Ian Woodward's Investing Blog

The DOW climbed a modest 41.13 points to 13473.90, after a session of wild roller coaster intra-day swings as the Market Gurus and investors tried to digest the Fed’s plans to add liquidity to money markets and also profit warnings from major banks:

1. The DOW jumped more than 250 points at the opening bell, which took the wind out of the sails of the Bears initially and then gradually, had a day-long descent.  Trading was very volatile in late afternoon, with the Index going down more than 110 points below its opening level before finally settling up a modest 41+ points.
2. J.P. Morgan Chase, and B of A were cut from buy to hold and Wachovia was cut from hold to sell.  Bank of America fell 2.7% after it warned of tough sledding to come, including larger write-downs on collateralized debt obligations and a fourth quarter that will be profitable but “disappointing.” Wachovia shares fell 3.4% after it said it sees higher provisions against credit losses and further mortgage-related losses.
3. Import prices surged today and the weak dollar is causing inflation beyond tolerable limits.
4. It is plainly obvious to the common person that the FED is trying to pull every trick out of the bag in dribs and drabs depending on how the market reacts to their medicine.  What that does is make investors more suspicious that this Global Sub-Prime loan crunch has many more shoes to drop.

This has to be a trifle frustrating to the Bears who once again have been thwarted unless they were exceedingly nimble and made their buy and sell decisions in nanoseconds instead of seconds, skipping over milliseconds and microseconds these days!  That’s meant to be a tame joke, but it is not laughable as I am sure genuine Investors are in a state of shock and disgust.

I will go back to my foxhole and enjoy my Nephew’s visit from England and leave you as frustrated as I am, as even the Crisis Counseling Phone is out of order!

The only smile I can offer you is that the Post Office unveiled a 41c stamp of Frank Sinatra with that infectious smile and wearing his fedora hat.  It will be out in late spring, 2008.  What other blog gives late breaking news like that?  Best regards, Ian.

A strong supporter and concerned customer wrote “I missed Ian’s blog this weekend.  Hope he’s busy or traveling, rather than sick.”  Sunni 

Hi Sunni:  Thanks for the concern and I am glad you may be having withdrawal symptoms…I am just taking a little R&R: 

1. The Carpel Tunnel said lay off a bit, and chastising me for doing too much typing 
2. The Newsletter is due this weekend and I have to save some goodies for that 
3. The Game Plan is intact and all is well so far:     

• Despite volume concerns which are natural…skittish waiting for tomorrow, holiday season, etc.,      
• 4-dma up through the 9, 17, 200 and 50-dma in that order spells strong move in ten days     
• 110 points in 10 days is over a 7% recovery for the S&P 500     
• The Index has poked its head above the 405-Freeway downtrend-line, above the 50-dma and has achieved a 61.8% retracement on the Fibonacci levels…All tough resistance, so things are looking up. 

Never Count your Chickens before Helicopter Ben makes his decision tomorrow…then with luck, fly high. Hopefully you have been making good money these past ten days as I have…but as you have said in the past you have to keep one foot near the exit signs.  On a personal note, my Nephew is visiting from England and I hope you folks will understand if I lie low for a few days. Best Regards, Ian.

We have had a few visits from Helicopter Ben to save the day in November, and now we have Santa Claus bringing the Bulls a gift on Mortgage Loans from the White House in December.  President Bush outlined a plan to help struggling homeowners avoid losing their properties, including a five year freeze on low and introductory mortgage loans.  Treasury Secretary Paulson said the effort isn’t a “silver bullet”, for the housing crisis but should provide some relief. 

The upshot of all of that is with a proper follow through day yesterday on the Stock market Indexes, we had another rip roaring session today to send the Indexes back up into respectable territories from their recent lows.  Since my last blog on Sunday where I laid out the Game Plan for the recovery from a Base Low in three steps using the 405-Freeway as the lynchpin to success, we trotted down calmly for two days at the start of the week to pause to refresh and yesterday and today have been blockbuster moves in the Stock Market.

That was my early Christmas Present to all of you last weekend, and here we are like magic sitting right at the 405-Freeway on all three Major Market Indexes (between friends).  I show the previous move on the S&P 500 so that you can see there can possibly be a slight hesitation similar to the yellow dotted oval last time, before the Indexes can push their way through that overhead supply depicted by the line I show; especially since there have been two powerful moves these last two days.  It goes without saying that the bear’s scenario is “Don’t count your chickens before they hatch” and “There is many a slip twixt cup and lip!”  So let’s review the bidding: 

1. It all hinges on two important pieces of news starting tomorrow with the Jobs Report and on Dec 11^th when the FOMC Meeting delivers their much awaited decision on lowering Fed Funds Rates once again.  Whether it is 25 or 50 basis points or none at all remains to be seen. 
2. Bad news on either or both of these two items can get the bears dancing and prancing once again, but good news of course will provide the booster rocket to propel the market for a decent Santa Claus Rally.   

In the meantime, the work that my friends have done suggests with a big winky-winky that stocks with ERG 270 is where the action is since the market started its correction on Nov 1, and I will show you that in the Newsletter next week.  When the market is jittery always go for those with the strongest credentials in ERG for the smoothest rides.  For sure you need Stocks with EPS Rank >90 and Rel Str >90 and preferably Group Ranks greater than 70 if not higher.  Some Wolf Packs such as the Transportation – Shipping are a trifle tired, and others trying bottom fishing for the umpteenth time with the Home Builders are still trying to find a bottom.  The Chemicals – Specialty are white hot, the Energy Alternatives run hot and cold and it is good to see that after a shaky week or so in the Technology Stocks they seem to be rebounding nicely with the likes of GOOG, AAPL, GRMN as well as fresher ones such as VIP, SIGM, PTT are worth a look based on their strong Fundamental credentials 

With regard to the Rebound, we can see that there has been substantial repair in the market Indexes this past week as we are essentially only 4 to 5% from the Oct/Nov highs. Notice that these stakes in the ground remain the same, and all one has to do is move up and down the scale as the case may be based on the Markets action.  Doing it this way gets your stomach in sync with the Fear and Greed Syndrome and which side of the market you should be on. 

Net-net, Stakes in the Ground, Frequent Measurements, Base Low, 405-Freeway are all part and parcel of guiding you to victory in mastering the Stock Market during corrections.  Best regards, Ian 

I felt it was time for me to write an HGS Investing Solutions Article on the value of the concept I developed called “The 405 Freeway”.  As those who have visited Los Angeles know only too well, the 405 Freeway runs from Santa Monica in the Northwest to San Diego in the Southeast.  It is the biggest parking lot in rush hour traffic you would find in these parts of the woods or for that matter in the world, and in Investing terms that would spell strong resistance to breakouts.   In doing the blog yesterday where I show the value of the 405-Freeway, it struck me that the recent examples we have lived through since the Base Low of August 16^th, 2007 give us a classic picture for describing the essential ingredients an investor faces after an Intermediate Correction.  History never repeats itself exactly the same way, but it comes close enough that one can usually identify three alternatives after an Intermediate Correction: 

1. A “V” bottom is the rarest chart formation and is more likely to occur early in a long bull rally than at the later stages.
2. A “W” bottom is the more frequent formation where the previous low is retested before the low is confirmed and the new rally is on the way.
3. An Inverse Head and Shoulders formation as shown on the chart below, which is a hybrid of the other two.

The psychology of the herd before a market bottom is confirmed is naturally one of more fear and less greed.  On August 16^th you will recall that we were at panic stations and many were throwing in the towel when the FOMC came to the rescue.  We had experienced two Bingo days in a row at the lows which culminated in a long spidery leg as the market drove back to recover most of the losses on August 16, and then moved up the following day.

The Best Stakes in the Ground at this stage is the Base Low and the 50-dma, and hence the best measuring tool is the High Jump, or in this case the Limbo Bar or Low jump…since the Index is below the 50-dma.  At its extreme this measured -5.64% and was the lowest it had been since it recorded -4.36% on 6/14/2006.  That in itself should indicate that the Index had a significant challenge to get back above the 50-dma, especially as the Index had also broken the 200-dma by -2.61%.  My point is that even with a powerful move back up it would be too far to come back to break through the 50-dma to produce a “V” bottom from such a low starting point.

From the first rally attempt off a Base Low to the start of a pullback is for nimble day and swing traders.  It gives the best gains in the shortest timeframe but has the highest risk.  It usually lasts 5 to 8 trading days.  It is when leaders for the anticipated rally to come define themselves.  However, it is also the period when those same leaders will invariably correct, before moving on to become the true Silverback Gorillas for the move.  Stocks like GOOG, AAPL, RIMM, GRMN, FSLR, POT, MOS, BHP, SIGM and BIDU become the stocks with halo.  These are the types of stocks one should find at the onset for the best longer term ride.  Likewise favored Wolf Packs also emerge.  It started with the Energy Alternatives (way earlier), followed by Chemicals – Specialty, Transportation – Shipping, Chinese Silverbacks, and what we dubbed as Gorillas in general as exemplified by the Gorilla RonIandex. Understand that at this stage of events there is a balance between Fear and Greed.  Since this is at the end of a long bull rally that started back in 2003, the likelihood is that the length of the move would not be more than two to four months.  The longer you wait, the less the reward, the quicker you move in the more the risk.  Only your stomach can tell you your risk/reward preference, and you must best decide when to make your move:

1. Leg 1. The Earliest Entry off a 405-Freeway is on the “Follow-through Day” ANTICIPATING a breakout above the steepest downtrend line shown in red.  Alternatively wait for the Index to break up through as shown by the second red arrow.  The longer you wait, the more the risk of the next pullback.  By now the Index should be close to the 50-dma, so the expectation is that it will correct due to the resistance at the 50-dma.
2. Leg 2. The orange arrow shows the next entry point where one is again ANTICIPATING the breakout above the 50-dma and the latest 405-Freeway downtrend line. 
3. Leg 3. Finally the Safest Entry is the actual breakout above the 50-dma as shown by the green arrow, but if the rally is short half the opportunity is lost – note the distance from the breakout to the top at 1575.  By that stage the leaders are long since gone and one played these and second string up and coming stocks on pullbacks.  Also the Earnings Reports were out in droves by then and there were new stocks making their mark. 

The question now is “How do we apply all these tenets to the current situation?”  We can immediately see that the Limbo Bar results are much the same as before with a reading of -5.25% and -3.65% for the 50-dma and 200-dma readings, respectively.  We have four days up in the rally, and the S&P 500 Index is just below the 200-dma.  The challenge it faces is to break through both 200-dma and 50-dma.  Note also that the 17-dma is still facing downwards and that has to reverse itself if and when the rally continues. 

Essentially the first leg is complete and sooner rather than later we should expect a pullback and then comes Legs 2 and 3 through the two dotted lines representing the 405-Freeway downtrend line from the highs as described above for you to decide at what stage you tip-toe back in.  Whether the Index pushes through the dotted red line early this coming week before a correction remains to be seen, but unless there is tremendous new news the odds are that there will be a pullback between the 200-dma and 50-dma, before we push through the top resistance line of the 405 – Freeway. Realize that we have the FOMC on our side, but the Technology stocks and especially the Internets seem to have gone sluggish with more defensive Industry Groups as Healthcare and Utilities showing signs of life.  

In summary, after at least an Intermediate Correction, expect three legs up before the final push through the 405-Freeway, with a “V” bottom, a “W” bottom or an Inverse Head and Shoulders formation.  Look for the follow through day either by way of a Eureka signal and/or the normal strong follow through day once the bounce play is initiated.  Keep an eye on the relationship of the Index relative to the 17-dma, 50-dma and 200-dma and the extent of the Limbo Bar readings to make the call of when to act.    Now let’s hope the fun begins on our way to a Santa Claus Rally…but at least you are prepared for any eventuality north or south of the 405 – Freeway!  Best regards, Ian.