Ian Woodward's Investing Blog

My good friend Ron Brown puts it so well in his Weekly Free Movie…”Some of the major market indexes are out to new yearly highs, but the NASDAQ, the former leader is beginning to lag.  Can the markets keep up this torrid pace?  It’s doubtful without a pullback to digest the recent gains.”

I had a Picture ready to go, but my friend, “Paxen”Mike Scott sent me a better one that describes the mood very well, so you will forgive me for showing both together as they both tell a story.  If you are a Type 1 and 2 trader, you can switch from Bear to Bull in a wink, a trifle disappointed but seldom hurt too much. 

Type 3 Swing Traders scratch their heads and realize they were fooled and should have stayed on the long side, or keep rubbing their hands which is always fatal.  If only the herd can find the right balance between Fear and Greed.  However, the rally was saved by the Jobs Report, the Bears had to cover their shorts as they found they were in a short squeeze ONCE AGAIN. 

Type 4’s, Long Term Buy and Hold now see that they have all the required longer term criteria in place, and wondering why they shoulda, coulda, and woulda earlier. However, at this stage they are playing with fire and would be prudent to wait for a pullback before they go for it.

I am again indebted to my friend Ron Brown for keeping my head on straight in this seldom encountered type of rally.  I have long been a believer in the McClellan Osc and Summation Index which my other friend, Aloha Mike Scott has made me focus on for the past twenty years, so I had already seen the phenomenon.  I digress, but here is the late breaking news which Ron sent me from Sherman McClellan himself in two recent notes, which give the Technical and Fundamental Reasons as to why:

“…Bear Market rallies do not display the sustained power that is showing now with the higher Summation posting.  When the Summation tops out in this move that may lead people to think that the bear market rally has been completed, but it would be very unusual for the price move down to be anything other than a consolidation of this initiation thrust.”  Type 3 and 4 Investors should take good heed of this point.

“…It only takes a look at the data from the St. Louis Fed to see that the past year has given us unprecedented money flows, economic outfall and FED creativity.  The US Government has dispensed exorbitant amounts in Clunkers rebates, TARPs and TAFTs and twisted CEOs arms and other body parts to ameliorate societal discomfort.  Fortunately the Summations do behave differently in Bull and Bear markets.  It is that difference that I was trying to point out.  While the economy and its operatives may be in an outlier situation, the Summations are telling their story using the same pictures they have always used to identify bear to bull trend reversal.  Sufficient liquidity does produce results.”  Here are the Results he refers to:

Given the above, I strongly suggest that those who look for comparables that you do your research with 1996, 2003 and 2009 to look for similarities in the force of this Index.  Now to take care of my High Growth Readers – there is no better old faithful than the Gorilla Index I have posted several times before on this blog.  I show two pictures, one of the numbers and the other of the chart.  Don’t quarrel with me as to where I placed the lines of demarcation. The only message that matters which we can all agree on is the Index is looking very tired.  Since these stocks are FAT with profits they will get hammered as many have already.  However, look at the % Pr Ch 6-Month column to see the great gains for these stocks, despite those they have already given up.

I will save the rest for the HGS Investor Newsletter that is due next weekend, but I have another piece for you called “A Case Study in Learning Your ABCDE’s” and Ron and I will unfold additional factors to look for as to when you should feel the Rally is confirmed to be broken.  Then we will look for new upside clues to start the process all over again. 

Meanwhile, pay attention to the above and don’t let the pundits sway you with what the Market should do.  It’s far better to let the market tell you what it is doing, and make your decisions accordingly.  Powerful corrections and rallies such as those we have endured the past year will invariably overswing the pendulum beyond that reasonably expected, so don’t count your chickens before they have fully hatched.

Best Regards, Ian.

The Bulls are enjoying the ride and seemingly this Market can do no wrong.  The
psychology has changed from gloom and doom to the Bottom is in and the
Recession is behind us.  How long the euphoria will last is another matter, but
with the chitter-chatter of “Cash for Clunkers” this weekend, it must surely spill
over to the Auto stocks if not the whole Stock Market on Monday.  But watch out
for the looming Jobs Report this coming week which if poor can turn the Market
sour; but if good can send the S&P 500 through 1000 and on its way to the next
target of 1012.

I gave you the Targets for the Bulls and Bears in the last blog and have updated the
Status for you below.  As you can see things have matured and now it is a question
of whether the Bulls can hold the line or we pause to refresh yet one more time.

This Rally is now five months old and we have not had a 10% correction…the worst
we have suffered is 9% on the S&P 500.  You will recall that all of 4 Months ago I gave you the Saw Tooth Plan as a way of staying on top of your Money Management and
running for the hills to save your 401-K if things got tough.  The chart below was on
the April 3rd Blog, and we have certainly come a long way.

The Bottom Line Message is that Higher Highs and Higher Lows with no more than an 8% correction is all you have to watch.  Then raise the Lines in the Sand when the
Cushion gets more comfortable which I have done in this updated chart as we have
got long in the tooth.

At the March HGS Investor Seminar, I told you that we would not fully recover from
this dreadful Black Swan swoon until we saw New NYSE Highs >100 and New Lows less than 25.  I am happy to report that we are there and this is yet another sign that the Market internals are strenthening for Type 4 Buy and Hold Investors to begin to dip their  toe in the water.  If you are not already in, then it would pay to be ready after the next correction provided it is not disastrous.  The next two charts show the status:

The NYSE Total Volume has improved and now sits just below 60 M shares.  I expect
if it stays at this level there should not be any further concern of insufficient volume.

The only item on the Targets that is a little sluggish is the 50-dma of Adv:Decl Volume Ratio, but as I show the 17-dma of this item is very healthy @ 1.55, and given that the market went sideways for two months, the 50-dma will take time to return above 1.2.

The Type 4 Buy and Hold Investors should stiffen up their backbones and begin to feel that the market has repaired sufficiently to dip their toe in the water.  Obviously, you need to watch the market and choose your spots carefully:

Lastly, let me finish with a caution on the High Jump which is screaming “extended”
when compared to what transpired back in 2003.  Of course it can go higher, but we
are due for a correction as shown by the dotted oval line back then.

Good Luck and Best Regards, Ian.