Ian Woodward's Investing Blog

1. U.S. stocks rallied at Tuesday’s start, reversing course after three days of declines, as investors cheered the Federal Reserve’s move to loan as much as $200 billion in securities in a bid to boost liquidity in the financial system.  Can the Fed break the Log Jam and get the banks lending again?  Is there any way to speed up the process of getting a huge amount of Liquidity into the Credit and Mortgage Markets?  The Fed recognizes it has a mess in the Credit Markets.  In another global show of financial force, the Federal Reserve and four other central banks announced significantly expanded loans of cash and securities to banks and securities dealers in an effort to alleviate growing strains in the credit markets. Along with this oversold condition, the Fed and Central Bankers initiated $200 billion injection in cash through loans in order to try and resolve the liquidity crisis this morning.  For the Fed, the steps are yet another attempt to address the credit crisis through means other than steep cuts in short-term interest rates.  But one of the consequences is that its own balance sheet is looking riskier as its composition shifts from super safe Treasury’s to less safe loans, mortgage-backed securities and the like.  This was “perfect timing” that added “high octane fuel” under a historically oversold level. 
2. Recent market moves have faced “selling into the short term buying” and pit traders will be watching carefully to see if the same reaction will be happening on today’s up move.  They want to see that it can hold, so they are cautiously optimistic.  However, there has to be a screaming follow through and not just for a few days for the sentiment in this market to turn around for a new Bull Rally.  It can turn out to trot up for a few days and then fizzle again for another Bear Trap.  One has only to look at the beaten down FXP…the Chinese reverse ETF, which was down over 17% today to see that they were buying back the same beaten down stocks for a quick pop. 
3. Too much damage has been done for this to turn into a “V” bottom, but time will tell.  Please recognize that we had a paltry 7 New Highs yesterday, and 26 today, so that is certainly not much to write home about.  I may be watching the wrong Barn Door, but I need to see some re-assurance that the Bulls are in earnest and show their irrational exuberance for more than a couple of days.  Anyway, the Bulls can’t look at a Gift Horse in the mouth, and at least there is some respite from what seemed to be an inevitable spiral downwards.    As usual, the timing couldn’t have been better and the Bears must be scratching their heads as to what they have to do other than to scurry to cover their short positions every now and then when Uncle Ben comes by in his Helicopter dropping his leaflets.  At least it seems they are now thinking out of the box and have begun to realize that the age old tactics of reducing Interest rates is like a wet squib that has done little but slaughter the dollar and exacerbate the inflation problems.  Type 1&2 traders enjoy the respite, but Type 3&4 Longer Term Investors still need to keep their powder dry.

Best Regards, Ian

U.S. stocks were hammered Friday, pushing the Dow industrials to their lowest close since Oct. 11, 2006, after February’s unemployment report cemented thinking of a recession and central bank moves to stem the credit crunch failed to offset the damage. 

• “Folks, based on today’s employment report, if we are not in a recession, it is a darned good imitation of one; we are in an unprecedented real estate and credit crisis that is whipping its way through the U.S. economy,” said Kevin Giddis, managing director, fixed income trading, Morgan Keegan & Co. Dow Jones Industrial Average declined 146.70 points to 11,893.69, giving it a weekly loss of 3%. Since the year began, the blue-chip index has lost more than 1,370 points, declining 10% in value. We are close to a Bear Market with a -18.05% drop from the High on 10/31/2007 to the recent low.  My last blog suggested that if we do not hold at 2203 on the Nasdaq we would trundle down to -30% at 2010, and next week is the final chance for the Bulls to hold the goal-line.   
• At times like these, I revert to my most trusted tool which I call the High Jump, or in this case since the Index is BELOW the 200-dma I refer to it as the Limbo Bar.  It is the % from the 200-dma to the High of the Index, which as you will see from the snapshot below we are currently down -10% and at a critical point based on past history for the S&P 500 looking back to the Major Bear Market from 2000 to 2002.  In staring at the chart below, I couldn’t help but ask if what I see is a coincidence or another case of History does repeat itself in different but similar ways.

   

  

• With that said, I overlaid the next three months of the 2001 dip down to -20% on the Limbo Bar on top of where we are currently and this is what the picture looks like.  It is uncanny to my mind, and although I am not for one moment wishing this on us, it is a wake up call that if the Bulls do not hold here at the current Double Bottom, we are headed down to 1100 before we might see a proper Bounce Play:       

     

• For those of you who are not too familiar with the Value of the High Jump or Limbo Bar, I refer you to the Blog “HGS Investing Principles – The 405 Freeway” written on December 2, 2007, where I discuss this valuable tool when the market is headed for extremes, either Tops or Bottoms.

Best Regards, Ian.

Over several months since the market peaked in October, I have kept account of the critical fights for territory between the bulls and bears, and now we are into round #3.

Round #3 of the Fight at the OK Corral between the Bulls and Bears is fast going to the bears despite the encouraging contra trend rally we experienced. It was still too weak to hold and having broken the triangle to the downside it seems we are headed down again to test the low at 2203. 

It is now very apparent that with today’s action that the odds are high that we will retest the previous low on the Nasdaq at 2203, as we are now just ~ 50 points off that low.  I felt it important to expand the playing field to include a HYPOTHETICAL third leg of a symmetrical triangle as shown in anticipation that at least we are familiar with what it might look like…should it come to pass.  Of course I am game playing, but there is little harm in having a game plan that bounds the Bulls and Bears Scenarios.

Bear Scenario:  Today was an extremely high volume day with 2.7 Billion shares traded on the Nasdaq, with 298 New Lows and only 14 New Highs on the Nasdaq.  With that low New Highs it will take a big positive surprise to turn the sentiment around, and deliver over 150 New Highs to kick start any form of rally.  The Nasdaq eked out a positive gain in the last half hour when Charlie Gasparino once again fed his latest understanding of the hope of an Ambac bailout which yet again took the DOW up to close just down 45 points and bring the Nasdaq back to positive territory having been down over 25 points for most of the day.  INTC’s bleak outlook, GOOG down below the $450 mark and Ben Bernanke speaking at a community banking forum in Orlando, FLA., indicating more foreclosures are expected as the sub-prime lending crisis gets worse, all weighed heavily on the Market all day.

Based on Past History of the Nasdaq Bear Markets since 1973, we already had a -23% drop when we last hit 2203 five weeks ago on January 22.  This drop was the second lowest since 1978 which had -20.37%.  The Average over the 13 Bear Markets is -36.5% so if we are to head down, it would not seem unreasonable to suggest that -30% would be an appropriate next leg down (white arrow).  That would put it only in the lower third of past results, and if and when we get there we can review the bidding further.  A 30% drop would put us close to 2010, which is the Base Low of July 21, 2006 when we first had a taste of the extreme Volatility we have today.  That is depicted by the White Arrow on the chart.

Bull Scenario:  Given that the hope of the Bulls is that capitulation will occur at the double bottom of 2203 and they can muster enough good news to propel them back up on a Bounce Play one more time, the best they can expect at the first instance is a quick repair to 2435 (green arrow), the 50-yard line I show on the chart.  What is significant in the psychology of the market about 2435, you might ask?  You will recall on January 10, 2008, Helicopter Ben gave a speech where he said that the Fed would “Take Substantive Additional Action” and the Stock Market yawned and went rattling down from there as shown on the chart.  That drove the chart down into the second symmetrical triangle.  It has yo-yoed for the past 5 weeks and has completely run out of steam, so the only other potential good news would be an extraordinary rate cut of 50 basis points prior to the March Meeting.

Best Regards, Ian. 

My good friend David Galardi says in his comment on the last blog that short-term Type 1 and 2 traders are suffering from too many anti-acids and bland foods these days, but the Types 3 and 4 are relaxing on the ski slopes and sitting in their fox-holes. The three Scenarios in play are: 

1. Back down to test 2203 on the Nasdaq to form a double bottom and then maybe another attempt at a rally. 
2. The Bears win the fight at the OK Corral #3 and we head down below 2203 to my next target at -30% on the Nasdaq of 2010. 
3. An immediate turn-up today or early this week based on more rumors and/or real news that suggests yet again that all is well.  It wasn’t too encouraging today, but they brought the market back at the end so they may be able to rally it for a few days. This beast is like a lump of jelly these days and I need say no more. 

Different Stomachs enjoy different times: 

• a. Very short-term players equally adept as you on playing the market both ways.  They know their trump card is “Nimble” as you know too well, have the stomach to play the reward/risk throw of the dice, and are making good money on both sides of the market.  They are the Type 1 & 2 traders who are now becoming even more adept in trading in moments, not hours or intra-day.   
• b. Those who have already preserved their Capital and are sitting on the sidelines waiting patiently until we see better signs that the market has truly bottomed.  They accept the tongue in cheek scenario of using the Thick Blue Pencil Technique I use on a few previous notes to cut through to what the market is telling us now.  They are the Type 3 & 4 Investors who usually cannot or do not wish to get their hands burnt one more time on a hot stove, as one of our supporters tells me, and prefer to ski and sharpen their thinking for when the coast is clear. 
• c. Those who are refining their T/A techniques and are finding new avenues to challenge them and use the Yahoo HGSI bb as a great sounding board to determine whether their Gann, EW, Reif, etc can be sharpened further on what has to be a challenging Volatile situation that most will admit have not seen before now and has become the norm.  It’s a friendly place to try out their skills, but heaven help them if their forecasts are not within acceptable tolerance levels, despite the last two moves by the herd, one up and one down based on nothing other than rumor. Amazing that these days a hard earned week’s profits are killed in an hour based on faulty rumor.  But that’s the nature of the beast and the times we live in. 

Only less than one month to the Seminar on March 29 to 31, so hurry up and sign up for the last few seats still available.   Best Regards, Ian.