Ian Woodward's Investing Blog

Give my HGSI supporters an inch and they take a mile!  Joe came up with a great new term for all this %B good stuff I have thrown at you and “Bucketology” sure fits the bill.  The hour is late so here in two slides is my New Year’s gift to you. 

In my last blog I covered all the bases for you and showed you how the Market was deteriorating.  We must recognize that this week is a very quiet week with little volume since most people are still enjoying their holidays despite the turmoil on both the East and West Coast with snowstorms and heavy rains, respectively.  We all are saddened for those who have suffered so much these last few days. 

I have followed up with what I had suggested should be an early warning sign and to watch carefully for the #17 or greater in Bucket #8,  >0.6 <=0.7, and here is the first signs of chinks in the armor.  Not full blown yet, but if this downward deterioration continues one more day, it will be interesting to see what happens next:

Don’t forget to click on the chart to see a bigger view if the numbers are too small for your beady eyes, but I have highlighted the three 17’s/18’s that “fired” today as shown.  As you all know this is a new concept evolving as it is happening, so take it for what it is worth with a pinch of salt, and we shall soon see if the Market bounces from here as it must do to maintain the rally, or it fizzles in the next few days or early next year.

Best Regards, Ian.

Santa Claus has come and gone and sputtered this last week, but that was to be expected as we have had the best part of a 17 week rally if you accept that the two week “Pause to Refresh” in mid to late November was only a minor correction of about 4%.

The $64 question is “What’s Next?” Never ever have only one outlook or bias.  By all means develop the High, Middle and Low Road Scenarios, but in the final equation let the Market tell you which road it is on.  Certainly, when the Rally is this long in the tooth, it is prudent to take profits along the way, lighten up and be cautious.  But how many times have we all been fooled by the Market Behavior, so although the odds favor a correction soon, don’t bet on it until the evidence is cast-iron.

So let’s turn to “Fly-Specking” Sherlock Holmes style using all we have learned these past several months to see if we can develop the three scenarios for the High, Middle and Low Roads.  The objective is to identify some Early Warning Signs using %B criteria, given what we have observed in the recent past.

Allow me a little indulgence in that many of our supporters are realizing the value of watching more carefully what I call the “internals of the market”.  We each have our own favorites, but many of you are seeing the value of observing the EBB-Tide effect as the percentage of stocks in the Market Indexes slosh back and forth from oversold to overbought.  The extremes are usually not difficult to see when they happen.  However, it is that important phase of just a few days grace one can look for without being caught in an avoidable downdraft that can make all the difference to your pocket and your confidence.  No one can foresee Flash Crashes, but it is the Fly-Specking that may catch the early wind either up or down when the Market is sitting in Stalemate.

The first place to start is to establish a Stake in the Ground and Measuring Rods.  ALWAYS establish the latest Base Low…it used to be back on 3/06/2009 but once we had that over 17% Correction back in May and June, we moved the Base Low to 7/1/2010, as shown on the Chart below.  I use Heikin-Ashi Weekly Charts to determine the trend and you can do this in HGSI as shown.

78 Trading days is long in the tooth by any stretch of the imagination, hence the concern by many.  Leading stocks are being pummeled, rotation is clearly visible from the NDX to the OEX, Large Caps to Small Caps, etc., etc.  We have the recent heads-up of the infamous Hindenburg Omen coupled with the VIX at lows, and %E’s rising with the Market for a little while and then falling back again (strange behavior), to say nothing of Distribution Days two-a-penny as all the usual tell-tale signs that we are on borrowed time.  To top it off, oil is up and rotation to Energy stocks is well underway.  What all of that adds up to is that the Market is climbing a Wall of Fear, and will ultimately have to move out to an obvious Climax Run or fall apart at the seams very soon.

For those who are casual readers, we now have great insight into the sloshing from High Tide through Stalemate to Low Tide with the Pictographs I show below: 

I suggest that although there are no chinks in the armor as yet, there are subtle signs that we are fast turning to “Stalemate”, and let me lay out the logic through the next few slides.  Let’s start with the fact that so far in the past three weeks, the MOMENTUM of the market reached a peak on December 10 by showing ten Market Indexes at that snapshot and for comparison as it is at the close of business on Thursday, Dec. 23rd.

Understand that the chart depicts the % of stocks for each Market Index by “bucket” of 0.1 slices making 12 in all, and also the % Above and Below 0.5, the Middle Bollinger Band, and NOT the %B of the Indexes themselves, which are usually higher as I have shown you several times before.

The first point to note is that it is nine days since December 10th, so we have three days of cloth on that score before the market should correct, OR we move to a higher level!  We have not long to wait on that score.  Look back at the previous notes if you don’t follow that logic.  There is a lot to take in, but let me direct you to look at the heat maps on the two “Average” lines which I highlighted in Yellow.  Note how the Dark Blue has slipped two Buckets to the left between the two timeframes.  Please understand that I maintain right now that the Markets are still positive, but it doesn’t take much imagination that if the next downward step were to come it would move the center of gravity still further to the left with the likelihood that Bucket >0.6 <=0.7 will be prominently higher than the rest. 

I told my HGSI supporters I would give them a clue that when that Bucket hits 17 (or higher), which is my oldest grandson’s age, watch out below.  I’m sure you are wondering where on earth did that piece of logic come into play, and I offer you the next chart which shows the Heat Maps for four Market Indexes:

I have highlighted with a dotted red line the critical area where the market Indexes all hit “17” or greater before the pause to refresh occured.  The numbers are shaded in gray.  By the way, if you really want to see the numbers more clearly, just click in the window of the chart and it should open up larger in a separate window.  Better yet, use Snagit to capture the picture and you can blow it up to whatever size suits you.

Now let’s zero in on the S&P 1500 and look at the Pie Charts and Spikes for the period 11/11/2010 to 11/16/2010 to show how the  shape changed dramatically within four days as Box # 8 (>0.6 <=0.7) moved through two days of peak at 18 and 17, respectively, and then the dramatic shift to the left on 11/16/2010, where the Bears were once in control of the Market for the Two Week Pause to Refresh period.

The next chart unfolds the strengths and weaknesses from the peak in 11/4/2010 down through the valley for two weeks and back up again these past three weeks.  As my new found friend, Joe, points out, we have hit our head against a wall at the 81:19 level several times recently, and we are right at that mark as we speak.  Note that I have highlighted the “23” in the bucket just before the famous one to watch and that number of 23 is higher than any previous one when the Market was at 81:19…suggesting that we are weaker right now.  There must be a holding of the fort on Monday to take the Market higher or we look for the now famous 17% in bucket #8.

In the next two charts, I show you how easy it is to watch for this phenomenon using HGSI software and it becomes even easier when you use the NDX and the OEX in the Major Market Components Folder, since they both have 100 stocks and the percentages fall into place immediately.

So what then are the High, Middle and Low Road Scenarios:

High Road:  An Immediate bounce play this week, with the Nasdaq ultimately reaching 2700 and then 2727 which would give reasonable targets for the High Jump.

Middle Road:  The tug-o-war continues with little ground being given up through the first week in January, and most likely a move to the downside depending on world events.

Low Road:  The observed weakness continues and we trot down with both the 12 Drummers Drumming and the count of 17 in Box #8 fulfilling our Sherlock Holmes Fly-Specking!

Now we have done our homework and we let the Market tell us where we are headed with one finger on the Eject Button!

Best Regards to you all.  Ian.

Time goes by so fast when you are having fun, and another year has rolled around and it is time to dust off my favorite video and wish you all a Merry Christmas and a Happy New Year from the HGSI Team:   

As most of you know, my life revolves around threes:  This time not only is the Market under the Weather; California is likewise with rain pouring down as we speak; and sad to say that my Wife, Pat, is also under the weather having caught a mild dose of flu from me which I had earlier in the week. 

But what of Santa?…Glad to say he is still on his way:

It seems the Moose Droppings are in his way as those pundits who avidly follow the Hindenburg Omen (HO) mumbo jumbo will tell you we had two signals this past week PROVIDED you use Wall Street Journal Data.  Skeptics will warn you that the last warning in mid and late August fizzled into a “nothing”.  The avid followers will come back with the fact that the VIX showing complacency is also a good sign and this time we may have the real thing…just watch for the next 4 months!  The only real point to remember is that one can have these signals and 75% of the time they fizzle into a minor correction, but a Major Bear Market Correction has never happened without being preceded by a Hindenburg Omen.  It’s all part of the folklore, depending on how you want to present it. 

Meanwhile, we have our own bag of tricks to keep us on the right side of the market, and given that we have now had 16 weeks of a rally with only a couple of weeks Pause to Refresh, it will be no surprise to anyone if we have a correction in the New Year with the market so long in the tooth:

…And let me give you its twin picture for those who like to see both the red and green bars to get the full picture.  We are a long way from the churning area, but that is what to look for FIRST, if and when this market decides to correct:

I make no apology for the pun since I feel part of my job is to drum home the key messages of my findings…I tell you 12 Drummers Drumming is working:

Just judge for yourself – we started the last correction WITHIN the last twelve days from the obvious warning sign of the 570 stocks for the S&P 1500 with %B >1.0 as shown before in a previous blog note.  It hit on the eight and the 13th day with two Phoenix signals to take the market down as shown:

    On December 15th, we saw the first signs of the market deteoriating, but it has snapped back, so the only conclusion at this time is to confirm that Santa is on his way next week unless we have a Flash-Crash-like correction.  Understand that this picture shows the %B itself for each of ten Indexes on the right hand side with the Average in the last column.  0.82 is still healthy, but for a decent Santa Claus Rally we want to see this number rise to above 0.95 to show real strength compared to the high on 12/09/10, or else we remain skeptical. 

Why Skeptical…because we have observed a “biforcated Market” with all this HO stuff of simultaneous numbers above 79 for New Highs and New Lows.  Let’s face it the Semiconductor Index (SOX) got a trifle overheated, and it didn’t take long to see that some of the true leaders we follow in the NDX were also struck down, but would you believe that there has been a strengthening in the OEX!  Net-net, this market is sloshing around:

Of course I have taught you moons ago to watch the action of the Fed and you should know by now that Uncle Ben is distributing his POMO to the tune of 6 to 9 Billion dollars a day…yes a day for the next couple of weeks.  You also know that this is a two edged sword that one of these days will bite us good and hard, so there is major skittishness as we approach the year-end. 

Let me leave you with one more chart that is a Major Shot across the Bow of a warning sign that my group of friends and I have spotted between us.  As you well know, we keep a beady eye on knowing your ABCDE’s and at times like these, especially our E’s.  Well, we have spotted that the %E’s are rising in concert with the Nasdaq.  Big deal, more fly specking you say!  Well, the last time this happpened was in 2007 on two occasions, in July when Uncle Ben waved leaflets around and again at the top in October.  It’s trotting up as shown:

Look over to the left when this happened in 2007 and as circled on the right for now.  Bottom line, all things are showing a caution flag as the market is long in the tooth.

Best Regards, Ian.

I felt this note from Akiva was worth sharing with you as he figured out any possible confusion in the numbers for himself.  The first two notes are from him and the last one with the diagram is from me, which confirms his findings.  We are here to learn from each other:

Hi Ian,

Happy Christmas and a happy New Year to you and your family.

Thanks again for your continuous guidance and assistance.

 Trying to follow your calculation on the first chart:

 For the !SPC on the 12/08/10 it shows : 0.91    However from the lower chart: 81/ (81+19=100) = 0.81 As such the 0.91 should be 0.81?

 Am I doing something wrong in my calculation?   Thank you for your clarification.

Akiva

Hi Ian

Disregard please my previous message.

 The confusion came that when speaking about %B for the S&P 1500: one is related to the Index itself position (Bollinger Bands % change) and the other is related to the HGSI calculation of “buckets” (&gt; 0.5%)

 Your “yardsticks” I assume relate all the time to the HGSI calculation only ( Disregarding what !SPSC index shows).  I assume they are related somehow.

Thank you again.

Akiva

Ahhh Akiva!  You figured it out for yourself…that is the best way to learn.  As you have worked it out they are two separate factors.  Invariably %B itself is a higher number at the peaks and valleys (above 1.0 and <0), since the other formula for % of STOCKS above or below 0.5 can ONLY go between 0% and 100%.  Therefore one can watch for spikes at either end of the scale to establish when we are very overbought!  See the chart below.  You will also note that the “Natural” break in the chart is around 0.65…where have you heard that song before?  Grandma’s Pies.  Best Regards, Ian.

We have Reversal Days and Distribution Days, but the Stock Market Indexes keep climbing up a Wall of Fear:

So let’s see if we can disect which way the wind is blowing by using John Bollinger’s %B and also the excellent insight we can get using HGSI and Edgerater for the Internals of the Market with the % Ratio of Stocks in the S&P 1500 above and below %B of 0.5, the Middle Bollinger Band:

The Simple Steps in the Process are:

1.  When the Ratio falls below 70:30 “Get Ready” and

2.  When it goes to 65:35 “Get Set” and if

3.  It skips buckets with a Phoenix and a Kahuna to the Downside with a 45:55 ratio “you’re outta here, but too late!” 

However, %B for the Indexes themselves have a big cushion now, ranging from .82 to .94.  Watch out as they lose strength to 0.7, and then below 0.5.

You have seen past examples of the following chart, which show a “scrunched view” for the %B Buckets for the Nasdaq 100, the S&P 100 and the S&P 1500:

Back on 11/04, the ones to watch were the S&P 100 & S&P 1500;  Note that on 11/11/2007 the S&P 100 gave the early warning sign and had reversed the next day…eight days from Top.  Note how 11/12 saw the tide turn and you had at least two days to be “outta here”!

Now it is the Nasdaq 100’s turn. We are in Day 4.  Note the readings of 82, 76 and 83 on 12/7 says the Market Indexes are in the Safe Zone.  Begin to worry when they come down to 70:30, and for sure when you see it at 65:35.

The Nasdaq 100 Index is the current leader and naturally fat with profits:

Start Counting “Twelve Drummer’s Drumming” from the day after 12/2/2010.  We are currently in day 4, and have eight more days of cloth.

One of two Scenarios will tell us what’s happening:

1.   Column M rises again to solid “green numbers” of 12 or higher…All’s well, or

2.   Column “I” moves up to >17 and “O” and “P” move down to < 65:35 and we are about to cave in, or will have done so already.  It’s not difficult to follow.

With the first Scenario, if we get above 30 again, the rally is confirmed as still very strong and we start a fresh count as explained above.

With the second Scenario, here is a template of what one might expect and still have time for a Santa Claus Rally, though the Moose Dropping will be very apparent:

There you have it.  Best Regards, Ian.