Joshua Hayes'  Instablog

"I learned that an opinion isn't worth that much. It is more important to listen to the market."
-Brian Gelber

"Most traders who fail have large egos and can't admit that they are wrong. Even those who are willing to admit that they are wrong early in their career can't admit it later on! Also, some traders fail because they are too worried about losing. I'm not afraid to lose. When you start being afraid to lose, you're finished."
-Brian Gelber

The Big Wave Trading Portfolio switched from a weak BUY to a NEUTRAL to a strong SELL signal on Friday. The weak BUY signal was generated by CANSLIM stocks breaking out and the Homebuilder indexes (ITB, XHB). The nature of the BUY signal was problematic and it is no surprise we are now under a SELL signal.

What was surprising was the shocking (almost stunning) amount of CANSLIM quality stocks that broke out during the recent signal. This caused our portfolios to definitely be way too long the recent move and thus subjected us to more cut losses than what would normally happen. The mistake was taking any breakout that came within two weeks of earnings. This will now be a hard rule in our methodology. New breakouts in high quality stocks within 10 days of earnings are now completely off the table. Had this one rule been observed the small losses we did take would have been cut by nearly 50%.

As for the current market condition, the breakdown we just saw in the market was on above average volume on the Nasdaq. This volume was also higher than the recent upside volume in the index. AAPL, CMG, and PCLN are beginning to see some serious distribution problems. Other CANSLIM quality stocks have reversed their previous breakouts on heavy volume. Other CANSLIM quality stocks failed late-stage basing patterns. Even other CANSLIM quality stocks had total and complete devastation following earnings misses. This all came on top of a horrible jobs report. This definitely weighs on our model.

The only problem we have with this SELL signal is that our internal indicators are not confirming the move. They are, however, beginning to have a rollover type look and if the market does continue to selloff these indicators will go into confirmation.

Overall, the charts in individual stocks have gotten very ugly very fast. The old market axiom of sell in May and go away appears to be intact. The amount of distribution in this market since February has been very large in comparison to the accumulation. Now that we have the market breaking down below the 50 day moving averages on above average volume it appears everything is in line for a rough May to October period.

In all fairness to the stock market, we do know that it can and will do anything it wants whenever it wants. Therefore, if we selloff and then rebound on huge volume and get a massive follow-through day on accumulation, we will go long. This despite Big Wave Trading's opinion that a serious correction is in our very near term future.

I penned an article that was denied publication by Seeking Alpha due to the "technical" analysis nature of the article. I believe it is worth a read for anyone who has recently gone long this market and believes this is the start of a normal pullback. It could be but it probably is not.

Top Current Holdings - Percent Gain - Date of Purchase

SWHC - 81% - 1/3/12
AVD - 68% - 1/10/12
BVSN short - 57% - 3/19/12
MNST - 32% - 1/13/12
PRXI short - 25% - 3/30/12

Disclosure: I am long SWHC, AVD, MNST.

Additional disclosure: I am short PRXI CMG BVSN