Ian Woodward's Investing Blog

Happy Halloween to you all:

Type 4 Long-Term Investors are safely tucked in their Foxhole waiting for more signals to confirm this is at least more than a Snap-Back Bounce Play and do not want to be caught in a Bear Trap.  Type 3 Intermediate Term are itching to get back and have ants in their pants.

I suggest it would be prudent to wait for one more week to decide whether we have a Santa Claus Rally or fall back into the doldrums, especially as the Election is next week.  Type 1 and 2 short-term traders will continue to enjoy the volatility on both the long and short side of the market.To help you make up your mind, I have developed a short-term perspective of where the market stands now that we have had two weeks to reflect on what has transpired since the big dive to almost a 50% drop from the Highs of Last November.  Let’s review the bidding of key events:

1. The Bail-Out Bill was passed on October 3rd. and the Stock Market crashed a week later

2. In the process we got a good feel for the Volatility which increased four fold from six months ago

3. It is not uncommon to see 600, 80 and 50 point swings/day on the DOW, the Nasdaq and S&P 500, respectively

4. As expected we had a snap-back in two days that produced over 23% for these Indexes

5. Then the market re-tested its Base Lows within two days, but basically held at that level

6. Helicopter Ben came flying in and propped the market up with a 1/2 point cut in the Rates

7. This has buoyed the market to hold the snap-back at the down-trend line half way back

8. The Critical Line in the Sand I offered is 9250 and the DOW is there abouts right now

9. From the following three charts, we are at a critical point on all three Indexes…Enjoy

A couple of blogs ago, I gave you the key yarsticks to keep an eye on, and here it is again:

Now there is both good news and bad news if you dig a bit deeper on the Internals of the Market.  Those who eagerly look for Breakouts from “Big Stocks” with good credentials have been disappointed so far, though things have been perking up with a few stocks showing signs of life.  It is no wonder when I show you the key internals that one looks for at times like these, which include the % of Industry Groups that have Di+ and D-  which is totally negative.  Likewise Industry Groups that are above 200-day and 50-dma are also putrid as is the Groups with either A or B Accumulation which again are the piths. A picture is worth a thousand words and that is clearly visible by the deep pink in these factors over the past 15 days or so:

Now for the good news for those who wish to be the early bird that catches the worm.  I have told you time and time again to watch %B relative to the Bandwidth of the Bollinger Band Indicators.  %B is above and as you can see from the chart below, it is showing strong signs of life as it has already crossed the middle band to the upside.  If that relationship of the two Indicators which I have dubbed the Bulls-Eye can hold its positive status next week, we have the makings of at least a Bear Rally.

Those who attended the seminar last weekend understand all of this in spades, but I felt this would bring the rest of you up to speed on the essence of what they learnt to look for. 

Best Regards, Ian

Mail-Bag Question from a Newbie:

Hi Ian:     I’ve become a regular visitor to your blog.  I don’t know much about investing.  However, I have a fair sum of money available in bonds and also some cash (+$200.000). Considering the current crisis, do you think that it is a good time for a novice like me to start investing in stocks…?  And what is your best advice to the newbies.  I’ve tried to follow the ups and downs of the stock market together with the commentary from the news pundits in the last couple of month.  The 22nd of September you wrote on this blog:“I’m not suggesting that we head down to 800 on the S&P 500 any time soon, but the odds of 1150 is now almost a certainty and again, if we see any signs of bickering in Congress we are headed for 1000 and possibly lower.” I’m asking since I’ve become a little wary of the risk involved with stocks.

Response:  Hi Matt:     I apologize for the long delay in responding to your comment on my blog.  I got inundated with work at this end preparing for the seminar we just held and I am afraid your note got buried until now.

Thank you for being a regular visitor to the blog and I appreciate your concern about dipping your toe into the market with the high degree of VOLATILITY and UNCERTAINTY of the market direction.

As you can see from the one piece you picked out from the blog note, nobody can predict how fast a Market can go down or up, but as you have seen by watching my blogs, I can give you the three scenarios for what I perceive are the current Up, Down or Sideways scenarios.  I also will show my leanings of the odds of any scenario, but it is the Market which tells me the direction.  Never, ever fall in love with one scenario.  However, having evaluated the three you will find that you will invariably be on the right side of the market or are ready to change course quickly if you have made a mistake.

Since you are a newbie to investing in stocks here are some pointers I would give you:

1.  The worst time for you to start was a year ago when the market was at a peak.  The best time to sharpen your pencil is NOW when the market has corrected so violently.

2.  The worst time for a Newbie to engage is when the Volatility is so high.  500 to 1000 point swings per day in the DOW are commonplace these days and that is 4 times more than it was six months ago.  Accomplished Day and Moment Traders are having a ball as they enjoy being jack-in-the-boxes hopping in and out of being long and being short.  That is no place for a newbie to start putting their hard earned money.

3.  One of the key reasons that one has seen such a change in volatility is due to the attraction of using leveraged ETF’s (Electronic Traded Funds) both long and short.  One can now trade them with twice the return if you wish to do so with these ETF’s being surrogates for the Market.  One can be in and out of the market quickly and yet have the comfort that you are buying a basket of stocks that emulate an Index such as the QID or QLD for the Nasdaq.  Ergo, Mutual Funds are a thing of the past.  Another reason for the volatility is the “No Up Tick Rule” for shorting stocks has been eliminated, so one can short at anytime rather than having to wait for the stock to “uptick” before you can purchase a short.  It goes without saying that a third reason is the flagrant over-indulgence in buying on “tick” on a world-wide basis where most can ill afford to do so, nor have the discipline to have proper money management.

4.  As a newbie, you MUST understand that over 50% of the gain/loss in a stock’s price is influenced by the Market.  A further 30% is due to the Industry Group the stock is in.  Only 20% is due to the stock itself.  With those odds and this volatility, it is fool-hardy at this point in time to think of long-term buy and hold unless you are prepared to possibly sit with dead money for a long time, unless you are a clever stock picker…which you are not since you declare you are both scared and a newbie.  Over the years, we have found that the trump card “retail investors” such as ourselves have is “Nimble”.

5.  That is why our approach to stock investing is what we call “Tops Down” starting first with an understanding of the Market behavior, then identifying the strongest Groups or Wolf-Packs as we call them, and then selecting the best stocks in those groups for a decent gain dependent on how the market is behaving.  If the wind is at your back, you attack…if it is a hurricane in your face, you will be blown over.  The trick is to understand what the Market and Industry Groups are telling you and this is the tremendous power of the HGSI software.

6.  To become accomplished as a Stock Investor/Trader, you must first be a master of one approach before you can blossom out into becoming a Jack of all Trades.  In other words, I find that one of the biggest mistakes Newbies make is to flitter around from one “guru” to another, and one talking head to another.   They are never around to tell you that they have changed direction while you are still holding the bag which is invariably dwindling, or they will always tell you “don’t sell now, it will come back” and it seldom does.

7.  However, NOW is the TIME for Newbies to get educated if not started into learning the Strategy, the Process, and the Implementation of how to make money in stocks.  Rome was not built in a day.  There is no dodging the fact that if you don’t first learn and paid some dues to study an approach, you will pay costly dues for learning from your mistakes.  That is why we have a three pronged approach to teaching Newbies like yourself how to get started:

a.  There is this Blog which you came across and find that my message is on point and useful.  Presumably, you like what you see.

b.  My partner, Ron Brown, does a WEEKLY FREE Stock Market Reports Movie every Saturday morning when he is not on holiday, that gives you his pulse of the market within 30 minutes of your time.  In addition by watching his approach you begin to pick up how to maneuver between the different elements of the HGSI software we use.

c.  We offer you a 60-day free trial of the High Growth Stock Investor software so that you can follow both Ron and I as we give you pointers of “What’s Working Now”.

Beyond that we continue to hold one’s hand by offering High Growth Stock Seminars twice a year (which as you can see are very successful) and a stock newsletter that comes out once a month on key relevant strategies and Case Studies of what to look for at that point in time.  We have also started a series of short Internet “Go To Meeting” courses to help trial members understand how to use the software.

The rest is up to you.  What you yourself put in is what you will get out.  It takes hard work.  Few of us can make a fortune without understanding and learning how to avoid the costly mistakes up front.  On the other hand, you will not start to increase your wealth to develop a nest-egg for your retirement unless you take the time to learn.  Ready, aim, aim, aim and never firing will never get you there.

Two last points:  There is a wealth of information on the Learning Center on different topics Ron and I cover at the highgrowthstock.com web-site.  Also, I strongly suggest you go back to the blog and find the note I wrote on “Ignore the Fog and Follow the Signposts” written on Thursday, September 20th, 2007, and read that post and then STARE at the table (which is hard to read), and you will see that each of those milestones have come to pass as we have trundled down from the high of 1576 on the S&P500.  We had a PLAN and were able to ACT accordingly.

I’m sure there are other points I could cover.  If you have any questions, you have only to ask.

Best Regards, Ian.

I felt that it would be good to give you a quick bonus follow up for the Short-term Game Plan to the blog I wrote yesterday, especially as the FOMC acted today as anticipated with a 1/2 point rate reduction.  As you know I pay great attention to the Stock Market action at times like these and it will be interesting to see what tomorrow brings.  One seldom gets the type of symmetry we have right now at this critical juncture and I need say no more than present the picture to keep it simple:

The HGSI Team thank you all for your compliments on the great seminar we had. 

Best Regards, Ian.

I’m back in the saddle after an exhilarating three day Seminar where the participants had a fun time even though the general Stock Market outlook was gloom and doom especially when it tried desperately to break the previous lows on all Market Indexes yesterday.   Hence we come to the Desperate and Decisive Gun Fight at the OK Corral #4, since if it goes any lower we are due for records to be broken to the downside on all fronts:

As the saying goes, “To move the market, one must surprise the Market”, and it seems that Helicopter Ben’s winky-winky of last week may have done the trick by suggesting that the Fed was not averse to cutting rates yet again.

The Bears were at it again first thing this morning as Maynard’s Warriors from San Antonio, Texas who attended the Seminar will attest, but fortunately on two scores the Bears fumbled the ball at the goal line and the Bulls threw a “Hail Mary” Pass to get us breathing again at least with about a 10% cushion from the Base Low:

1.  Rumor has it that there will be further cuts in Interest Rates on a Global front with the Bank of Japan leading the way by leaning towards cutting its benchmark interest rate by 0.25% and so the Dollar rose against the yen, and

2.  The Fed’s interest-rate setting committee begins deliberations Tuesday afternoon at the start of its two-day meeting, with expectations for a half-point cut to bring the federal funds rate to 1% — which would be its lowest level since June 2004.

So it seems the tradition which my good friend Manu reminds me at the HGSI Seminars is that the Market always goes up after we hold one, and although it looked miserable yesterday maybe we will keep the tradition alive.

All of this gives the Bulls a couple of days to catch their breath and hope the promising Bounce Play today can continue.  Naturally, with a 10.88% move of 889.35 in the DOW which is the 2nd best point move ever, there is hope that the rally will push past the strong line in the sand at 9250 where the Bulls failed to break through on three occasions the previous couple of weeks since the watershed decline on 10/10/2008. Below is the picture of the Stakes in the Ground, the lines in the sand and the measuring rods where the short-term game is being played between the Bulls and the Bears.  I call it a Desperation fight as any lower and this market will be in deep yogurt.

Please don’t be misled by the arrow pointing up at 1780 and the remark that says “The Bulls Win”.  As attendees to the seminar will attest, this trick of mine of using this picture has great value for a very short-term feel for where the ball game is being played right now.  Clearly we have a lot further to go to get up far enough to even consider this as a Bear Market Rally.  My advice is to always make a note of where the Market stood when an important event occurred, and that to our way of thinking is when the Market swooned AFTER the Bail Out Bill was passed.   Please make a note of these Lines in the Sand for that occasion and what has transpired since:

 From the above table we can see that the best snap-back today from the Base Low is the DOW, followed by the S&P500 and then the Nasdaq.  We can also see that, given the current volatility, we are only a couple of days worth of snap back from the Base Low.  The best we can call today’s action is an Excellent Reversal Day with a reasonable snap back.  We must now wait for a Follow through Day (FTD) with some signs of Eureka’s firing up before we can get excited that we are in a decent Bear Market Rally.

Best Regards, Ian.

Ian, Now I know what a Swan Dive is. Black, White, Pink and Blue, they all went. Another big day, but no bottom. Is that the good news?  Can’t wait for the workshop.  Maynard

Hi Maynard, the Newsletter which anticipated your question says it all, and also shows a beautiful chart of the last nine big corrections.  The bottom lines are:

1.  The “mode’ has now changed to 500-700 points a day on the Dow, 50 to 100 on the S&P 500, and >80 on the Nasdaq as a normal event.  As you recall, we used to marvel at 150 point swings on the Dow just six months ago at the March Seminar.  There’s a measure of volatility for you!

2. The expected rise from the precipitous drop was >20% from bottom to top, and as we see it finished up at around 22% to 24% for each of the three indexes.  The expected re-test is likely to take us down to -17%, between friends, which suggests that should that occur we will not take out the current lows.  However, as I say in the newsletter, that is in the lap of the gods and all it takes is another Global financial negative surprise, hardening of the arteries on the credit scene and rotten EPS reports due out during these next three weeks to take us down below that level.  I am sure there are fifty-four other reasons, but you get the point.  In which case we will forget a double bottom formation of the usual nature and look to a head and shoulders (complex bottom) ala 2002 to 2003 timeframe.

3.  I am sad to say that the Limbo Bar (inverse high jump) has indeed reached the piths as I suggested might happen at the last Seminar and on the March 9 blog, and that is no surprise to us.

4.  Manu will be pleased with me as I have used his Rainbow Charts to show you the rope-a-dope trick which I hope you will enjoy to estimate the Golden Cross of the 50-dma up through the 200-dma, which I can tell you will not happen any time soon.

5. Those who are Type 4 Investors can bury themselves in their foxholes for several months as it is a trifle difficult to high jump Niagara Falls at this stage of the game.

6. Those who are Type 3 Investors need only draw 405-Freeway trend-lines to see that it is a long way to Tipperary.

7. Those who are Type 2 Day Traders must of necessity become Type 1’s

8. Type 1’s who are Moment Traders are having the most fun since they enjoy volatility, but even with tight stops it must be a trifle harrowing.

The Newsletter is up, and Ron and I are looking forward to seeing all of you and raring to go in ten days time. There will be a quiz on its contents so I hope the gang of five coming up from San Antonio will have it down pat from your tutelage by the time they get here.

Would you believe I had over 22,000 hits on the 401-Keg Blog in one week, so that is a measure of the light-hearted relief in frustration in these bad times!

Best Regards, Ian.