Ian Woodward's Investing Blog

This is a quick observation from my colleague Ron Brown

The image below is a snapshot of the market internals for Monday,August 6, 2007.

As you can see the NASDAQ decliners outnumbered the NASDAQ advancers while the NYA advancers versus decliners were slightly positive. It was a heavy volume reversal day with shorts getting squeezed in the financial stocks and in large caps.  Please note that the NASDAQ numbers are on the left and NYA are on the right, with IIQA and IIQD being the NASDAQ advancers and decliners, respectively.

Today’s action shows how very important it is to have stops in place if you get caught on the wrong side of the market, and also how dangerous the leveraged ETFs can be if you are not nimble.

Next week will be interesting.  Just a few statistics on the S&P 500 to give a balanced view of where we stand: 

1. The least % down for the 13 previous longest moves on the S&P 500 is -9.73%.  That was in 1990.
2. The next lowest was back in 1953…who cares, but it was -14.82%
3. The Average of the past 13 such long rallies is -28.05%.  Let us pray we don’t suffer that big a drop.
4. We are currently down -7.91%, so we hope it holds at 8% or a bit more.
5. We badly need a bounce play at least.  Call it a snap back this week. 
6. That doesn’t mean we will be out of the woods…no pun intended while enjoying the golf with Tiger leading.
7. If the downdraft sets in, understand that the least number of Trading days to the low was in 1987 with 39
8. If we liken this to 1990 for a drop of around 10%, that took 43 Trading Days. 
9. The ONLY saving grace is that the P-E of the S&P 500 is 15.20 which is the lowest since 1990
10. If Corporate Earnings continue at this clip, we can hit 100 for the S&P 500 and that will give us plenty of Gas in the Tank.  The tug of war I described earlier between EPS reports and Sub-prime spill over has been won by the latter for now.  So, the bad news is that Technicals trump Fundamentals right now. 

Best Regards, Ian.

1. The first and most important thing on our minds is Capital Preservation.  Just move your money to the sidelines and take a deep breath and regroup if you suffered a loss these last couple of weeks.  There is nothing worse than a leaky faucet.
2. The second point is to be careful of the small caps…the Russell 2000 is in bad shape and may present some shorting opportunities, but it is already so beaten down that one may get caught if there is a snap-back.  Ron Brown showed how to address the ETF’s in his movie today, so see what opportunities appeal to you on that score.  The QID/QLD are a good pair for gamblers but one must be very, very quick on the trigger both ways.
3. The only saving grace is Strong Industry Earnings.  We are very fortunate that the S&P 500 earnings are still on their way to achieving 90.00+ by year end.  However, that means very little right at this moment.  It will be of great value when the dust settles.
4. Now is the time to be sharpening the pencil and observing how leaders behave to see if the rot has stopped:

• Stocks whose Trailing Twelve Months (TTM) earnings are out and are stellar, i.e. >20%.
• Stocks that have A or at most B Accumulation since they are the current leaders.
• Stocks that have a Rel Str of at least 87 and preferably 95.
•  Stocks that have an ERG >210
•  Stocks that are still above their 50-dma and preferably above their 17-dma.
•  Stocks that have not corrected more than 15% at most from their high and/or basing

Here is a list to keep an eye on.  If this Index can’t hold, this Market is in a lot more trouble:

 Best Regards, Ian.

In my last few notes we have had plenty of warning signs this past week that the Market Indexes were going to head down. I won’t repeat all of that, but at least you now know the steps to take if you find yourself in this situation again.  Before I go into an analysis I showed you how valuable the Tsunami Indicator is in times like this.  Here is the current picture.  Just look at the damage: 

 It is worth a few sentences on what possibly caused the psychology to change in the Bears’ favor: 

Three things immediately come to mind:   

I. The clientele were primed for a correction with weeks and even months of anticipation for a 10% correction on the S&P 500.  The talking heads talked that one up daily on CNBC. 

II. The sub-prime lending bubble which affected the Hedge Fund debacle for Bear Stearns and others. 

III. The unbelievable Volatility in the Markets for the past year building up from the correction last May 11, 2006 and increasing right up to the present day.  This discouraged most investors and even swing traders to throw in the towel. Day Traders had a ball, but even they were put to the test at being very nimble.    

It is far more important to assess where next and what the possible alternatives maybe for the immediate future: 

1. The Volatility is here to stay.  It may decrease but not anytime soon, so realize you must contend with that.  

2. The housing market and the sub-prime fiasco have still a ways to go to work itself off. 

Net-net on these two items is that it will take a while and there is little investors can do than to realize that for the moment long term Buy and Hold is very risky no matter how tempting we might feel in trying to bottom fish for value.  The knife is still falling and our motto is never catch a falling knife.  We have no idea of where the bottom might be.  That leads me to item I above, where at least we can resort to the up, down and sideways scenarios you have seen me use for setting the Benchmark Targets: 

3. The psychological mood is “let’s get a decent clean out and start a fresh bull rally”.  The $64 question is how low is low, but we have the tools to identify reasonable targets:    

a. Go back to the psychology – 10% correction for a decent clean out. The odds suggest an 8% correction on top of the several we have had since the bottom of 2002 is unlikely.  We are essentially there right now and already broken the 200-dma.  If the market does stop here then this problem is only postponed.  So we must be on guard for at least a 10% correction which takes us down to a nice easy number to remember, which is 1400 points on the S&P 500.  That is just 33 points away.  The odds suggest there is a 77% chance the correction will be <8% and an 11% chance of it being between 8% and 12%.  Since the 200-dma is broken, it usually takes weeks rather than a few days to recover, unless we have a major snap back next week.          

b. Beyond that we head for an Intermediate Correction of 12 to 16%.  You can do the math, but that takes us down to 1369 and then 1307, which would essentially mean wiping out the entire rally from this past March.  The continued sub-prime mess can do that.  Anything above 10% hurts and deeper corrections will kill you.   Appreciate that 12% down would be 6% down on the Limbo Bar (Reverse High Jump) and gives us an estimated P-E of about 15 for the S&P 500.  It goes without saying that the market would be very oversold and undervalued at that stage. 

I will give you a Game Plan for the immediate future in the next blog note, but I would appreciate any comments which you can leave at the bottom of this note as to whether this is of help to you. For more on the health of the Market, I strongly recommend you listen to my colleague Ron Brown’s movie at http://www.highgrowthstock.com/WeeklyReports/

Best Regards, Ian.

Last night I gave you eleven stocks which had recent stellar earnings reports and were bucking the trend of a down market.  I called it the “Last Chance for the Last Dance.”  The $64 question is whether the strong performance today of the stocks in the Index is the expected Dead Cat Bounce or an Irish Jig with this Index leading the way to new highs. 

One day does not a market make, but I note that the Index is up 2.53% already, based on buying 100 shares of each stock for a total outlay of $117,102, up $2905 already.  Of course the outlay can be scaled to just $10,000 for a gain of ~$291.  Ten of the eleven stocks are up so this clearly shows this group is made up of leaders, with only Amazon (AMZN) taking a breather after its stellar earnings announcement. Now, let’s come back down to earth and reality.  The purpose of this Case Study is to show you that there are all kinds of opportunity in the market if your timing is right and you are nimble with Strong High Growth Stocks (HGS).   

Here is the lesson learned: 

1. When a market is badly oversold, the pendulum invariably swings the other way 
2. When Earnings Reports are out, look for those that have reported stellar earnings   
3. If you are a very short term trader, select a basket and be at the ready for the next day 
4. Wait for how the market reacts the next day and then decide whether to take the basket or selected stocks from that basket depending on their behavior and the Market. 
5. If the Market goes up, you will invariably be on a winning trade.  Now you are in the driver’s seat and can play for short or longer term gains. 
6. Recall I said the purpose of this select list was to determine when the Party might be over 
7. So the tactics must be to look only for short term gains and play close to the exits 
8. At some point these OVERBOUGHT glamorous stocks will be too fat with profits that they become a target for a correction. 
9. The best way to measure that point is to use the High Jump Indicator…another proprietary HGSI Indicator.  It is the sum of the 17-dma, 50-dma and 200-dma from the Stock Price. 
10. So play close to the exits and you will do an Irish Jig with the money you make 

We will know if this was a Dead Cat Bounce for the Last Dance or if the Market has had a minor perturbation like the week of Feb 27, 2007 in the fullness of time.  Nobody knows how the cards will play out, but if “You know when to hold them and when to fold them” you will be a winner.