Ian Woodward's Investing Blog

The Critical Fork in the Road for the Stock Market

two roads

On this Labor Day, I am reminded of one of America’s greatest Poets, Robert Frost and his challenging Poem of the Road Not Taken.  The Market is faced with the same challenge during the next two weeks and we wait with much anticipation as to how it will unfold. 

In these past few weeks the pundits have covered the gamut from total gloom and doom of crash proportions ala 1929 and 1987, to this recent correction was little more than a storm in a teacup and now that we have had a decent correction we are up, up and away again.  Make no mistake about it this Market will be news driven in the next two weeks.  By way of that news and the current standing of the Market Indexes we have the potential of the perfect storm of events occurring all around the same time: 

  1. The FOMC will have returned from Jackson Hole,Wyoming all primed to act depending on the next fracas in the financial markets.
  2. General David Patreaus is due back on Capitol Hill with his report on Iraq and that may cause a flurry of discussion in Congress and stir up the pot in affecting the Markets.
  3. The Market Indexes have done their Bounce Routine and are poised to take either the high road or the low road to Loch Lomond, as the song goes. Bulls and Bears are at a stand off at the OK Corral, as we now enter September, historically the weakest month of the year. The S&P 500 has been up these past three years. So the stage is set for what we will look back on as a couple of weeks in Stock Market History. Let’s first summarize what we gleaned from the three mini-stakes in the ground and then we will step back and look at the macro picture.

Mini-Stakes in the Ground: 
  1. Leaders in leading Industry Groups is where the action is, with Technology, Telecom and Health Care leading the way along with Box #7 stocks with strong Fundamentals.  The StockPicker group performance shows Growth is preferred over Value at this time. 
  2. Wolf Packs as exemplified by Chemical – Specialty are also working according to form, and are poised for a breakout. 
  3. The Game Plan Index has demonstrated strength and has produced a cup with handle formation and is also poised to move.  It doesn’t have to be this Index, any strong index based on our HGS Principles will do the same thing for you, but the point I have made before is that this little bag of tricks has stood me in good stead for ages, ever since I introduced it 15 years ago. The bottom line for the mini-stakes is the Bulls have recovered and are set to head on back up. 

Major Stakes in the Ground:   

Frankly, all three of the items being so positive makes up for my disappointment that the Market Indexes have not snapped back more than 10% and above their 50-dma.  I am prepared to make an allowance for the seasonal low volume compensated by two Eureka signals.  

I expect that tomorrow will be a settling back day and not much will happen, but we should all be back from vacation and back to school with the old routine starting on Wednesday when the real clues will emerge.   

One item of Fly Specking that did not sit well with me was the unusually high sell off in the last 15 minutes on Friday.  Granted it was a three day weekend ahead and people were unwinding their positions, but I was licking my chops just prior to that and expecting the Indexes to finish very strong compared to the targets.  They finished flat. Other summary points from past blogs: 

  1. Trading in moments is where it is at right now; take your trades off before the end of the day! 
  2. The Reverse Head and Shoulders pattern makes the call easier on the downside
  3. The Gunfight at the OK Corral is won or lost by the FOMC’s action or inaction.  

    One of the good things in life is that we learn from each other.  Robert Minkowski, my good friend has turned up trumps on his work relating to Confirmation Days and Market Timing.  Having set targets and taken measurements for all of a month, it is now a good time to reset and fine-tune those targets going into tomorrow.  Riding piggy-back on Robert’s work, here is what I see for targets to the upside for a decent bounce assuring less odds of breaking the downside. I have added the S&P 500 to the list (with an eyeball):

Index Criteria                                Low     Target    Actual     % Up fr Low   Up to Target   

·     The S&P 500 > the 50-dma         1371      1500       1474            9.4%              26 pts (2 days) 

·     The Nasdaq 100 back to             1806      2002       1989           10.9%              13 (1 day)  

·     The NASDAQ back to                 2387      2655       2596           11.2%              59 (2 days)   

·     The !VAY                                   2153      2351       2327            9.2%               24 (1 day)             

What the above tells me for the future is that a good rule of thumb is 10 to 11% for the Indexes to repair from their Base Low, so tuck that yardstick away for future use.  Note that it won’t take much to achieve these targets…it is measured in a couple of good up days.  As I see it right now, the only item that can really upset the apple cart is more negative news on the financial banking front and all the accompanying baggage we have discussed ad nauseum; Also a global surprise of either a Political or Market nature, and those two come with the territory. 

Be careful which Road you take in the Yellow Wood.  Best regards, Ian.

Copyright © 2007-2010 Ian Woodward
Disclaimer: Commentaries on this Blog are not to be construed as recommendations to buy or sell the market and/or specific securites. The consumer of the information is responsible for their own investment decisions.