Google (NASDAQ:GOOG), and Research In Motion (RIMM) in 2007? These companies reported earnings during these time periods that indicated short-term stock appreciation was a given. Why didn't these stocks continue to move higher in 2008? Because that cold hard truth, once again, is that the market does not move on fundamentals. It moves on human emotions.

    The only way to game a market is to follow the big boys. The mutual funds, hedge funds, pension funds, and insurance funds. These are the guys that create the volume. Not me and you. We don't move $100 million to $10 billion here and there. These guys move stocks. Their movements can be tracked on a simple price and volume chart.

    So let's analyze the current condition of the Nasdaq. Since the March highs, the Nasdaq has seen 10 distribution days (an index falls more than .20% on volume higher than the day before). One, two, or three distribution days are normal during an uptrend or pullback. 10 however is problematic. This amount of distribution on an index eventually weighs on it and prices soon start falling. But how do we know if this is just going to be a pullback or a real correction? The truth is you don't. It is impossible to predict the future.

    However, if we look at past stock market tops by taking a look at the leading stocks during that time and then match them up with today we can get an idea of where we are at. I hate to tell you this, it looks like we are near a top.

    Below are the charts of Cisco, Microsoft, and Qualcomm back in 2000.

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    Below are the charts of Research In Motion, Google, and Baidu back in 2007.

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    Below are the charts of Priceline.com, Chipotle Mexican Grill, and Apple now

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    Are you starting to see a pattern?

    What happens is that as an uptrend starts and gets going a few top stocks start to outperform the rest due to their huge EPS and sales growth. These strong fundamentals get noticed by the big boys first and the retail crowd second. By the time the retail crowd notices that these stocks do nothing but go up, the big boys are already slowly and systematically selling to mom and pop.

    Sadly, what happens next is where it finally all falls apart. On the initial pullback, like we are seeing now in Chipotle Mexican Grill, Apple, and Priceline.com, all the retail crowd that just bought or who is now waiting to buy the next pullback, start buying more.

    This time, the big boys are not buying and are instead selling. What happens next is that the stock starts turning higher again but without the big boys accumulating shares the stock soon collapses on itself. Prices simply can not lift higher on thin air alone. When the next leg down starts, this is where funds that still have supply left start dumping. This is about the time when mom and pop are now trapped "hoping" that their stock will rise again.

    Unfortunately, for them, stocks rarely come back. How many times was I told in 2001, 2002, or 2003 to buy Microsoft, Cisco, or Qualcomm? I can tell you. At least 1,000 times. How did that work out for those that did buy? You think they were able to find TASER International (NASDAQ:TASR) in 2003 or Travelzoo (NASDAQ:TZOO) in 2004 like trend followers were able to? You better believe not. They became bag holders collecting a dividend that was wiped out by inflation and the actual loss in the value of the stock.

    The truth is that we are here again. Everyone is telling me that Apple can only go higher. I am sure it can but history suggest it will not. Who is left to buy Apple that does not already know about this story? This is Microsoft of 2000 all over again. History always repeats itself.

    Now let's get into the nitty gritty with the current monthly and daily charts of Apple, Priceline.com, and Chipotle Mexican Grill.

    Apple has been in a non-stop uptrend since the 2008 lows. From 2004-2008 you can see that Apple rallied the entire way on very strong volume. During the entire QE driven rally it has rallied on below average monthly volume. This is a clear sign of limited demand for the stock compared to its previous run. On top of this, we have 5 clear down months on larger volume than the volume during up months.

    (click to enlarge)

    When we take this long-term chart into account with the current daily chart you can see during the parabolic stage of this uptrend that heavy volume distribution days came on 2/15 and 3/15 before the recent April top. Following this April top, the stock is now rolling over on very heavy selling. The selling is non-stop and it appears someone with a very large stake is getting out now. On top of this, the internal price, volume, and time indicators I use (Time Segment Volume and MACD) both topped out in March. Now price is confirming these early warning signs. Not good for recent Apple longs.

    (click to enlarge)

    Priceline.com is not nearly as problematic but it is not beloved like Apple--this market is really all about one stock. However, Priceline.com is a clear leader when you look at EPS, sales, profit margin, return on equity, and any other fundamental matrix. It, like Apple, recently went on a very rapid price gain. These gains were basically on below average monthly volume. Compare that to the period of 2003 to 2008. This shows a lack of demand. This is another indication that this entire rally post-2008 has been a QE led melt up and not a real bull market where real demand (volume) drives prices higher.

    (click to enlarge)

    Lately, Priceline.com has done nothing but move higher. The move higher is on higher than average daily volume but is nothing spectacular. Now the stock is selling off on volume that is much higher than anything it saw during its most recent run from the January breakout. As you can see on the chart, my internal indicators also topped out before price did. Now price is confirming the indicators. Not good for recent Priceline.com longs.

    (click to enlarge)

    Finally, Chipotle Mexican Grill. Chipotle Mexican Grill has rallied on higher than average volume. That is until this year. As it has pushed higher this year, helping make its chart near parabolic, volume has been completely absent. This stock is almost lifting itself via magic every month. However, as you can see via the tall red bars above the yellow line in the middle window (volume), the big boys have been selling this stock the whole way up. They have been doing it very methodically. Every higher volume sell off is followed by a lower volume rally. That is until now.

    (click to enlarge)

    Chipotle Mexican Grill has recently started to churn on volume much higher than anything during its most recent uptrend and finally cracked on Friday on very heavy volume. What should be more troubling to longs here is that my internal indicators topped on this stock back in July. Now they are finally falling off a cliff. Price should soon follow. Not good for Chipotle Mexican Grill longs.

    (click to enlarge)

    We are nearing an end to the current rally and possibly the three year QE driven bull market. This three year rally should never have happened in the first place. Government intervention is why we had our recent bull market.

    Low volume rallies were something you never saw last very long in the stock market pre-2008. If a lower volume rally occurred, a sell off was around the corner around 85% of the time within the next three months. For 125 years that was the case, via back testing price and volume in our in-house stock market index models.

    Post-2008, volume has become useless for uptrends. However, for the flash crash of 2010 and for the July to August swoon, volume still worked before major downside breaks.

    We are seeing the same price and volume action in the indexes that we saw before the flash crash and the July to August swoon. Maybe this time those in charge will do the right thing and let the market correct for as long and as hard as it needs to. If they do not, we will just have another low volume rally where it will be hard to make money on the long side. The next manipulated fake rally (like the 2009-2012 rally) will just eventually lead to the next brutal bear market.

    Free markets need to be left alone to work properly. By all indications, if nothing was done by the Federal government during the 2008 crisis, while we might still be in a bear market or correction, we would be near the end of the down cycle. Unfortunately, we have not even started to do what is necessary for markets to work properly again.

    For three years we have done nothing but move or hide the problems. We have to hide them to avoid the reality and pain of the situation. Reality is painful. The pain that has to happen is just being kicked down the road over and over. Eventually, you have to stop kicking the can. Eventually, you have to have pain. Without pain there can be no gain.

    When the next bear market hits and everyone is focused on the money they have lost and who is to blame, trend followers will be sitting back, possibly smiling, enjoying the fruits of their labor. That is brutal honesty. Something you will not get from CNBC. Many people have great stories. Great stories do not make stocks move higher. Fear, greed, and hope--that is what really moves stocks. Not fundamentals. Not stories. Just fear, greed, and hope.

    Disclosure: I am short PCLN, CMG.

    Additional disclosure: I may initiate a short positions in AAPL over the next 72 hours.

    Themes: market-outlook Stocks: AAPL, CMG, PCLN
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Comments (17)
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  • untrusting investor
    , contributor
    Comments (9933) | Send Message
     
    Very good article and presentation. Do agree with the central thesis. Would like to play for example CMG for a decline via options, but they are very pricey.
    23 Apr 2012, 06:41 PM Reply Like
  • Jonathan Verenger
    , contributor
    Comments (354) | Send Message
     
    Sounds like a permabear to me.
    24 Apr 2012, 12:04 AM Reply Like
  • Hypnos7
    , contributor
    Comments (139) | Send Message
     
    Perhaps his macro outlook is bearish, but if you read the 8th paragraph his trading outlook is far more flexible.
    24 Apr 2012, 01:47 AM Reply Like
  • traderjoe70
    , contributor
    Comments (9) | Send Message
     
    Obviously, you have never read any of Josh's previous material.
    24 Apr 2012, 01:41 PM Reply Like
  • Jonathan Verenger
    , contributor
    Comments (354) | Send Message
     
    his previous articles? the dude was saying in august 2010 that the market was done. i've heard the low volume it's all because of the fed argument for 3 years now. meanwhile i've stayed long and made out very well.
    26 Apr 2012, 11:37 AM Reply Like
  • Joshua Hayes
    , contributor
    Comments (362) | Send Message
     
    Author’s reply » Perma bear, LOL. I was long from January to March. Get real. Also October to November. I am a trend follower. Perma bear? I hold no opinions. I follow the trend.The trend is turning lower. Just look at the charts. That is reality. I have made my small fortune on the long side also. Not the bear side. It just added to it. Aloha!
    24 Apr 2012, 03:36 AM Reply Like
  • Jonathan Verenger
    , contributor
    Comments (354) | Send Message
     
    you may want to ready some of your other articles like the one from august 2010
    24 Apr 2012, 05:18 PM Reply Like
  • Joshua Hayes
    , contributor
    Comments (362) | Send Message
     
    Author’s reply » Thank you Hypnos for actually reading the article. If the market turns higher, I will buy the leading stocks leading the rally higher. So difficult for non-trend followers to understand. Kind of sad but it let's me know that I will be able to do this forever as human pyschology and emotions never change. Aloha, Hypnos. #veryflexible
    24 Apr 2012, 03:36 AM Reply Like
  • Inflection Point Investing LLC
    , contributor
    Comments (624) | Send Message
     
    Great article. Thanks for posting.
    24 Apr 2012, 09:06 AM Reply Like
  • traderjoe70
    , contributor
    Comments (9) | Send Message
     
    Great article Josh. Looking FWD to AAPL earnings tonight. Think it showed a climatic type of run from 3/7 thru 3/20. Plus those 4 gap ups with the last being on 4/3.
    24 Apr 2012, 01:50 PM Reply Like
  • realornot
    , contributor
    Comments (1281) | Send Message
     
    Joshua,

     

    Well presented article! I am one of the few who yelled out sell sell sell at the top of all those stocks that are covered under your great article. Although, Apple is having a blow out report but it won't last long.

     

    Finally, someone is willing to lay out all the facts at this critical juncture. I thank you for that.

     

    Ron
    25 Apr 2012, 12:55 AM Reply Like
  • Jonathan Verenger
    , contributor
    Comments (354) | Send Message
     
    Looks like those crazy little fundamentals like earnings are driving the market higher. Trend followers would know that a drop of 4% from the highs to a level above the prior lows doesn't qualify as a trend change. If a trend follower was REALLY a trend follower he would wait for confirmation of a trend change and not waste money shorting anything until then.

     

    That's the problem with emotions...they get the best of ya don't they?
    26 Apr 2012, 01:25 PM Reply Like
  • Joshua Hayes
    , contributor
    Comments (362) | Send Message
     
    Author’s reply » Our market direction model has returned to a BUY signal and have initiated long positions in AZO GEOI SWI. The thesis that we remain near a top based on historical charts remained. We continue to believe we are the end of this 3 year uptrend rather than a start of a new bull market. This uptrend is the possible final wave of the Elliot Wave 5-wave cycle. This move higher should put AAPL PCLN CMG completely parabolic and sucker in the final late comers to the three year rally. We have covered our short PCLN position for a profit and cut our short on CMG for a small loss. We will continue to buy CANSLIM quality stocks as they break out and ride them higher. Another rally to new highs here will only make the short side that much better when this thing finally falls flat on its face. Don't forget this whole rally from the October lows has been on below average weekly volume the entire way on the NYSE and Nasdaq. There has not been one week of higher than average volume (using the 50 day volume average). Not one. What goes straight up must come down. For now we will follow the trend and wait for the ultimate top. Our thesis remains.
    26 Apr 2012, 03:47 PM Reply Like
  • Jonathan Verenger
    , contributor
    Comments (354) | Send Message
     
    "This move higher should put AAPL PCLN CMG completely parabolic and sucker in the final late comers to the three year rally"

     

    ha! written like a true permabear.
    27 Apr 2012, 11:42 AM Reply Like
  • Wise Investor
    , contributor
    Comments (35) | Send Message
     
    Wow CAN SLIM loser hula stock dancer man is still posting his trite rubbish here. Unbelievable. Still trying to catch a top in PCLN I see. One day you may actually be right on your short, but your track record really sucks major and you're wrong so often, but as long as you can make a decent amount to live as a bum on the lovely beaches of Maui, it'll be alright won't it?

     

    Perhaps you should refresh all your follower's memories on how you were so adamantly confident that PCLN was such a magnificent short 2 years ago @ 192 or how about the one you wrote about how AAPL was finished and peaked in the 250 area? Oh now that one's priceless. Too bad they fixed that antenna issue you thought was such a death knell. Oh but wait, the technicals were saying it looked overbought and was ready to plunge. That's what my CAN SLIM methodology was telling me and that CASH was KING. It can't be wrong! "I made my millions by it" brags the arrogant hula stock dancer man.

     

    Pathetic. In the meanwhile, little old me who doesn't aspire to such BS and won't be suckered\scared by charlatan shorters such as yourself, have sat back calmly the past 3 years with just a handful of 3 dozen stocks purchased during the deluge of damage in early '09 and have made cap gains a hundred times over that you can only DREAM OF in your thousands of accumulated trades the past 3 years trying to scrounge those miniscule amounts from your bearish short positions. How many times have you lost out just on shorting PCLN & AAPL the past several years? My assessment is that it was probably a gargantaun amount, especially during that tumultuous run AAPL had after January's epic blowout quarter. LOL I bet more than fur was singed during that escalated surge when all bears were caught with full frontal totally exposed.

     

    As far as PCLN is concerned, still scamming viewers with your topping out talk I see after 2 years of runup of 550+ points. I feel for those that subscribed to your asinine CAN SLIM method and shorted it or due to your scare tactics didn't purchase shares as I had implored and suggested back then 2 years ago. I wonder how those shorts felt when they shorted near the 200 mark only to see it ascend up 60 points within months of your dire call? I bet they quickly weren't your followers any longer right? Pathetic. Good write-up to scare PCLN holders in running from their shares, but then again you've had years of practice at being adept in deception.

     

    A little bit of advice, true wealth is not flaunted as you consistently do in so many of your posts and if your methodology was truly functioning/working to assist others then you wouldn't need to keep pumping its operational ability trying so extremely hard to substantiate its validity, so it begs the question of whether its function is truly valid or not. I have always held long term and have never shorted an equity because I don't believe in betting on a company to fail, but that's just moi.

     

    PRICELINE SHAREHOLDERS .... my suggestion at this point is that if you have longterm gains in your shares, then take a quarter to half of your position off the table and lock in some LT gains just in case we experience a retrenchment in the next 4 to 6 week period. If we do get a pullback, always look to the 50 day MA for initial strong support as PCLN notably bounces off that mark during a drop. DO NOT GO SHORT with PCLN as there may be considerable risk damage to the upside when they report earnings next week as you should know PCLN equity holds no prisoners.

     

    As far a CMG goes, I cannot comment on that equity as I disposed of my remaining LT shares back @ 428.83 last month. CMG's 50 day MA is around 411 at the moment so look for support at that area.

     

    Don't let shorter/bears scare tactics make you do something out of emotion because when you relinquish your shares in panic, they're the sole beneficiary of your actions. Good luck and think twice before you listen to methodology screamers.....

     

    As for CAN SLIM ( Cash Available Now ... slim GAINS ) it's a purely hype and shite.

     

    Disclosure:

     

    Currently still holding 1800 of my original 3600 LT shares of PCLN purchased in February '09 @ 48 & 54 levels. 800 shares AAPL @ 78 & 80 level, 100 shares @ 363.88. LT shares purchased from October '08 through May '09 of FFIV, CTXS, ISRG, AMZN, CRM, BIDU, QCOM, VRSN, EBAY, (RIMM - Loss equity position), CSCO, INTC, CAT, BRCM, WYNN, LVS, GS, (EA - Loss equity position), AZO, FCX, PNRA, FIRE, AGNC, HTS, NKE, LULU, FOSL, DECK, PX, BWA, AVGO, CE, PCP, (FSLR - Loss equity position) FLS, & HANS aka MNST.
    2 May 2012, 12:56 AM Reply Like
  • 1980XLS-2.0
    , contributor
    Comments (525) | Send Message
     
    Wise investor,

     

    There are many ways to make money in the market, varying based on one's strategy and timline.

     

    Both yours, as well as Josh's can be effective when deployed properly.

     

    Although you may disaggree with Josh's methods, his observations and comments are worth consideration for even a fundamental investor, imo.

     

    As far as Josh's article, I agree. It was well written given the current conditions as applied to his preferred market strategy.
    6 May 2012, 03:34 PM Reply Like
  • Joshua Hayes
    , contributor
    Comments (362) | Send Message
     
    Author’s reply » The Big Wave Trading Portfolio model remains under a SELL signal generated on 5/4/12. The SELL signal was very strong but four false signals (3 SELL, 1 BUY–first time that has happened in the model since 1979) left us gun shy from going 100% all-in on the most recent strong signal. While this is unfortunate in the IRA/Retirement account (since it can not go short), as we are under-investing in inverse ETFs that are doing very well for us, it has worked itself out in the Aggressive/Margin account. Tons of stocks have produced very strong short signals for us since 5/4/12 and almost everything we are touching is working immediately. A far departure from the past two months. We realize that the market is very oversold here and thus it would be very dangerous pushing new short positions. If the market does not get a bounce on continues to selloff, we will continue to reduce the exposure in each new short signal that we receive. If the market can manage a bounce here and the charts stay broken with no real sign of accumulation in the market or leading stocks, we will look to fully press our bets on the inverse ETFs in the Retirement account and on shorts/ETFs in the Margin account. If the market does bounce, we get some good accumulation in leading stocks, and our current shorts start giving us cover signals, we will be more than happy to get exposure to the long side. However, we believe the fact that Facebook came public in such an environment and the fact that insiders sold over 50% of their personal holdings on the first day tells us everything we need to know as it relates to the 3-year bull”shit” market. I will redirect everyone to this post on April 23rd that I wrote for Seeking Alpha. It was denied publication because of its “technical analysis” content. That sure was unfortunate for their readers as the level of bullish articles that day was extremely intense. Aloha and have a great weekend.

     

    Current Top Holdings – Percent Return – Date of Signal

     

    BVSN short – 69% – 3/16/12
    AVD – 65% – 1/10/12
    UVXY – 63% – 5/9/12
    LQDT – 62% – 2/1/12
    SINO short – 37% – 4/12/12
    MNST – 36% – 1/13/12
    VRNM short – 34% – 4/10/12
    PRXI short – 28% – 3/30/12
    WZE short – 25% – 4/10/12
    19 May 2012, 11:32 PM Reply Like
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