Larry,
I recently read an interesting little book, maybe you've read it, "Lessons from the greastest stock traders of all time" If not, it's basically a short discussion of the trading methods of Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvis & William O'Neil. The one similarity that they all had, as you probably already know, was buying stocks that were making new highs. Another idea that I got from the book was that they all tended to look for the leading stocks to break down first as a signal that the market was possibly topping and headed down. My question, is this pattern prevalent today? I quickly went through the S&P and Nasdaq 100 and found about 10% of all stocks are in a definite downtrend (200 dma in steady decline). Are these stocks signaling weakness in the market or is 10% about a normal average for declining versus advancing stocks?

Jim

i am very familiar with william o'neil's work & i know that he would not consider the stocks in the S&P or the Nasdaq to (necessairly) be "leading" stocks.

he tracks a number of indexes of his own making including the ibd 100 & the 85-85 index. these are comprised of "leading" stocks (his definition) that have top fundamentals (earnings, roe, etc) and strong relitive strength lines (see stockcharts.com for a definition).

so... according to ibd & o'neil leading stocks are NOT yet topping. the market is in "confirmed rally" mode & a quick look at the ibd 100 stocks tells me that leading stocks are all in strong uptrends...

however, markets can turn fast & we MAY be in the 5th inning, so to speak.

if you liked that book you might want to read o'neils book "how to make money in stocks".

just a tho't.

-ja

case in point:

in the ibd 100 index, 43 stocks are hitting new highs today.
these "leading" stocks are NOT falling yet.

watching an index of leading stocks IS, in my opinion, a great early indicator as to the direction of the broad market.

in may of 2000 i noticed that leading stocks were failing after their break-outs and that my holdings were getting stopped out at a high failure rate - we know now that THAT was the beginning of the multi-year bear market. i used this "sign" to get off margin immediatly & was totally in cash by june. i lost some money... but i didn't lose my shrit!

-ja

Jim,

First of all, whatever patterns were valid then would be valid today. The most dangerous words in market history are “it’s different this time.” It’s never different.

10% of leading stocks in a downtrend would not be an indication that the market is rolling over. Of course, what are the leading stocks? I would say it’s energy and housing. I don’t think those great investors you mentioned would think energy and housing are going to lead to a new bull market.

Livermore, Baruch, Loeb, Darvas, and O’Neil had some similarities but they also had some differences. Livermore is the one that always fascinated me the most. I’ve often thought that Livermore would have been out of the bull market of the 90’s in about 1998. That’s when a lot of stocks started to roll over. And then he would go on a long vacation. He would do that a lot. One of his most famous sayings was that he made his money by sitting.

Darvas and O’Neil were clearly inspired by Livermore.

Larry

This doesn't have anything to do with Livermore, et all but Art Cashin (a head floor trader and one of the few on CNBC worth listening to) said yesterday that what we've seen since Thursday is a rotation out of bonds and into stocks. And when it's over it's going to be tough to keep this market going.

Also, since we're ramping going into earnings season, it seems to me that the market is a sitting duck for selling the news once reports start coming out. Think about it. The smart money is selling bonds and buying stocks (and at the same time selling futures) going into earnings season. And when earnings reports start coming out, they'll be selling to those who are buying the news.

Larry