TraderTalk: What Did Gary Kaltbaum See?

This is an edited transcript of the TraderTalk session held by Gary Kaltbaum for TM subscribers on Thursday, August 22, 2002.

Gary Kaltbaum: Good afternoon and welcome to TraderTalk.

Brice Wightman: Today we are fortunate to have with us a gentleman who, in addition to being a fine technical analyst, also manages over $100 million in assets. For 20 years, he has been spotting and trading growth stocks. You can listen to him daily on his radio program "Investor's Edge." (Gary, just told me that, in addition to being a good technical analyst, he's good-looking, too.) So it's with great pleasure that I now introduce you to Mr. Gary Kaltbaum.

Kaltbaum: Good afternoon all. First off, it has been one of the most amazing years on record. I hope you have been doing what I have been doing. Playing it close to the vest and not getting killed like most average investors. If you have been reading my reports, listening in on the radio show or in my service, you know we were short almost all the time from late February to about three weeks ago. The market finally bottomed on July 24 and followed through.

I must tell you that in no way did I believe the market would cover such territory in such a short period of time...that's why we shouldn't have opinions. I have let the market be my guide and will continue to do so. Right now, the market's rally is feeling long in the tooth...but every time I think it is going to stop...another 100 points up.

How do I play it? I just wait for stocks to break out of sound bases on heavy volume. If they keep working and more names show up, I keep playing. If they start to crap out, I end it. Believe it or not, that's all you have to do. I get more and more nervous every time the market ticks up because I want pullbacks...that's why we have stops in place.

Long term, I urge you to look at the chart of the S&P 500 that is shown. It is weekly and it is ugly. You can easily see that it is looking like Sept 2001 rally, as well as the March 2001 rally, and that scares me. This is a classic bear market rally but it can be played. Even though I label it, it doesn't mean you can't go after it. These rallies can last a few months if they want to.

Wightman: Click here to see the chart.

Kaltbaum: The best stocks are the ones coming off their lows so not a lot of new highs. The market is actually lifting the bottom feeders like AIRLINES and TELCOM. If you are a bottom feeder, you can play but not for me. The big test will come if the market rallies another few percent. Does it turn tail or just make a right turn...I don't know. I just believe in interpreting daily action. The market will show clues to topping just like it did earlier in the year. You do remember the 120 short candidates I put out (on April 29 and June 24)? They were trashed. So far, not a sign of topping out. It is important to scan every day the NEW HIGH LIST as well as the high volume movers. This will tell you where you need to go at all times. Every big move...both up and down...started with big weekly or daily volume.

Wightman: Gary, we have a few questions...

Kaltbaum: Go ahead.

Question: Is this a bull market? We today reached a milestone with the ($SPX | Quote | Chart | News | PowerRating) out passing the ($DJI | Quote | Chart | News | PowerRating), which is up 20% off the lows which technically is the definition of a new bull run?

Kaltbaum: I think it is a mistake to label it as such. I look at things in a broader context. You will get in big trouble if the market tops out tomorrow and you think it is a bull market. That is talk from the donutheads on TV who's ratings are down 25%...and think about it. The Nasdaq 100 went from 4800 to 900 and has now rallied up. Does that sound like a new bull or is it the definition of a dead cat bounce? You will know over time if this is a new bull because we won't be looking over our shoulders in three months.

Question: Is the market in reverse from July? Not letting longs waiting for a pullback. Pullbacks are intraday only so far. Shorts couldn't short in July, waiting for pull-up...

Kaltbaum: So far, the market off the lows, is acting perfect that's it as long as the pattern continues...we go with it Shorts are not working right now...so we don't play them.

Question: What are the three best-looking sectors on a tech basis?

Kaltbaum: Very tough to say because most sectors are way down. I would say small to mid-size banks, Chemicals....look at (GLK | Quote | Chart | News | PowerRating) and others and I think you have more to go in the OILS...best stocks are (PXD | Quote | Chart | News | PowerRating) and (SII | Quote | Chart | News | PowerRating) but not much as powerful breakouts in sectors.

Question: What are you looking for (either up or down) when the S&P 500 reaches the neckline of its multi-year H&S pattern?

Kaltbaum: The word "yonk" comes to mind but that's a prediction. The market doesn't care what I think. We will see what happens and how things trade from there. All I know is so far so good, but the market will be dealing with a lot of congestion around there.

Question: If there were five distribution days in two weeks, would you start shorting again?

Kaltbaum: Hopefully, I would be shorting after number 2 by that time, my short list would already be gagging.

Question: Do you set targets for entry exit? I find that the stocks seem to obey like dogs on a leash.

Kaltbaum: ALWAYS and I mean ALWAYS have a target stop-out if you are wrong. It is tough right now but try to let the winners run or at least sell half and let half run if you are right.

Question: From the March 2002 high of 1174 to the July 24 low of 776, a halfway retracement is to 975. Wouldn't this be a logical place for resistance to exert itself?

Kaltbaum: Definitely but I must admit, I didn't think it would get this far you need to watch (IBM | Quote | Chart | News | PowerRating), (MSFT | Quote | Chart | News | PowerRating) and the like, because they have such a huge influence.

Question: Will you please let us know on TM commentary when and if you see a topping out of this rally?

Kaltbaum: Absolutely I nailed it for you the last go-round and don't plan on missing it. Here is what I will need to see: Churning at the highs meaning high volume with no progress...a couple of distribution days... leadership names breaking down ... and stocks breaking below the 50-day MA and an inability to rally above it. and of course, Abby Joseph Cohen getting even more bullish than she's been. Sorry Abby, had to throw that one in.

Question: How do you define big volume?

Kaltbaum: On big caps 50% above their average midcaps and small caps...at least 2x and higher.

Dave Landry: Is it true that you and Joe Battapaglia are best buddies?

Kaltbaum: I just hope I never meet him. He's 6' 8".

Dave Landry: You're doing an excellent job, Gary, sorry to interrupt.

Kaltbaum: I don't think I will be at Joe B's wedding. You could never interrupt, Mr. Landry.

Question: What sectors have the weakest charts?

Kaltbaum: Weakest sectors are actually strong off their lows AIRLINES, FIBEROPTICS, STORAGE I am seeing a topping out here of DEFENSE stocks right now. Sorry FIBEROPTICS and STORAGE are not strong off lows. Very poor technicals in (LMT | Quote | Chart | News | PowerRating) which has been leading the group. I think I just put that up a while back.

Question: Gary, what are the signs of topping-out?

Kaltbaum: High-volume down days; low-volume bounces; lower highs and lower lows breaking moving averages; breakouts failing...

Question: Sept. 2001 low was due to an unfortunate event. 2002 low is due to Enron, Worldcom, etc. Having difficulty to believe that another low is coming. What event can bring it out? My perma-bull mind says, that's it. No more new or retest of indices. Straighten me out please. Thanks.

Kaltbaum: Never...ever... anticipate that something can't happen. I do recall everyone saying that the Sept. lows was it, don't you" I don't care about why, who, if, when, but I only care about reality. If the market wants to go lower, it will and vice-a versa. I just hope you haven't been a permabull for the past 30 months. Important note: It's not the news...it's how the market reacts to the news that counts.

Question: (NWRE | Quote | Chart | News | PowerRating) RSI 98 trading around 16 Can you offer an opinion?

Kaltbaum: Wouldn't buy it. Wouldn't sell it. Strongest stock on Nasdaq but too extended and has had a big run already. But does look higher. Next question?

Question: Since the advent of online trading and daytrading and a larger percentage of market volume comprised of program trading and Hedge Funds, do you notice that your formulas of intermediate-term investing have been out of kilter a little bit... and if so what adjustments have you made to your style?

Kaltbaum: Not at all. I couldn't care less who is doing what. The laws of supply and demand, fear and greed are here to stay. All you need to do is learn how to use them to your advantage by reading chart patterns, reading sentiment, always keeping close stops and never getting too full of yourself, no matter how well you are doing. A little hope and prayer could do but has never worked for me.

My last words of advice: I used to sell penny stocks...I used to have no clue...I used to get by by putting my finger in the air to figure out which way the wind was blowing. There is no substitute for hard work there are no short cuts. If you really want to be good at this, you first have to strip away everything you have learned from all the buzzardheads about buy and hold, target prices and predictions. You must learn to never lose big.

Wightman: For more info on how Gary trades, and for the link to his radio show, go to: http://events.yahoo.com/radio/archives/btr/investorsedge/ and click on business talk radio live. For a seven-day trial to Gary's service, go here: http://www.tradingsubscriptions.com/subscriptions/details.cfm?item=5735&subcat=it. Or call (888) 484-8220, ext. 1, for your free trial. You can save 10% now, and also get a free extra month added to the service. Thanks again, Gary, for a great session.

Kaltbaum: You must learn that the market will have the edge if you let it. I urge you to read the books I recommend, read the lessons on the TM site and practice, practice, practice. I know this may sound like a cliche but if I can get to where I am, you can also. Night, night.

Wightman: Thanks again, Gary.

Kaltbaum: Always my pleasure. I hope I was a help.

Wightman: One last thing: Gary will be on Fox's "Bulls And Bears" at 10 a.m. ET this Saturday, August 24, 2002.