Ian Woodward's Investing Blog

It is barely ten days since we held our Seminar, and who would have thought the Internals of the Market would show such weakness in such a short time.  My good friend Maynard is holding his Group Meeting tomorrow, so I felt they would like some fresh fodder to update them on where the Internals stand.  The charts are self explanatory and the hour is late so I want to get this posted in a hurry with no explanation, but the charts speak for themselves:

Enjoy.  Best regards, Ian.

Question:  thanks…so the QID is short the NASDAQ x 2 and the QLD is long the NASDAQ x 2. The ratio of 3.3 to 1 needed to signal capitulation means that 3.3 times higher volume (or is it dollar value) in the QID (the short one) is the telltale sign things are turning to custard big-time?  Have I got that basically correct?

And conversely, if the QLD (long NASDAQ x 2) is showing only 1.5 to 1 higher ratio vs. the QID then it is time to buy again…

And not having heaps of time, a glance every day at the volume of these two ETF’s will give a glimpse of the underlying behaviour of larger market participants to indicate possible market direction?  Kiwi Keith

Answer: Kiwi Keith:  Now you’re cooking, you have it close enough for government work.  But let me make sure you know exactly what is involved.  Let’s take a specific case like today to show you what you are looking at in the “Green and Yellow” chart on the previous blog, and why Maynard and I feel it captures the relationships between the two regarding which way the wind is blowing in the MARKET! 

If you trot over to Yahoo Finance and type in  the QID and QLD you will get the following numbers:

           Date        Open    High    Low    Close      Volume          Cl x Vol         Ratio
QID 11/2/2009     24.13   24.54  23.46  23.97      40,304,907    966,108,621    1.182
QLD 11/2/2009     47.81   49.12  46.97  48.08      16,996,844     817,208,260

The second last Column is the Close Price x Volume for each. 

QID/QLD Total $ Volume Ratio = 966,108,621/817,208,26 = 1.182

NOTE! If your numbers are slightly different sitting in sunny New Zealand, don’t worry about it…it’s close enough for gov’t work.

What concerns me is that although you have it pegged right that 3.3 times means “custard big-time”, that happened back in November 2008, and it is important to undestand WHAT it takes to get to that ratio.  It is a totally different state of affairs than now and the numbers back on 11/12/2008 just 10 days short of a year ago looked like this:

            Date         Open   High   Low    Close      Volume           Cl x Vol          Ratio
QID  11/12/2008    76.87  81.80  76.11  81.40      49,680,200      4,043,968,280   3.388
QLD  11/12/2008    28.14  28.45  26.22  26.39      45,231,000      1,193,646,090

Big Difference…and let’s hope we don’t see that again during any correction we might have going forward.  My point is that you will know full well when the Market is falling apart long before we see a number like that.

“And not having heaps of time, a glance every day at the volume of these two ETF’s will give a glimpse of the underlying behaviour of larger market participants to indicate possible market direction?”

Now you are on the ball and almost correct.  If you cast your beady eyes on the price of the QID and QLD, you will see the price difference is 2:1 in favor of the QLD at this time.  Since you don’t have heaps of time, all you have to do to see which way the wind is blowing is divide the QID VOLUME by 2 on the day and if it is running higher than the QLD volume, you know that the ratio is >1 and if lower, then the Market favors the Bulls with the ratio <1.  Otherwise, do the math as shown above.

But Kiwi…life is not that simple, especially for Type 3 people like you.  Since you do not have time to watch the market all day long, the INTRA day swings are humongous right now.  There is a 4% swing from Low to High and the QID essentially finished flat…16c between the open and close is no biggie. 

I sense you have lopped onto the “twofer one” of the QID and QLD, and gambling types are playing “threefers” which is the whole attraction of these ETF’s.  A Type 3 playing with Type 1 toys gets slaughtered unless they are nimble.  These are primarily short-term instruments unless you call the Bottom and the Top precisely:

I hope that clears up your questions and that you are understanding the value of the above chart to keep you on the right side of which way the wind is blowing in the Market.  So much to learn, so little time.

Best Regards, Ian.

My good friend Maynard reminds me that in my last blog I forgot to mention one key target that has served us well in the past.  Since Cricket has eleven players, here is the 11th Man to keep an eye on in this tug-o-war between Bulls and Bears.

In this modern day and age with the advent of ETF’s, one measure of the fight between Bulls and Bears is to watch the relationship of the Nasdaq 100 (NDX) and the QID/QLD Total Dollar Ratio.  Here are two charts that I have shown in the past and I am sure it may give us a feel for who is winning by watching these two views this time:

1.  Note how quickly the QID/QLD Total Dollar Ratio rose rapidly from 1.0 to 2.5 as the NDX bottomed back in March 2009. 

2.  Then see how the ratio has remained dormant essentially below 1.5 for this entire rally, except again in mid year when all the Market Indexes swooned about 9% from High to Low.  Note the dotted vertical blue line which shows that when the Bulls gained control again the ratio which had risen sharply fell back below 1.5.

3. Now once again, the Bears are rising from the ashes with the lowest ratio reaching 0.7 and ominously touching the down-trend-line from last March.  The Target to watch is two fold; a) break above the line , and b) head rapidly for a reading of 1.5 for the Bears to win or fall back rapidly for the Bulls to gain control again.

I’m sure you are saying “That’s all well and good, but I can’t keep track of these factors; life is too short, Ian.”  You don’t have to, as I am sure what caught Maynard’s beady eyes was that the VOLUME on the QID on Friday rose to nearly 41 million shares, while the QLD by comparison had a paltry 18 million.  The day previous the volume was 23M and 11M, respectively, but what we need to do is just keep an eye on the day to day volume more so than the price change at this stage of the game to see which way the wind is blowing.  We must recognize that these instruments are also used as a hedge for one’s portfolio, but let’s see if this item can help us.  Incidently, the last time the QID volume was above 41 Million shares was on July 23rd when it hit nearly 50 Million shares while the QLD was at 19 Million. The QID lost ground after that and the Bull Rally continued until now.

This one is more “loosey-goosey” where we divide the NDX by the QID:QLD Total Dollar Volume.  However it has broken the lower trend line though not convincingly.

Best regards, Ian.