Ian Woodward's Investing Blog

At times like these one needs magnifying glasses to see the footprints in the sand to know what may lie ahead.  I rely on past yardsticks to identify what hurdles we must cross both up or down to know whether we are now on the Low Road going higher or lower. So far the bounce is weak: 

The Benchmarks Going Upwards for a Reasonable Bounce: 

1. The S&P 500 must at least get back to the 50-dma which is at 1485 for starters, i.e., three strong up days, to put the odds strongly in our favor that the Base Low when re-tested will hold.  
2. The NYSE for good measure must get back to 9750, but expect resistance at 9500. The NYSE New Highs must get above 125 and new lows down below 50 on that same day, for the very first sign of a recovery.  I didn’t say recovery, I said very first sign.  It must build from a >2:1 ratio to 4:1 and then 8:1.  These are not easy targets, but understand much damage has been done. 
3. The NASDAQ must get back above 2575, i.e. two strong up days to start to repair the damage.  
4. The DOW needs to get above 13,400 for the same reason; three strong up days – a tall order. 
5. Understand that the Market is already baking in the expectation of a Fed Fund’s rate cut and so the naysayer’s I mentioned the other day are just waiting to see if the FED will act further. The cloth the Fed has is until their next FOMC meeting in September.  Bake this in to the equation, as any shilly-shallying on their part on surprises will be a sign of weakness and one up for the Bears.  
6. The Critical Lines in the Sand are 1371 on the S&P 500 and 2387 for the NASDAQ, which are tapped in lightly for now.  These are the Big Bad Wolf lines, and everything hinges around them.  If these are broken to the downside the Market is in a lot more trouble.   

A. If the above criteria are met, then there is a reasonable chance that the following retest will hold at the previous low or higher, i.e., the third huff and puff won’t blow the Brick House down.  However, as I said Rome was not built in a day, and this will be a drawn out recovery at best, one that could last well into Labor Day and even up to the fresh earnings reports in mid October.    The FED is now on notice and let’s face it they have acted promptly so far.  The Grand Old Duke of York…a.k.a. Bernanke baby knows that this test is his legacy.  He is no fool.  So, if you are on the short side of the Market, make sure to include “expect the unexpected” in your deliberations.  

B. If these criteria are not met, then it will be a tepid bounce, so expect the retrace to test the low and the odds are the Indexes will break down further.  Just refer to the roadmap in the Newsletter and you will know the journey ahead.  But remember, there is no point in having a road map, if you as the driver do not have your hands on the steering wheel, are in control and prepared to act.  So that those who are short the market can also take comfort, I have given you enough fodder to establish the downside Strategy and Plan.  Best Regards, Ian.

Today’s volume on the bounce turned out to be very disappointing, leading one to recall the caption above, from all of 20 years ago.  There is no question that buying came back in to the “Game Plan Index” I gave you several days ago. (See an earlier note below.) However, today’s action was little more than marking time and we will soon see a retest of the lows I described earlier.  Remember 1371 on the S&P 500 is the line in the sand.

The good news is that the Game Plan Index has recovered a bit, but we need a lot more.  The Tsunami still shows the Index is on a sell, and we need this to turn to solid green again, before the coast is clear.  Keep your powder dry and don’t be too impatient to start nibbling. We still need the Big Bad Wolf to Huff and Puff one more time to see if the Market can hold or fold:

 From today’s action, expect that retest of the lows soon.  Ignore today’s green bar.  Best Regards, Ian.

One could not help but feel the angst and hand wringing this past week when Hedge Fund and Carry Trade news hit the wires.  This was a severe body blow to the Bulls who hardly expected this news after the excitement of relatively good Earnings Reports a couple of weeks earlier.  As would naturally be expected, the shorts in their multifarious forms knew a good thing and took the Market down to test the usual first line of defense, the 50-dma and then in quick succession headed for the 200-dma when the former could not hold.  I’m not telling you anything you didn’t know by now that a well trained Technical Analyst would do to draw automatic lines in the sand.

Many are in a State of Denial from the shock of seeing their fortunes pruned, but we had two weeks warning with the Eureka and Hindenburg Omen triggering together as far back as June 13^th, which was the very first warning sign.  (I describe the Eureka, Kahuna and Tsunami indicators lower down in this Blog.) As we well know we needed several additional Hindy’s to trigger and we got them at least eight more times until the last one on 7/24/2007. 

The bottom line is that readers of our newsletter knew well in advance that the end of this 4+ + Year Bull Run was reaching a climax.  In the March Seminar I suggested the top for the S&P 500 was 1557 and we hit 1555.90, so benchmarking and target setting does work.  With the help of the newly developed Blog I was able to keep you abreast of the thinking going into the correction.

But, that was last month, and the next question is what happened these last two weeks?

1. The Big Bad Wolf has huffed and puffed and blew down the straw house. That got us down in quick succession to a low of 1427.67 on 8/6/2007, breaking the 200-dma. and -8.2%.  As we well know 77% of the time the S&P 500 will hold at this point and either go up on its way back to the old high and beyond or it will toddle on down to test this same low. You will recall this was the first murmur of the sub-prime fiasco surfacing with vigor.

2. We didn’t have but four days to wait on the dead cat bounce to find we were headed down again, this time with Hedge Fund chaos to finish with a full break of the 200-dma to make an imprint low of 1370.60 or 12% down from the high.  The close was at 1411.27 which was 9.3% down.  So either way the gurus of the 10% folklore should be satisfied that at least the spirit of the correction has been met.  Net-net, the Big Bad Wolf huffed and puffed again and blew the second house down of Sticks. 

3. As we chewed on our finger nails on Friday morning, safely sitting in our house of brick but realizing that both Asian and European markets were being hit heavily, and the futures showing we were in for another heavy day, in struts the Grand Old Duke of York…a.k.a. Ben Bernanke and with one stroke of the pen turned blood red into green. 

4. Shorts ran scurrying to cover and of course there was some bottom fishing, but as my colleague, Ron Brown suggest in his weekly free movie, the volume was not all that extraordinary given that it was options expiration as well.  With mumble billion shares shorted, of course there was short covering in sync with the overall market coming back almost 300 points in the last hour on Thursday and for good measure another 200 points on the DOW on Friday. The net result was the S&P500 marched up to the top of the hill and finished at 1446, just a smidgeon below the 200-dma at 1449, which of course is resistance.

Next week is a new one and the $64 question is what do we expect next?

1. Given we found a new low on Thursday, that will be the temporary Base Low until further notice, so make a note of it at 1371.  Don’t forget to tap it in lightly, as we are not there yet.

2.  Your earliest clue to the Asian reaction to the Fed’s action will be on Sunday night before you trot off to bed.  Then look at what has transpired in worldwide markets before the open in addition to reviewing the Futures markets.   

3. For starters, the S&P500 must break up through the 200-dma with conviction, in other words we need to see a follow through of taking the shorts to the cleaners, but more importantly fresh buying across several Industry Groups to see some breadth of recovery.  

4. With 1080 New Lows, a veritable print to note as one of the all time lows, we still have more new lows than new highs on the day with 171 and 46, respectively.  We need to start to see those numbers reverse quickly next week, and if they don’t then for sure expect more on the downside.  So that is one item to keep your beady eyes on.

5. For any form of reasonable bounce we should expect it to at least get back to the 50-dma which is at 1485, another 40 points up (say).  Anything short of that will be a disappointment and indicative that naysayer’s who feel the Fed should have done a full basis point or better yet should cut the Interest Rate have the upper hand.  If it makes this level, then one should expect another attempt by the Big Bad Wolf to test the previous low and this time it had better be the Piggy’s Brick House.  It must hold at or near 1370 for a double bottom to feel comfortable that the ship is righted and the Grand Old Duke of York didn’t ride his 10,000 men to the top of the hill to only ride them down again.

The bottom line is expect a Double Bottom and that is the time to either sharpen your pencils to select good candidates for a new bull rally or button down the hatches for a lot longer. Otherwise gamble in Micro-Moments every day.

The Lesson Learned: If you think it’s a bottom, you are probably early, if you know it’s a bottom you are way too late.  All short covering so far.  Overseas money coming in is a good sign. 

My August High Growth Stock Newsletter for subscribers will be published tonight. Here is an overview for those who are not regular subscribers. If you are interested in subscribing use the link on the right side of my blog and go to the HGS website.

The sub-prime loan fiasco finally caught up with the market and we have been on a roller coaster ride this past month. Intra-day Volatility has been extremely high with swings of 200 points up or down in a day becoming commonplace. All Major Market Indexes are either at or close to their 200-dma lines and have recently printed 4-month closing lows this week. The seemingly low volume early this week may be attributed to seasonality and some “black box” trading firms who are taking a break until the dust settles.

I have done full treatment on Change Management as a precursor to good Money Management in this month’s newsletter, and describe the ten criteria which are important. I note in passing that the Benchmarking Process I use for Target Setting established an Intermediate High for the S&P 500 of 1557, and I am pleased to say that the current high peaked at 1555.40, which once again proves the process and tests of reasonableness used will get very accurate results with minimal surprises.

Ron Brown, my colleague has applied his attention to the Accumulation/Distribution criteria to find emerging stocks that have pedigreed earnings credentials and are emerging from a C+ through B accumulation. The clever application of certain criteria to the process of filtering and reserving other factors for the Combo Rank function gets the cream of the crop to the top. It’s pretty neat stuff using proprietary HGS software functions.

At times like these, a couple of pictures are worth a thousand words: 

I note that some people may have ants in their pants. Just look once more at the Title of the Note I put up two days ago…The Early Bird Catches the Worm, but Watch Out for the Hawk Above.  If you are too hurried and do not have time to read the whole article again, then focus on these two points: 

1. V bottoms are very rare patterns and one is far more likely to get caught in a retest of the lows. 
2. Watch the internals of the New Highs and New Lows on strong up days.  Yesterday was putrid, and most would call it a Dead Cat Bounce.  It also happened to come off support at the 200-dma on the NASDAQ, which was a most likely call for most technicians. 

Now think of what has happened since then and the reinforcement of where the psychology stands which has not changed at all in my note of August 4…The Party’s Over and the Jig is Up! 

1. The psychology – a 10% correction for a decent clean out 
2. The Volatility has increased…200 DOW Points swings every day are commonplace lately 
3. The Loans fiasco has now spilled overseas to Europe causing a miserable day here today 
4. The Earnings are long since forgotten other than to prop up a few stellar reporting stocks Then ask yourself if you should be fiddling while Rome is burning; only Moment Traders are having fun and they must be so nimble that they are literally down to moments, and not within the day trade decisions. 

The Net-net message today is the less said by me, the better.  You had the warning signs from me well before this and I hope you heeded the messages.  Keep Your Powder Dry.  Best Regards, Ian.