Ian Woodward's Investing Blog

From time to time Bill Luby at the vixandmore.blogspot.com has kindly pointed his clientele to my blog starting with the blog notes I wrote on the Hindenburg Omen and as recently as yesterday on the discussion on the “retrospective play-by-play account of the Bernanke speech and the market’s reaction.”  I felt it was time for me to return the favor and mention that since the VIX is an important tool in our assessment of the Market trends, you might find some interesting articles on the subject at that site.  

1. Since mine was highlighted as “one of several posts that may have some archival significance well beyond the day they were posted”, I felt it might be worthwhile to continue this discussion and format for just one more day.  
2. In addition I have expanded the timeframe to show the reaction of the markets for the four previous Interest rate cuts starting from August 16, 2007.
3. I also suggest that if you have not done so, please read the “Comments” made at the bottom of the previous blog with my good friend Maynard Burstein on the motivations and priorities of the FOMC relative to its allegiance to the financial structure of the Country or to save the market.      

 The Grand Ole Duke of York may soon be running out of rabbits to pull out of the hat to provide a cure

Let’s Review the Bidding of the Stock Market’s Reaction to Helicopter Ben:  

As far as the Stock Market is concerned, the quick assessment over five months is the Grand Ole Duke of York has marched his ten thousand men up to the top of the hill and marched them down again.  It is now five months since Helicopter Ben made his first surprise appearance, and saved the market from the abyss on August 16, 2007, when his first injection to the Sub-prime problem started a strong drive upwards in the Stock Market.   His first two recovery pills helped buoy the stock market as the Financial Markets applauded the actions to assist in the sub-prime debacle coupled with the Administrations actions to assist bona fide household owners keep their homes.   

However, with the general concerns about the slowing Economy, the Weak Dollar, the poor Retail Results at its peak selling period, the last two infusions have done nothing for the stock market.  It would seem that the general conclusion is that the entire Economy is beginning to stagnate and these infusions are not having the effect that was intended as the Banking System is seizing up.     

Likewise it is becoming apparent that after yesterday’s initial fillip of hope on Chairman Bernanke’s strong assertion of substantive action, there is still a growing concern that they are behind the curve as witnessed by Friday’s sobering downdraft of -247 points down or -1.92% on the DOW. It seems the Market is saying “Where’s the Beef” and actions speak louder than words.

Now I must turn my attention for the next few days to the newsletter which is due on the 15^th of the month.  Best Regards, Ian.

Fed Chairman Ben Bernanke indicated in a much anticipated speech Thursday that more rate cuts are on the way. “In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary,” Bernanke said in a speech to a business group. Bernanke added the central bankers “stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.” Bernanke said the Fed has seen evidence that banks are cutting back on lending to consumers and businesses as a result of the financial market turmoil. He said the December unemployment report was disappointing. In recent days, the outlook for growth has worsened.

As you can see from the minute by minute reaction, Bob Pisani of CNBC summed it up nicely in that “The Market doesn’t want a history lesson”.  However, the Bears had second thoughts and began to cover in anticipation of the next “Big Shoe to Drop!” as shown below:

My purpose in going through all this detail is to focus us on the psychology of how markets turn on a dime and react to the Fed speak and then the actions that follow…”Walk the Talk”.  This now sets up a very interesting situation and let me try to piece together the potential scenarios at play.  I really hope my spending the morning recording all this detail gives you insight in what to do in your own investments.  Some of you are in your foxholes waiting patiently for a Bingo on the NYSE Index.  Some are buying established Fallen Angels like AAPL either for the short term or for an intermediate play.  Others are on the short side and were licking their chops, but now are in a quandary.  They either covered quickly or are waiting for more shoes to fall.  I strongly suggest you review once more the thoughts I expressed on “Big Foot is Back and Others are Looming” in combination with what I now offer.  I felt sure something would be cooking when I asked “What tricks will the FOMC and Administration have up their sleeves in advance of the next Fed meeting towards the end of this month?”  Be sure to read the others as they still apply. 

The entire strategy from here to the next FOMC Meeting at the end of this month is centered on the two questions at the top of the second picture.  Nobody in the audience asked “Bennie and the Feds” as to what he meant by “Substantial”, so there will be a lot of second guessing on that.  In any event, Uncle Ben has signaled: 

1. A reaffirmation that he is prepared to cut interest rates.  Whatever he meant, it is obvious that the Market will begin to bake in a 50 basis point cut.  Anything less will be a disaster.

2. It will be done sooner rather than later so that the anticipation is that it will be done before the next meeting around the end of the month.  Patience can soon run out.  Likewise, some of this action today was the news that the Bank of America will bail out Countrywide Credit. 

3. The Fed, although caught between a rock and hard place, leans to cutting rates at the expense of inflation, a weaker dollar and all the other baggage that goes with that scenario.  They are prepared to bet that although the economy is slowing, and the common or garden man in the street is hurting, we are not yet showing signs that we are into a recession.  Of course a recession can only be established long after we are already in it, but they feel they can pull off a soft landing instead of a hard fall in the economy.

Who said that investing in the stock market was easy?  There are several schools of thought:

•            We are already in a Bear Market of which this is just the first leg.  There will be rallies along the way, but be rest assured it heads on down for another leg or two.  Not only are we in a bear market, but we are heading into a recession.

•       We have had yet another correction, which is over 11% for three such corrections in the past six months and once we retest this low, we will trot on up again with a fresh bull rally. 

•       We have had a third correction in six months, the market is so oversold that we will now have a V bottom and head on back up to new highs.

Take your pick, but I would be very leery of betting on the last one.  The odds are that any MAJOR downside are in favor of being postponed until Uncle Ben shows how big his shoe is and really provides the action to back up his words.  Since the Blue Pencil Line I taught you a good few notes ago says the trend is down, the extent of the medicine the Fed hands out will determine if they can stem the tide long enough to right the ship and change the direction of the market.  In any event, the odds are that we should at least retest the lows for a “W” bottom.  What has changed after today’s events is that the Bears are now caught between two stools, but will only postpone their efforts until any rally peters out.  

Lastly, one thing is certain.  UNTIL we see sustained New Highs greater than 150 per day, any hopes of a strong rally are a pipedream.  Today’s action should convince anyone that they cannot participate unless they can turn on a dime and are short term oriented to go either way.

Best Regards, Ian. 

I’m short on time tonight, but I trust you find I am hitting on all cylinders when it comes to cutting to the $64 questions and posing points to watch for.  So, let me pick up where I left off at the weekend and here are some of the answers we were looking for just three days ago:

Likewise, the 12292007 New Year RonIandex of Leading stocks broke the 17-dma and is headed down to test the 50-dma.  This Index has been hit hard in just two days and the five key leaders have taken a reasonable hit…AAPL, GOOG, RIMM, GRMN and BIDU.  The best stocks will correct from 15% to 20% and many of RonIandex are already down to this level.  Only the likes of JASO and a couple of others are holding up well.  The reaction to the AT&T CEO discussion on CNBC where he did not seem to have a rosy outlook was partly responsible for the swoon in the market along with the concern that Countrywide Credit has more trouble ahead with a drop of 17% today.  It goes without saying that the intraday swing on the DOW is now routine, being up more than 100 points during the session and finishing down -238.42 points to 12,589 or -1.9%. Given all of that the DOW has dropped 675 points since the start of the year with a loss of 5.1%, its worst drop percentage wise in five days since the first week of 1978, when it lost 5.6%.

You have the barometer to guide you from the previous Blog Note, and turning to the Nasdaq which has easy yardsticks to remember, we have already come down through two of them at 2600, and 2500, and we are but a scant 40 points to get down to 2400, so hold on to your hat and watch out.  I hope my picture of the two dogs says it all…we had a English Springer Spaniel just like the little fellow on the left with markings which was natural to name him “Saddle”!  Those were Happy Days and bring back fond memories.  Don’t end up like the little fellow on your right.  Remember I repeat it time and time again “When the Wind is at your Back…Attack;  When it is in your Face…Disgrace!”  Good luck.

Best regards, Ian. �

I am really delighted to see that some of you are refreshing your memory by referring back to previous blog notes such as “The $64 Question:  How Big will the Correction Be?” and “Ian’s Musings – Some Principles of HGS Investing”.  As such, I felt that a picture is worth a thousand words and I can kill several birds with one stone by using the “Quick Glance HGSI Barometer”.

U.S. stocks on Friday sank for a third time this week, with the Nasdaq Composite Index hit with its steepest drop since Feb. 27, 2007, after a jump in unemployment spelled a likely recession for investors.  Since 1949, the unemployment rate has never risen by this magnitude without the economy being in recession, according to John Ryding, a chief economist at Bear Stearns.  The Dow Jones Industrial Average fell 256.5 points, or 2%, to 12,800.2, with 29 of the blue-chip index’s 30 components finishing in the red, giving the Dow a weekly fall of 4.3%.  Broader equities indexes declined as well, with the S&P 500 Index dropping 35.53 points, or 2.5%, to 1,411.63, translating into a 4.5% decline from a week ago. Down for a sixth consecutive session, the Nasdaq Composite Index  was hit the hardest, shedding 98.03 points, or 3.8%, to 2,504.65, with the tech-heavy index falling to lows not seen since the end of August.  

After rising to a record intraday high of $100.09 a barrel on Thursday, crude pulled lower as worries about the economy sparked thoughts of reduced demand.  Oil futures ended $1.27 at $97.91 a barrel on the New York Mercantile Exchange. Ahead of Wall Street’s opening bell, the Labor Department reported U.S. seasonally adjusted non-farm payrolls climbed by 18,000 in December, the weakest growth since August 2003.  Stocks retained their losses after the Institute for Supply Management reported its non-manufacturing index fell to 53.9 in December from 54.1 in November.  Volume on the New York Stock Exchange topped 1.6 billion and nearly 2.5 billion on the Nasdaq, while declining stocks brushed aside those advancing by more than 3 to 1 on the NYSE and nearly 5 to 1 on the Nasdaq.  

Assessing the Damage done on Friday 

I told you that the RonIandex would give you a good feel for where the market is at.  I know that some of you are asking who needs that when I can see the DOW, the S&P 500 and Nasdaq fall to such an extent and the individual stocks fall on average 5%…between friends? The value comes after the fall to determine:

1. Are the favorite Wolf Packs still the leaders?
2. Is the herd buying the dips or waiting for the bounce plays to sell short these very stocks?
3. What happens to the Gorilla stocks of the five horsemen…GOOG, AAPL, RIMM, GRMN and BIDU?  Are they swooning for a deep correction or will they find a bottom and bounce with opportunities for climbing aboard for the next ride?  As they go, so goes the Nasdaq and Market.
4. Are we in the thick of a true rotation and if so which are the New Wolf Packs?  Health Care?
5. Can the RonIandex hold the 17-dma line or will it confirm that the Party is Over for this set of stocks and hence that we are in for a bleak period with more on the downside?

The $64 Question for Monday: Does the S&P 500 hold here and bounce from an oversold Market with five down days in a row or go down further to test the Base Low at 1370?

The August 16 S&P500 low has not been tested and eventually will be tested. The wild card is the Fed buying futures and assisting the financials as they did on August 16.  One thing for sure is something will happen to surprise everyone. With the rotten jobs report the tom toms are beating more loudly that a recession is on the cards and for this reason I feel the psychology for the traders has changed from buy the dips to short the bounces, so don’t be too quick to trot back into fallen angels of the previous strong Wolf Packs.  So far the selling was orderly and sustainable, and there has not been a rush for the exits similar to the mid-August downdraft.  None-the-less the selling was brutal with all the favorite stock Indexes indicating a 5% down day…between friends.  Although we have not yet had a Bingo signal suggesting a deeply oversold market we are not far away from that point.      We need to keep an eye on the following: 

1. What tricks will the FOMC and Administration have up their sleeves in advance of the next Fed meeting towards the end of this month?
2. What bright ideas might unfold to prop up the economy and hence the Market in the State of the Union Address?
3. What are the early Earnings Reports showing…good or disappointing news?
4. How do the Global Markets react tonight and first thing tomorrow…more on the downside?
5. Watch for the market behavior if a Bounce Play starts…don’t be too quick to buy but consider selling your losers and then possibly shorting the stocks you sell to make lemonade out of lemons. 

You all know what you are doing, but don’t try to ride it through with losers. They go down further.  Best Regards, Ian.

The Bulls are suffering from a New Year’s hangover…too much bubbly.  The Markets were rocked and Stocks fell sharply on the first trading day of 2008, reversing earlier gains after a key manufacturing report was surprisingly weak and as oil prices neared $100 a barrel.

The U.S. factory sector contracted in December for the first time in nearly a year as new orders collapsed.  The Institute for Supply Management said its index of U.S. manufacturing activity tumbled to 47.7% in December from 50.8% in November. It’s the lowest reading since April 2003 and the first sub-50 reading since January 2007.  The selling continued down as the markets broke down further, sending markets to the lowest levels of the day.  Retail shares traded lower on the first trading day of 2008 as crude-oil futures hit the $100 mark. Investors also awaited word of how retailers fared during the holiday season, their most significant selling period.  Retailers are set to report their December same-store-sales results on Jan. 10, and that will help provide an outlook for what’s in store for them in the New Year…but that is eight days away and in this market is an eternity.  Retailers’ sales at stores open at least a year in November and December combined are forecast to rise by 2.5% or less, according to the International Council of Shopping Centers.  Technology Stocks and the Steels were weak, but Energy Alternatives were strong.

The Dow Jones Industrial Average fell -220.06 points, or -1.67%, to 13043.96; the blue-chip index had been slightly higher just after the opening bell. The S&P 500 fell -21.2, or -1.44%, to 1447.16, and the Nasdaq Composite index was down -42.65, or 1.61%, to 2609.63.  The Yo-Yo Indexes show that the odds are we are headed down to test the recent lows.  The only scenario that can give the Bulls hope is a Bounce Play from an oversold market after four down days in a row.  Best regards, Ian.