Ian Woodward's Investing Blog

Is this a Top similar to 1999/2000 or are we already in a major correction ala 2001? 

There can be no question that essentially all the Market Indexes have ugly chart patterns as a result of Friday’s major drop, with many suffering Big and Little Kahunas (a one day drop in Bollinger Bands %B of -0.40 or -0.24, respectively). To put things in perspective, we should look at two factors, one related to past results on such big dip occasions in the DOW the following day and week, and the other as to how the Gorilla leaders faired.  Let me quickly remind you that we have this year already had bigger dips twice on 2/27/2007 and 8/9/2007 of 416 and 387 points, respectively, and one on 7/26/2007 of 312 points.  So we have certainly had a Yo-Yo market to contend with, and we are getting used to it, so it should come as no surprise.  That doesn’t mean we should be complacent.  Percentage wise the 367 point drop on Friday was the 2^nd lowest with -2.64% and 7/26 being the lowest at -2.26% in recent history:

We can see there have been 19 recent occasions that the market has dropped over 300 points in a day.  The question is what do we expect on Monday and for next weekend?  It’s not a big sample, but there are two chances in three it will be up on Monday, and nearly a 60:40 chance by the end of the week.  If we re-arrange the table to compare the big dips that occurred between 2000, 2001 and now, nobody knows for sure but we get a few hints of what might happen. If we first look at the comparison between 2001 and now, we must recognize that we were already well into a Bear Market, and were still struggling to recover: 

1. It is interesting that in 2001 we had two similar sets of action on 3/12 – 3/14 and 9/17 – 9/20, dates that were very close to each other in the same week.
2. The following day is usually less of a dip or even a small rise.
3. But then the floodgates open and by the end of the week there can be a complete capitulation and rollover followed by a steep rally the week after (not shown). 
4. Realize we were already well into a Bear Market in 2001 and struggling to recover, whereas we are currently attempting to stave off a major correction after five years.

Now let’s look at the comparison between 2000 and 2007, which is more in keeping with where we stand in the cycle of events relative to this long rally showing similar signs of topping as it did back in early and late 2000:

1. Note the similarity to now in that the occurrences in terms of dates are spread out over the year. 
2. Realize that we are at the top right now and essentially on what is a false breakout on all major Market Indexes having just had an intermediate correction on the Nasdaq back in July and August.  The Bulls are still in control, but showing major signs of fear based on all we have been through the past twelve weeks, and the long black candle recorded yesterday.
3. Using this comparison suggests a snapback on Monday and by next weekend. 

Only time will tell.  Those that hope and are either not close to the market or long term buy and hold types will say this was a pimple in the long term perspective and the market will come back and ride it through.  Those that fear know that we had a major shot across the bow fortunately with warning from the Hindenburg and we should take protective action if we have not already done so with the debacle of 2000 to 2002 still fresh in their minds. 

It is amazing what one can do with numbers to prove any point we wish…which is not the thrust of this note.  Rather, I like to use past history as to what the alternative scenarios may be and then have the market tell us which track it is on.  In my next note I will give you items to look for and how the Gorillas fared on Friday.

Best Regards, Ian.

The Hindenburg Omen gave us early warning and signaled three times this past week before the market tumbled.  Chalk one up to the HGSI Software! The Dow Jones, the main US share index, saw shares plummet more than 366 points on Friday, October 19^th, amid concerns over the state of the US economy. The technology-laden Nasdaq fell 74.15 points or 2.65% to 2,725.16, while the broad-market Standard & Poor’s 500 index declined 39.45 points 2.56% to 1,500.63.  Of course, the media repeatedly reminded us that this was the 20^th. Anniversary of the 1987 crash and of course such fear-mongering feeds on itself and supposedly is newsworthy!

The benchmark index of blue-chip stocks shed 366.94 points or 2.64% at 13,522.02 by Friday’s close of trade. The slump followed a warning by Caterpillar that the housing slowdown would harm the wider economy and cut its profit forecast.  It saw its shares down 5.3% to $73.57, and predicted weakness ahead after its earnings results, which missed forecasts.   

Although the name “Hindenburg Omen” conjures up images of gloom and doom, we must understand that need not necessarily be the case.  I prefer to look at it as a sign that the market is topping or has topped and we are due for some form of correction. Consider the following: 

“The probability of an S&P 500 move greater than 5% to the downside after a confirmed Hindenburg Omen within the next 41 days after its occurrence is 77%, the probability of a panic sellout is 41% and the probability of a real big stock market crash is 25%.The occurrence of a confirmed Hindenburg Omen does not necessarily mean that the stock market will go down. On the other hand there has never been a significant stock market decline in history that was not preceded by a confirmed Hindenburg Omen.”  

Be that as it may, the question is how severe was the damage and where do we go from here.  I strongly advise you to watch my associate, Ron Brown’s weekly free movie which you will find on this same highgrowthstock.com website. He shows the extent of the damage that has occurred and gives far better perspective than I can relate to the Internals of the Market. In my next blog before the weekend is finished I will relate this year’s action to past history in 2000 and 2001 and I will then wind up with a third blog of what do we do about it and what to look for. Stay tuned.

Best regards, Ian. 

Here’s a bonus for you tonight; I’m sure you are itching to see the picture I see.  Look over to the extreme right and you will see a thin pink line and thick pink line, representing two days in a row.  All told we have three Hindenburg Omen signals this week, as described in my previous blog.  Best Regards, Ian

Late Breaking News!  This is getting monotonous, but I have just downloaded tonight’s file, and I have another Hindenburg Omen to report.  This makes three this week…one on Monday, one yesterday on Wednesday and one today.  Maybe my Stress Reduction Exercise today is very timely!

My good friend, associate and partner, Ron Brown, sent me the snapshot below of how the top 19 Chinese Stocks faired in today’s market, and as a result he gave me the perfect theme for today’s Blog. You can see from the list that they did not fair too well today, but one-day does not make a trend.

Sometimes we can’t see the forest for the trees, what with concerns of Earnings Reports and the FOMC Meeting on the 31^st. October and Trick or Treat time on the same day.  Looming in the background is the concern of the impact of Global Markets, and I need hardly remind you that the Hang Seng Index is doing a dance “to da moon!”

However, I felt a few Stress Reduction Exercises may be in order to keep you in shape for things to come, especially since this Index is outstripping the Nasdaq in its hey-day back in early 2000.  I know we have had a couple of shots across the bow in the last few days what with the two Hindenburg Omen signals that have been clocked up on Monday and again yesterday.  Although you all know that I am neither a fear-monger nor a glass-half-empty type, it strikes me that the real worry may not be here but there…meaning Global Markets ala Hang Seng.   Keep your Powder Dry, play close to the exits and have tight stops is the name of the game right now.  Best Regards, Ian.�

 Late Breaking News as I go to Press – We have had a second Hindenburg signal today, on top of the one on Monday!

The U.S. economy slowed at the end of the third quarter and into the start of the fourth, while businesses grew even more uncertain about the future, the Federal Reserve said in its latest beige book released Wednesday.  Housing continued to take a toll, meanwhile, and is expected to remain “subdued” for several months, the Fed said.

U.S. stocks pared gains on Wednesday, with the Dow turning negative as a disappointing outlook from United Technologies Corp (UTX) and lackluster hardware sales from IBM (IBM) tempered optimism about profits.

Needless-to-say, the Market took a beating mid-way through the session, but once the dust cleared the little engine that could…the Stock Market, rallied again to wind up positive for the day on the Nasdaq and only a paltry 20 points down on the DOW.  This could have been the third distribution day in a row and that coupled with the one last Thursday would have suggested that we were heading for a correction today.  We still may be, but the Bulls live to fight another day.  Did you see the QID and the QLD change places as they each had a swing from positive to negative territory and back again? The VIX jumped 2 points and gave back as many (between friends) at the close.  Volatility and Yo-Yo Market continue to be the key words of the moment.

The Lesson learned today is to never panic, and if your stomach can bear the agony and the ecstasy, just wait till the market is closing to make your call, unless of course it is painfully obvious the market is headed for a disastrous day of >200 points on the DOW.  The way I do that is to watch the Gorilla RonIandex I gave you in the Newsletter and although that Index got down to near zero gain for the day, it stayed positive and came roaring back to give us a 1.44% gain based on 100 share lots.  Ron and I have emphasized it often to watch the Leaders, and here they are.  Best Regards, Ian.