Ian Woodward's Investing Blog

Happy Days and Off to the Races?




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. 

4 Responses to “Happy Days and Off to the Races?”

  1. Jim Pinkerton Says:

    Great article! Greatly appreciated!

  2. Michael V Says:

    Hello… very nice article!

  3. dave Says:

    Dear Scottish John,

    Not only haven’t we run out of time for #2 but hasn’t Mr. Market failed to fulfill most of those clues ?

    Therefore, shouldn’t we “Otherwise consider anything less as a Bounce Play and expect a retest of the lows.”

    Regards and much thanks,

  4. ian Says:

    Hi Dave: Move to the head of the class, your beady eyes have seen that SO FAR this is nothing but a Bounce Play and a failed Rally, and therefore as of right now the key sentence you plucked from my note is where the odds stand as of today. Now comes the tricky part, and the full answer should come next week; so your note is very timely. Always have three scenarios:

    1. The Market goes down to retest the lows and the Bears are in command
    2. The Market hovers around sideways and then either goes up or down
    3. The Market is still oversold and the Bulls feel it is time to try again, since the Bears have not collared this by the scruff of the neck this past week.

    My point is nothing is ever cut and dried. Next week should tell us which way the wind is truly blowing, although it points to #1. The reason I hesitate is that the INTERNALS of the market relating to Accumulation/Distribution have improved both for the Industry Groups and the Stocks themselves since July 19.

    When a Market is so oversold as this one is, the tide goes out so far that most boats are still stuck in the mud, and it sometimes takes a pull back and a second effort to take off on a rally…that is why 50% of the Follow Through Days (FTD’s) fail on the first attempt and then go on the second shot. This is especially true in a Bear Market. It needs a one-two punch from the Bulls to drive it up, while at this stage of the game the Bears only need one punch from here to drive it down. Net-net, the Bears have the upper hand after two weeks of trying by the Bulls.

    That should give you enough to chew on for an immediate response, but I will give you more in a blog I will put up over the weekend, which will show you the good stuff “Under the Hood” that makes me hesitate to say the “Party is Over”, period. Since this note is buried in the comments section, I will resurrect it in its entirety to full view and repeat all this and add more in a fresh blog.

    Thank you for showing an interest and following up as I often wonder if this stuff goes in through one ear and out the other.

    Best Regards, Ian.

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