Ian Woodward's Investing Blog

 I couldn’t resist a tongue-in-cheek analogy to the hot topic around the country on this gasoline affair, and I am sure it will all eventually sort itself out, but not before the hubbub on the Price of Gas comes back down below $4.00 and a Barrel of Crude Oil dips below $100, and/or T. Boone Pickens Wind Plan comes to fruition, etc. etc.  Unfortunately, it is no laughing matter but the question is how do we as Investors and Traders deal with it?  The Market is telling us what to do:

Investors:  Stay in your foxhole and/or not only bottom fish, but dredge in beaten down Industry Groups that are showing signs of moving.  

1. These include the recent hot Wolf Packs of the Solars, Steels, Fertilizers, Coal, Machine General, Railroads, and Energy Drilling…mostly hot today, but you must turn to trading these.  Coal is white hot today as are the Steels!
2. Alternatively, you buy the Home Builders and Financials and pray you dredged correctly.  Today the Home Builders are getting whacked.
3. Yet again, you can fiddle around with the Health Care Sector, and an occasional good Tech stock.
4. Be aware that the small caps are outpacing the mid caps which in turn are doing better than the large caps…unless you are buying JIRM stocks. 
5. But don’t say I didn’t warn you that Cash is King at the moment, unless you have it in a failing Bank!  Then, stuff it under the Mattress, even if it gets lumpy.
6. Wait for a Eureka signal, and the New Highs at least >100, and then stay up there to average around 150.  This last point is EXTREMELY important, and I will show you why at the next Seminar in October.  Hurry, we have eight seats left. 

Traders:   

1. Have your hot Wolf Packs at the ready as mentioned above, and trade the Flavor of the Day.  Add the JIRM Stocks to your Wolf Packs as shown below.
2. What’s up today is down tomorrow so be prepared to turn on a dime and you must be nimble, take what the market will give you, have tight stops and stay glued to your screen. 
3. If you have confidence in us and/or know your onions, then concentrate on the JIRM >$35 and JIRM <$35 for your best picks, given to you all of four months ago, and are still as good as ever considering the hammering the Market has taken:

        Late Breaking News:  First Solar reported earnings after the bell and it is flying high.  There’s your winky winky for tomorrow.  Watch the Solar Wolf Pack first thing tomorrow.         Best Regards, Ian.  �

Mail-Bag Question: Ian, RBN is doing extremely well in this correction. Since it’s now extended what would you need to see in order to consider it a safe buy? Best Regards, Paul

Paul:  There is no “safe” time in this market.  You have picked one of the leaders in the Machine General Group which you identified as moving several days ago.

1. If you were a Type 1 or Type 2 trader (moment or day trader), you would have pounced then.  Since you are not, and are more a Type 3 and mainly a Type 4 investor, you should stay in your fox hole.

2. For the very short term, if you want to dabble, you are getting your second chance today…but wait, RBN is correcting back into the base having made a BRAND NEW High.   

3. The Group is “HOT” once again and rising as a WOLFPACK against the grain. You should watch the Group Movement first and then the individual Stocks.  Today, the group is taking a breather, having been up several days in a row, so if $51.62 is the low today and the market doesn’t tank, your best chance to get in will be at below $52 for a BOUNCE Play with a tight stop.  But if you do, remember you have changed your stripes to be a Type 1 day or moment trader when you buy.

• FYI, without a lot of research, FLS, RBN, WGOV, FSYS, BMI and SNHY are the overall leaders, but you will notice that four of those five are all being hit today and FSYS has given up $2 from its follow through day today at $42.42 down to $40.25.  On the other hand, a terribly beaten down stock like GENC is up 18.43%, so you know that was a great bottom fish.

• The bottom line message is “Timing” my friend…and your trump card is “Nimble” with “Tight” Stops.  If you want to “dabble” in this market, you will need to adapt to those three points.  He who hesitates is lost.

• Lastly, think Wolf Packs first and Stocks within the Wolf pack second, which I am glad to see you are doing. 
• As I finish writing I see that at 10:47 Pacific Time, RBN has repaired to $52.19 with a bid/ask spread of $52.17 and $52.25, so that speaks well for a possible recovery, particularly if the market is once again on the trot.  If not, all bets are off.

          Net-net…you snooze, you lose.   Best regards, Ian. 

IAN: IS THIS A CUB BEAR MARKET OR A FULL SIZE BEAR. i.e. HAPPY DAYS ARE HERE AGAIN???  XLF OFF TO THE RACES??   Bob

Hi Bob, let’s review the bidding: 

1. We are already in a “Full Size Bear”, i.e., >20% down from the high last Oct 11
2. We just finished a Bear Market Rally of ~15% in two months from March 17 to May 19
3. We have just had an Intermediate Correction on top of the Bear Market of ~17% down for two months to July 15, so this “cub” is a trifle bigger than we wish!
4. We had Capitulation on July 15, where the XLF bottomed and produced $8 Billion Dollar Volume
5. XLF bounced with last week’s shoring up by Bernanke and Paulson of Fannie May & Freddie Mac
6. Whether XLF fully recovers or is just a bottom fish Bounce Play depends on the Markets.
7. The Markets have bounced mainly on Short Covering these last three days
8. The Markets recovering are dependent on:     

• OIL continuing to drop     
• The Dollar rising     
• Strong EPS Reports over the next three weeks, beating estimates     
• Institutions buying into Finance, Technology, Health-Care to replace loss of leadership in Oils   
• Global Stability   
• Inflation controlled, including Energy and Food Prices, which are killing the public at large 

Now that we have temporary Capitulation, What are the clues to look for in a Bear Market Rally? 

1. A Strong Follow Through Day (FTD) with >2.5% rise in all Indexes and Nasdaq Volume >2.5 Billion
2. This MUST occur in 3 to 12 days from the Low of July 15 
3. HGS Investors will expect at least 2 or 3 Eurekas along with Kahuna signals
4. By that time the New Highs on the NYSE must show at least 100 New Highs and <30 New Lows
5. Ideally the New Highs should rise above 150 for several days with New Lows down at <30
6. Technically we must get above the 17-dma, then up to 1334 on the S&P to the 50-dma
7. That requires a 10% Bear Market Rally which is the minimum, since >15% is considered normal.
8. Otherwise consider anything less as a Bounce Play and expect a retest of the lows

Net-net: Don’t expect Manna from heaven any time soon.  It will take a long time for this market to repair, and don’t be surprised if we trot down to 1150 on the S&P 500. 

Best Regards, Ian. 

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke explained the plan to prop up troubled mortgage-buyers Fannie Mae and Freddie Mac to members of the Senate Banking Committee.

• They faced questions about the cost to taxpayers, but Paulson didn’t put a dollar amount on the proposed aid, which gave some senators pause.  He drew the analogy of requesting a Bazooka in his pocket rather than being given a squirt gun. 
• Congress must approve the plan, hammered out over the weekend by the Treasury and the Federal Reserve.
•  “I think you could be risking the taxpayers’ dollar here,” said Sen. Richard Shelby, R-Ala. the panel’s top Republican. “To give you a blank check…I’m not sure.” 
• With that remark, you can guess where the plan will end up…IMHO on the shelf with more trouble to come. 
• Ask the stock market which once again yawned at the Administration and Congress’ stalemate in getting anything done.  It’s a sad commentary.

SEC to limit naked shorting of Fannie, Freddie, brokers 

• Christopher Cox, chairman of the Securities and Exchange Commission, said on Tuesday that the regulator will try to limit so-called naked shorting of shares in Fannie Mae, Freddie Mac and primary dealers. The SEC will issue an emergency order stating that all short sales of shares in these companies will be subject to a “pre-borrow” requirement, Cox explained. The SEC is also planning more rule-making focused on the broader market, Cox said. 
• Naked Shorting has been illegal for years, but the SEC has turned a blind eye to it until now when their hands were forced, and then only in a limited sense.  If history repeats itself this too will be forgotten when the hubbub dies down. 

Crude Oil Down >$6 a Barrel 

• Crude futures Tuesday closed down more than $6 a barrel, the biggest daily drop in more than 17 years, as concerns that slowing economic growth will dampen oil demand triggered a broad sell-off in energy commodities.  It buoyed the market for most of the day, but then with that big a drop and the dollar bouncing back a little, the market died in the last hour and was down 93 points!  It shows how weak the market is.

The Banking ETF, XLF hit a New Low and a New High in $ Volume! 

• The Banking ETF, XLF, went in sync with the day’s speeches and confirms that there was a ray of speculative hope that a bottom had been reached, but then it swooned.

The VIX is moving towards a high 

• The VIX bounced to 30.55 within 35 minutes of the open and it looked as if it would spike up to the 34ish that all are looking for to see a full capitulation, but no such luck with it backing off to 28.54 at the end of the day. 

Intel Ray of Hope for Technology stocks after hours 

• Intel came in with a 25% rise in profits, Revenues of $9.47 Billion with Gross Margins of 55% in their after hours EPS report and may offer a ray of sunshine for the Tech Sector tomorrow. 

 Net-net…we should be thankful for small mercies that Crude dropped, the Dollar rose, and INTC had a blockbuster EPS Report.   Best Regards, Ian.

It’s an uncertain week ahead for U.S. stocks, as IndyMac Bank falls and jitters slam Fannie Mae and Freddie Mac. Still to come: testimony from Bernanke and crucial financial results from top investment firms and tech giants.

• Reports that the Treasury Department and the Federal Reserve may be planning to rescue Fannie Mae and Freddie Mac were flying around in the media and in the markets late in the week, although most were officially denied or never completely clarified.  Unfortunately for the Stock Market and for the US Economy these latter two are the big fish in the pond, and unless there are quick announcements to shore things up the Stock Market is in for a bumpy ride this coming week.  My good friend, Maynard Burstein says it best…“My hope is that they announce whatever they are going to do prior to the market open.  If not rumors might cause “bad stuff” and it won’t be capitulation.” 
• Editor’s Note:  Late Breaking News on Sunday Evening!  Maynard called it right on the nose…Treasury Secretary Paulson has made an announcement that might have just snatched this Market from the Jaws of Death with proposed solutions for Fannie Mae and Freddie Mac.  Of course it depends on how Wall Street views the medicine, but at least there is a positive change to the futures markets, where the DOW at 5.00pm Pacific time is showing +86, the Nasdaq is +16 and the S&P 500 is +10.20.  It may give us breathing room at the open, and give us a chance to flip to Scenario 1 when it looked as if we were headed for Scenario 3, below.  Good luck to you all.  Ian.

  If it were not for this latter problem, the good news is that News of Bank Failures has invariably signaled a capitulation and a strong reversal in the Stock Market.  There have been five Bank Failures since 1974, and here is the S&P 500 performance later:

      

  I am not suggesting that history will repeat itself this time as the situation of the Indymac Bank pales in relationship to a debacle in Fannie-Mae and Freddie-Mac.  We will have to wait and see how Monday unfolds, and again it all depends on what happens before the open or soon thereafter in what the FOMC and Treasury do.  At times like these, Cash is King for most.  The Three Road Scenario is simple from here: 

  1. High Road…Capitulation, Reversal Day, Bounce Play from an oversold situation 
  2. Middle Road…Fluctuate between 1200 and 1250 on the S&P 500; most unlikely 
  3. Low Road…Down to 1150 as the Next Target as I posted in my February 17th…And 2010 for the Nasdaq as posted in my blog of February 23^rd.

     

     

     Best Regards, Ian.