Ian Woodward's Investing Blog

A strong supporter and concerned customer wrote “I missed Ian’s blog this weekend.  Hope he’s busy or traveling, rather than sick.”  Sunni 

Hi Sunni:  Thanks for the concern and I am glad you may be having withdrawal symptoms…I am just taking a little R&R: 

1. The Carpel Tunnel said lay off a bit, and chastising me for doing too much typing 
2. The Newsletter is due this weekend and I have to save some goodies for that 
3. The Game Plan is intact and all is well so far:     

• Despite volume concerns which are natural…skittish waiting for tomorrow, holiday season, etc.,      
• 4-dma up through the 9, 17, 200 and 50-dma in that order spells strong move in ten days     
• 110 points in 10 days is over a 7% recovery for the S&P 500     
• The Index has poked its head above the 405-Freeway downtrend-line, above the 50-dma and has achieved a 61.8% retracement on the Fibonacci levels…All tough resistance, so things are looking up. 

Never Count your Chickens before Helicopter Ben makes his decision tomorrow…then with luck, fly high. Hopefully you have been making good money these past ten days as I have…but as you have said in the past you have to keep one foot near the exit signs.  On a personal note, my Nephew is visiting from England and I hope you folks will understand if I lie low for a few days. Best Regards, Ian.

We have had a few visits from Helicopter Ben to save the day in November, and now we have Santa Claus bringing the Bulls a gift on Mortgage Loans from the White House in December.  President Bush outlined a plan to help struggling homeowners avoid losing their properties, including a five year freeze on low and introductory mortgage loans.  Treasury Secretary Paulson said the effort isn’t a “silver bullet”, for the housing crisis but should provide some relief. 

The upshot of all of that is with a proper follow through day yesterday on the Stock market Indexes, we had another rip roaring session today to send the Indexes back up into respectable territories from their recent lows.  Since my last blog on Sunday where I laid out the Game Plan for the recovery from a Base Low in three steps using the 405-Freeway as the lynchpin to success, we trotted down calmly for two days at the start of the week to pause to refresh and yesterday and today have been blockbuster moves in the Stock Market.

That was my early Christmas Present to all of you last weekend, and here we are like magic sitting right at the 405-Freeway on all three Major Market Indexes (between friends).  I show the previous move on the S&P 500 so that you can see there can possibly be a slight hesitation similar to the yellow dotted oval last time, before the Indexes can push their way through that overhead supply depicted by the line I show; especially since there have been two powerful moves these last two days.  It goes without saying that the bear’s scenario is “Don’t count your chickens before they hatch” and “There is many a slip twixt cup and lip!”  So let’s review the bidding: 

1. It all hinges on two important pieces of news starting tomorrow with the Jobs Report and on Dec 11^th when the FOMC Meeting delivers their much awaited decision on lowering Fed Funds Rates once again.  Whether it is 25 or 50 basis points or none at all remains to be seen. 
2. Bad news on either or both of these two items can get the bears dancing and prancing once again, but good news of course will provide the booster rocket to propel the market for a decent Santa Claus Rally.   

In the meantime, the work that my friends have done suggests with a big winky-winky that stocks with ERG 270 is where the action is since the market started its correction on Nov 1, and I will show you that in the Newsletter next week.  When the market is jittery always go for those with the strongest credentials in ERG for the smoothest rides.  For sure you need Stocks with EPS Rank >90 and Rel Str >90 and preferably Group Ranks greater than 70 if not higher.  Some Wolf Packs such as the Transportation – Shipping are a trifle tired, and others trying bottom fishing for the umpteenth time with the Home Builders are still trying to find a bottom.  The Chemicals – Specialty are white hot, the Energy Alternatives run hot and cold and it is good to see that after a shaky week or so in the Technology Stocks they seem to be rebounding nicely with the likes of GOOG, AAPL, GRMN as well as fresher ones such as VIP, SIGM, PTT are worth a look based on their strong Fundamental credentials 

With regard to the Rebound, we can see that there has been substantial repair in the market Indexes this past week as we are essentially only 4 to 5% from the Oct/Nov highs. Notice that these stakes in the ground remain the same, and all one has to do is move up and down the scale as the case may be based on the Markets action.  Doing it this way gets your stomach in sync with the Fear and Greed Syndrome and which side of the market you should be on. 

Net-net, Stakes in the Ground, Frequent Measurements, Base Low, 405-Freeway are all part and parcel of guiding you to victory in mastering the Stock Market during corrections.  Best regards, Ian 

I felt it was time for me to write an HGS Investing Solutions Article on the value of the concept I developed called “The 405 Freeway”.  As those who have visited Los Angeles know only too well, the 405 Freeway runs from Santa Monica in the Northwest to San Diego in the Southeast.  It is the biggest parking lot in rush hour traffic you would find in these parts of the woods or for that matter in the world, and in Investing terms that would spell strong resistance to breakouts.   In doing the blog yesterday where I show the value of the 405-Freeway, it struck me that the recent examples we have lived through since the Base Low of August 16^th, 2007 give us a classic picture for describing the essential ingredients an investor faces after an Intermediate Correction.  History never repeats itself exactly the same way, but it comes close enough that one can usually identify three alternatives after an Intermediate Correction: 

1. A “V” bottom is the rarest chart formation and is more likely to occur early in a long bull rally than at the later stages.
2. A “W” bottom is the more frequent formation where the previous low is retested before the low is confirmed and the new rally is on the way.
3. An Inverse Head and Shoulders formation as shown on the chart below, which is a hybrid of the other two.

The psychology of the herd before a market bottom is confirmed is naturally one of more fear and less greed.  On August 16^th you will recall that we were at panic stations and many were throwing in the towel when the FOMC came to the rescue.  We had experienced two Bingo days in a row at the lows which culminated in a long spidery leg as the market drove back to recover most of the losses on August 16, and then moved up the following day.

The Best Stakes in the Ground at this stage is the Base Low and the 50-dma, and hence the best measuring tool is the High Jump, or in this case the Limbo Bar or Low jump…since the Index is below the 50-dma.  At its extreme this measured -5.64% and was the lowest it had been since it recorded -4.36% on 6/14/2006.  That in itself should indicate that the Index had a significant challenge to get back above the 50-dma, especially as the Index had also broken the 200-dma by -2.61%.  My point is that even with a powerful move back up it would be too far to come back to break through the 50-dma to produce a “V” bottom from such a low starting point.

From the first rally attempt off a Base Low to the start of a pullback is for nimble day and swing traders.  It gives the best gains in the shortest timeframe but has the highest risk.  It usually lasts 5 to 8 trading days.  It is when leaders for the anticipated rally to come define themselves.  However, it is also the period when those same leaders will invariably correct, before moving on to become the true Silverback Gorillas for the move.  Stocks like GOOG, AAPL, RIMM, GRMN, FSLR, POT, MOS, BHP, SIGM and BIDU become the stocks with halo.  These are the types of stocks one should find at the onset for the best longer term ride.  Likewise favored Wolf Packs also emerge.  It started with the Energy Alternatives (way earlier), followed by Chemicals – Specialty, Transportation – Shipping, Chinese Silverbacks, and what we dubbed as Gorillas in general as exemplified by the Gorilla RonIandex. Understand that at this stage of events there is a balance between Fear and Greed.  Since this is at the end of a long bull rally that started back in 2003, the likelihood is that the length of the move would not be more than two to four months.  The longer you wait, the less the reward, the quicker you move in the more the risk.  Only your stomach can tell you your risk/reward preference, and you must best decide when to make your move:

1. Leg 1. The Earliest Entry off a 405-Freeway is on the “Follow-through Day” ANTICIPATING a breakout above the steepest downtrend line shown in red.  Alternatively wait for the Index to break up through as shown by the second red arrow.  The longer you wait, the more the risk of the next pullback.  By now the Index should be close to the 50-dma, so the expectation is that it will correct due to the resistance at the 50-dma.
2. Leg 2. The orange arrow shows the next entry point where one is again ANTICIPATING the breakout above the 50-dma and the latest 405-Freeway downtrend line. 
3. Leg 3. Finally the Safest Entry is the actual breakout above the 50-dma as shown by the green arrow, but if the rally is short half the opportunity is lost – note the distance from the breakout to the top at 1575.  By that stage the leaders are long since gone and one played these and second string up and coming stocks on pullbacks.  Also the Earnings Reports were out in droves by then and there were new stocks making their mark. 

The question now is “How do we apply all these tenets to the current situation?”  We can immediately see that the Limbo Bar results are much the same as before with a reading of -5.25% and -3.65% for the 50-dma and 200-dma readings, respectively.  We have four days up in the rally, and the S&P 500 Index is just below the 200-dma.  The challenge it faces is to break through both 200-dma and 50-dma.  Note also that the 17-dma is still facing downwards and that has to reverse itself if and when the rally continues. 

Essentially the first leg is complete and sooner rather than later we should expect a pullback and then comes Legs 2 and 3 through the two dotted lines representing the 405-Freeway downtrend line from the highs as described above for you to decide at what stage you tip-toe back in.  Whether the Index pushes through the dotted red line early this coming week before a correction remains to be seen, but unless there is tremendous new news the odds are that there will be a pullback between the 200-dma and 50-dma, before we push through the top resistance line of the 405 – Freeway. Realize that we have the FOMC on our side, but the Technology stocks and especially the Internets seem to have gone sluggish with more defensive Industry Groups as Healthcare and Utilities showing signs of life.  

In summary, after at least an Intermediate Correction, expect three legs up before the final push through the 405-Freeway, with a “V” bottom, a “W” bottom or an Inverse Head and Shoulders formation.  Look for the follow through day either by way of a Eureka signal and/or the normal strong follow through day once the bounce play is initiated.  Keep an eye on the relationship of the Index relative to the 17-dma, 50-dma and 200-dma and the extent of the Limbo Bar readings to make the call of when to act.    Now let’s hope the fun begins on our way to a Santa Claus Rally…but at least you are prepared for any eventuality north or south of the 405 – Freeway!  Best regards, Ian. 

It goes without saying that the question on everyone’s mind this weekend is what the “Cartoon Says”!  It happens to be very correct right now as the Bulls and Bears are not quite at the 50% retracement level, the 50-yard marker.  Beggars can’t be choosers, but the Bulls will certainly take their position this weekend compared to last weekend when they were on the ropes.

John Murphy has written an excellent piece of what to look for in the Markets and I am sure one can Google it and find the article which seems to be floating around the bulletin boards the last day.  Anyway, a strong supporter Rick wrote and asked if I would take a look at some of his points and maybe throw my two cents in the ring this weekend…which I will attempt.  One concern that John Murphy has expressed is the 13-ema coming down through the 34-ema, and I decided I would show you a chart with my normal moving averages not to confuse you, but to show the point where the 13-ema crosses the 34-ema. It is the dotted circle with the black arrow showing the crossover point.  Note how similar this is to the 9-dma crossing the 17-dma…the pink line down through the green line.  

As you will recall from our past work we always want the faster moving average crossovers to be driving up through each other but most importantly we need to see the 50-dma flat or pointing slightly up when this occurs.  As we can see from the chart, the 4-dma and 9-dma have both turned up but the 17-dma is still pointing down and none of them are anywhere near to breaking UP through the 50-dma which is flat.  Those of you who are tempted by all the “fru-frau’ around you of our friendly Financial Newspaper making the unusual call which flummoxed their readers that we had a follow through day as the signal to jump in with both feet got taught a lesson; especially if you fell for the trap that was set on the Nasdaq and the NDX in particular first thing on Friday Morning. They telegraphed the move which had the market makers dancing an Irish Jig, especially as my good friend Mike Scott reminds me that one of the things that bother him is “our friendly newspaper using moving indexes. That is indexes that change weekly or more often to determine a rally start. 85-85 and Top 100 are both like that and constantly change.” 

Another point that John Murphy makes is that the S&P 500 needs to clear the 100-dma line which means it must get above 1492.  As you can see from the chart below that would mean it must get above the blue line…the 50-yard marker.  I would much prefer to see this Index above the 50-dma and sitting at the 61.8% retracement level to feel comfortable as the 50-dma is still pointing down.  If you look one stage back when we were all biting our finger nails after the August 16^th bottom, note how the Index had to grind its way back and forth before it could get itself above the 50-dma.  Don’t be surprised if the S&P 500 Index retests the 1440 level, especially as it has not got above the 200-dma as yet.  Although the four day bounce has been impressive, it takes a lot more oomph to drive through all the overhead supply. The second important point I have taught you is that the Index must drive above the “405 – Freeway”, which is shown on the chart, i.e. the downtrend line from the highs.  At this stage it is a long way to Tipperary!  I might remind you that this is all basic HGS 201!   Go back to the basics and pull out that PDF and digest the slides around the Base Low and what the steps in the process are for it to clear the Overhead Supply.  Alternatively, for those who are new readers, browse back through some of the previous blogs to find similar discussions of what to expect for steps to recovery.

So let’s review the bidding: 

1. The Market Makers gapped all major market Indexes up first thing on Friday morning and the likes of the Nasdaq and NDX didn’t see that level again all day and finished with red candles.  Most of the Gorilla favorites such as GOOG, AAPL, RIMM, BIDU, etc all got hit for the rest of the day to finish down…a sign that buying these beasts on dips has worn a trifle thin now and is left to the day traders to play with in their sandbox.  Fortunately, my friend Mike Orlyk thought better of it and stayed out after reading my blog on Thursday night.  Those of you who want more assurance before you venture in, do yourself a favor and go back one paragraph and read it over and over again for knowing when it is safer to start to engage in the euphoria.  The Early Bird catches the worm but watch out for the Hawk above.  Sure there are all sorts of opportunities, but fit the stage the market is at to YOUR STOMACH and not someone else’s.  Right now this is a Day-Trader’s market, period.
2. As it turns out most of the movers were in the bottom-fishing category of the Home Builders and Financials, and for good reason due to the news on an anticipated rate cut, but more importantly a deal that is being worked out supposedly with the government to keep the Adjustable Rate Mortgages from being adjusted up.  This helped the Constr-Resid/Cml, Finance Mortgage Svc, Banking Regional etc.  I know most of you watch my associate, partner and good friend Ron Brown’s free weekend movie but if you don’t you can get a good feel for all of this far better than I can do justice to it in this blog.  Try this url to enjoy 20 minutes of fun and pulse of the market:  http://www.highgrowthstock.com/WeeklyReports/.  It takes you to the “Available Market Reports” and you can then download the Dec1, 2007 movie.
3. Understand that much damage has been done and we need to be more patient regarding the recovery compared to the previous phase that led to the August 16^th bottom.  Just look at the chart above and you will see there is a lot more overhead supply to overcome this time and the mood now is more of selling into the rallies rather than starting a fresh full bloodied rally. Fortunately with each passing day we bridge closer and closer to the FOMC meeting on Dec 11^th.  Since all the signals reassure the market that Helicopter Ben stands ready and able to cut a further 50 basis points, we may eke out a Santa Claus Rally of some sorts, but that is all wishful thinking right now especially as that is the predominant talk around the office cooler by everyone who don’t know a Cup and Handle from a High Tight Flag.
4. I am grateful to my good friend Mike Scott who provided me data to show how the underlying internals of the market have faired through this correction.  All internals on the market obviously show we are badly oversold so it was not surprising that we should expect a decent bounce play given the latest fresh news.  Understand that:

• The % of stocks above the 200-dma is a paltry 35% having risen from a low of 27%
• The % of A+B accumulation to the total is 33.5% having risen from 23.9%.  It should normally be at well over 50%.  Those with “A” accumulation is a meager 5%.
• The % of “E” stocks is at 13.3% having dropped from a very negative 22%.  Most rallies start from such oversold level    
• Mike also provided me with the information on the McClellan Oscillator and Summation Index and it is encouraging to see that both have turned up with the former now into positive territory.  However as you can see by the empty circles we need to see the Mc. Osc stay up above the zero line and the Summation Index rise rapidly with large separation of postings to get above the zero line for a bull rally to continue.  It is currently deep in negative territory.  He goes on to remind me that the FOMC being caught between a rock and a hard place leaves them with three choices “stagflation, inflation, recession…what a choice.”

On re-reading what I have written, I can’t help but feel that I am giving a gloomy picture, but I would rather layout reality than a lot of fluff of how good it is going to be.  The market will do what it wants to do and nobody can tell you with any certainty that they are Soothsayers.  After all, we started from a worse low and more panic on August 16^th so we have to keep these things in perspective.  The bottom line of my message is that there may be a short term rally in the making, but the longer term is far less re-assuring.  My thanks to many of you for chirping up with helpful suggestions and information.  Many hands make light work.  It’s always “Your Call”.  Best regards, Ian.

The Stock Market has been kind to the Bulls these last three days just when we felt they were down and out for the count.  It took new news to get a rally going again, but it is a little too early to call if it will continue into a full-bloodied Santa Claus Rally.  Let’s review the bidding: 

1. We had an oversold market and the Sheiks of Abu Dhabi stepped up to the plate with a $7.5B loan to Citigroup that changed the paradigm for the moment on the Credit Crunch situation.  That gave us a relief for the first day to get the Bulls out of the depths of despair.  The Bears were taken by surprise and had to run for cover. 
2. To rub salt in the wounds of the Bears and raise the hopes of the Bulls, it is amazing how the Fed Governors come charging in on their white horse to give a glimmer of hope that they will make a further rate cut at their FOMC Meeting on December 11^th. Vice Chairman Donald Kohn hinted as much yesterday and that sent the DOW charging like a Bull in a China Shop for another 300+ point up day, and the shorts having to cover in earnest.  Crazy Market…just when the Bears had the end zone in their sights of driving the Bulls into a Bear Market.  They will have to wait one more time to get a decent run on the likes of the QIDs and the FXPs, etc. 
3. It doesn’t matter which side of the market one is on, there is only one word…NIMBLE, or if you snooze you lose.  Take the QID as an example which is both a good hedging tool and a shorting instrument, up 12% in a matter of four days, and down 9% in three days, so beware unless this kind of action comes automatically to you.  You have to be a day trader in order to take advantage of this kind of volatility, but when one sees 38 million shares traded on the QID as normal these days, this is a whole “New Sport” for the thrill seekers.
4. Of course the action is back into beaten down wolf packs of the likes of Transportation – Shipping, Chemicals – Specialty, or for that matter even the Gorilla RonIandex and Chinese Silverbacks have all found favor again.  The Solars are flying high into climax runs, but who cares when everyone is playing the same “Bubble Game”.  No such luck for those trying to find a bottom in the Home-builders as they keep inching lower with every fake rally attempt.
5. Meanwhile on the Indicator front we have had three Eureka signals in the span of two weeks, two genuine and one false.  The false one is easy to detect in that it was the day after Thanksgiving on November 23, and those should ALWAYS be discounted since they invariably fire on low volume days at holiday time.  Yesterday’s signal was definitely one to sit up and taken notice of since it was on heavy volume and had all the trappings of the first day of a true rally if it is to occur. 
6. So now the Bulls wait for the proverbial Follow-through Day, which as the pundits have taught us should occur anytime starting tomorrow through next week…between friends.  My last blog gave the conditions both on the DOW and the Nasdaq for the hurdles they had to jump to even begin to consider a Rally ATTEMPT.  We are well past the 13,100 and 2640 levels, respectively, so the Bulls can certainly take courage that they have the makings of a Rally attempt.  Both Indexes are back to where they were over a week ago, and with today’s pause to refresh there may be a fighting chance of a move to the upside.
7. The Ten Year Bond (TNX) is below 4.00 at 3.94 so that is signaling that the bond market, and hence the stock market, is already baking in the expected rate cut in two week’s time.  Heaven forbid if that does NOT occur as the Bears will make hay while the sun shines, and will cause all sorts of perturbations prior to the year end.�

So what’s the bottom line of all that?  It nets out to two things for the short term: 

• Tomorrow being Friday one should expect the decks to be cleared going into the weekend so don’t be surprised to see the market tail off towards the last hour.  If not, then it bodes well for the following week.
• Keep a beady eye out for a strong follow through day…if that doesn’t materialize then the obvious conclusion is that we will head down again to test the recent lows and one should look for either a double bottom or a further deterioration into a full blooded Intermediate Correction as the next step.  I’m sure you have printed out the stakes in the ground so the game plan is at your elbow and you are all set for whatever the market does.  Don’t second guess and wish it to do what you want it to do.�

For the longer term, we should recognize that if we finish up with a Santa Claus rally the Bulls would have dodged two bullets within the span of five months and the long bull rally will now be into a fresh year.  We should expect some more dramatic form of correction as by then we can well expect the clamor of Recession showing its ugly head in the Financial Media, especially if the 4^th qtr earnings turn out to be disappointing.  But that is a story for another day!  Best regards, Ian.