Ian Woodward's Investing Blog

1.  With its second rate cut in nine days the Federal Reserve continued one of its most aggressive monetary easing campaigns in recent history as it seeks to nip an incipient recession in the bud. This 1.25% cut in nine days is the biggest change since 1990, but the Market yawned.  The Jobs Report this coming Friday is the next big factor to drive the momentum one way or another.  We are also in the height of Earnings Reports season and Google announces tomorrow, so keep an eye out for the reaction to that report.  It is down 20% ahead of the Earnings Report so be careful.
2. The Fed lowered its short-term interest rate target 0.5 percentage points to 3%, and left the door open to more: the statement accompanying the move said “downside risks to growth remain” and the Fed would “act in a timely manner as needed to address those risks.” Investors expect the Fed to cut the rate to 2.75% in March. 
3. The stock market rallied but saw its gains erode following a half percentage-point cut in the Federal Reserve’s key interest-rate target, an aggressive follow-up to its move last week to spur the U.S. economy and fend off recession.  Just look at the reaction in the DOW to the announcement where it rose about 210 points and then gave it all back and then finished negative for the day at 12442.83 down -37.47 points for the day. 
4. Meanwhile, back at the Ranch, the Congress has approved a $157 Billion stimulus package, so we shall see what we shall see on that count.  I thought you would like to see the action in the DOW over the past four days where it formed a Deep Cup scaring the bears to cover their shorts, and then went sideways in a tight Darvas Box type flat base of a handle, waiting for the Fed announcement.  It blew out of the gate on the expected 50 basis point cut at 1.15pm EST, and then the DOW gave it all up in the last half hour.  I tell you this is a treacherous market and you would be well advised to sit this crazy nonsense out until things settle down one way or another. 

I say again, I would not hold your hopes up too high until we see >150 New Highs and that does not seem to be on the cards until we see a major follow through day with aggressive buying by the bulls and rapid quick covering by the Bears who are hungry for more lunch. For your benefit the New Highs for the last few days have been a paltry 35 today and worse yet as low as 15 or less for each of the past seven days.   Meanwhile it is a tight rope walk as to which way this will go in the next few days…thanks to the picture sent me by David Schoon sitting out in sunny China, a supporter of many years gone by. 

 Tomorrow’s action suggests the DOW must hold at 12,410 for the Bulls to have any continued respite from the tepid rally of the last few days, and the Bears can taste raw meat just waiting to pounce on all sorts of Right Shoulder set-ups off Head and Shoulders patterns.  

The Eureka: The Eureka uses a set of conditions based on the ARMS Index which usually indicates that the Bulls are sufficiently exuberant that they are pushing back on the Bears to initiate a bounce play from an oversold condition or to start a new rally.  Let me quickly add:

1. It does not mean for one minute that the direction has changed from Bearish to Bullish 

2. It can mean a respite for a few days where we have the prospects of a turn-around 

3. We will have to see if there is a strong follow through day with strong volume and a further Eureka which would at least indicate that a Bounce Play and/or a reasonable move up is on.

The intent is to identify the market bottom which I call a “Base Low”.  I use the Arms index to call the actual day of the Base Low before waiting for the follow through days. The concept uses specific value combinations of the Arms Index components to determine the Base Low.  There may be several Eurekas before the market bottom is confirmed, but consider the first one as a sigh of relief that at least there is potential respite to the downward spiral that can occur. Since we have just had two Bingo Signals indicating lower and lower deterioration in the market, the first ray of hope and move back should start with a Eureka.  I ask you to please go to the blog I wrote on January 18^th, which shows the past relationships of Bingo and Eureka signals.  I won’t belabor the point further except to say that I doubt we will be out of the woods until we see at least 150 New Highs and then repeated confidence in this number staying above this level to confirm the rally is strong.

Let us see how the week unfolds as we have the FOMC meeting tomorrow and many, many Earnings Reports due out in the next couple of weeks.  There is a long road back to gain the high ground, but in a Bear Market there are always rallies within further legs down.  No one knows where this will end, so play if you must to put food on the table in several beaten down Industry Groups including Energy – Coal (which is white hot), Homebuilders on a bounce off the lows one more time, Financials, Cap Goods, and Consumer Services.  Otherwise, take this as a heads up that better things may come and this is a first step, but be very cautious not to be the early bird who gets swallowed by the hawk above. Best Regards, Ian

One of my slogans in High Growth Stock Investing is to Buy Rockets and Sell Rocks, and this is an excellent time to show you what I mean.  In the course of a Long Bull Rally, there are always up and coming Giant Companies that are the bedrock of the move during that rally and are the undisputed Leaders of the period.  In the snapshot below, I have shown you just one year in the five-year Bull Rally that has just ended of the five Giants of this particular era. I am sure there are several other fine companies that have done equally as well or even better, as I have shown you from time to time in the RonIandex examples posted on this blog.  Please don’t get hung up on that point, they are the ones I have repeatedly featured as the key stocks to watch. 

Once the Party is over, these stocks are rich with profits and get whacked mercilessly.  So the key principles of HGS Investing is to always have an Index of the top stocks in the top Industry Groups, the Wolf Packs, and pick out the top five to watch as well. I don’t need to belabor the point, the facts speak for themselves in the above picture of the top five and the latest RonIandex which was generated at the end of 2007 shown below.

Once the Vultures have had their fill, then look for survivors in addition to new leaders that are rising out of the ashes.  As I have warned you, the Thick Blue Pencil Line Trick says that we are still heading down in towards a Bear Market Correction, so the current two day rally is a counter-trend rally.  We can expect more to the downside, but until we begin to see a consistent back and forth of higher highs and higher lows, the trend will still be down.  So how do we evaluate what the chart above is telling us: 

1. Day Traders are looking for a quick pop to garner profits for the day to put food on the table.
2. Swing Traders who are bottom fishing on stocks with strong credentials hoping that the worst is over and they can make a better than 10% gain in a week or two or three, but have tight stops. 
3. Long Term Buy and Hold types, who feel they had missed the boat on these great stocks and that in the scheme of things this is an ideal place to take positions in the undisputed winners such as AAPL, GOOG and RIMM to buy and hold hopefully for the next ride. The reasoning is that if the likes of Qualcom (QCOM) can get to over $900 in the last big move prior to 2000, then surely we are only halfway if that with the future still ahead for GOOG! 

So it goes, Hope, Fear and Greed and different Investing Styles will drive the Market.  The underlying principle I espouse is to buy QUALITY and that is defined by strong earnings, “E” with strong Relative Strength “R” in Strong Industry Groups “G”, preferably the leaders in the wolf pack.  When in doubt, always look for high quality. As long as a company continues to report solid earnings, its stock will do well.  The HGSI software makes it easy to spy the High ERG stocks. 

Now if you are prepared to step up to the plate and are nimble traders, you know what you are doing and go for it.  But for the longer term investors the prudent thing to do is to be patient and pounce when we give you the all clear.  To sober you up to the realities of what we face in terms of a skittish market just look at the intra-day swings today in the DOW. It’s called Moment Trading!

The swings are 50 to 75 to 100 to 150 points…you pick the time of the day!  Just the times we live in when we have swindlers causing $7Billion fraud which could also have been instrumental in the Fed easing as much as it did…go figure.  Best Regards, Ian.

Talk about a wild and wooly day!  There was a rumor that there was a possible bail out of the Municipal Bonds – MBI skyrocketed 33% and MBK was up 72%.  Also City Group was up 8%.  Net-net the market produced a 600 point swing between friends.  Talk about trading in nanoseconds, but there is always money to be made if you have to put bread on the table.  Ron’s early spy of the retailers yesterday was an excellent call as that same set of stocks which I showed you yesterday is now up over 14% in two days…if you had the courage to play them.  The Transports, Financials and Home-builders were the places to fish today. 

However, I do not want to give you the impression that we are Jack-in-the-box types on this site, so although this bounce play was expected it was certainly not looking that way at mid-afternoon.  Of course this is a counter-trend rally in a Bear Market and since it was so powerful there may be another day or two for it to play out, before the Bears come roaring back when this peters out. So keep your powder dry and since we have a few Bingo’s under our belt, wait for the possibility of an Eureka with strong indications of at least 150 New Highs for a follow through day after that.  The New Lows hit big numbers of 533 and 952 on the last two days so I need hardly say these are wash out numbers.  Likewise, New Highs are a paltry 5 and 12, respectively, so don’t get too itchy until we see a decent confirmation that there is at least a reasonable rally on the cards.  

It goes without saying that the VIX had all sorts of gyrations today, but I particularly want to draw your attention to two spidery legs which suggests there was some excellent shenanigans going on, which you and I would not decipher. Here is a screen shot I captured to make my point and if my good friend from VixandMore has any insights I am sure he will cover it on his blog.  I am not an authority on the VIX, but certainly follow it in my work as I am sure most of you do too, but I have never noticed these spidery legs before on the VIX. 

Well, tomorrow is another day and we shall see how the wind blows.  At least we have had the kind of fear hit the market to move towards capitulation.  If it was, expect a re-test of the bottom at around 11,640 on the low which is what it tested today and held from yesterday’s low.  So they are trying to hold the flood gates from opening further at this level of 18% down from its high.  If not, the gurus will trumpet that the Bear Market numbers are officially achieved and claim victory.  Whether it holds at this level is unlikely as past bear market statistics are a lot worse, judging from past bear market statistics for the Nasdaq since 1973.

Best regards, Ian.

Our Motto is that “We Aim To Please and Teach You to Make More Money”, and I do hope that over the months you have visited this blog that you have seen one avenue by which we keep you abreast of the pulse of the market, the opportunities we see, and avoiding the pitfalls that are out there.  We have several other Free and Pay for offerings and these are listed below.  A Key Objective of ours among many others is to teach you how to Preserve your Capital and avoid catching a Falling Knife. 

The HGSI Team is hitting on all cylinders and we hope you are enjoying seeing how we weave our way through the minefields and tiptoe through the tulips. With all the gloom and doom around us which I have managed to steer you through of late, including the expected downdraft in the market which was first signaled three months ago, this has been a difficult time for us all.  However, through it all, you have also seen that the HGSI Software and the proprietary Indicators we have developed can pinpoint when the Markets are in trouble, when they are oversold and when we can expect an all clear for a new rally.  In addition, my partner Ron Brown and I have demonstrated how to use HGSI to guide us to the Wolf Packs and therefore the Industry Groups that present opportunities for stock selection from time to time.  Here is an example of the power of HGSI for ferreting out opportunities on the “buy side”, even in a rotten and scary sell off as we are experiencing today:

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March 2008 Workshop
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Best Regards, Ian.