Ian Woodward's Investing Blog

Investing, Trading or Playing in the stock market is like playing the game of “Snakes and Ladders”.  I remember as a little boy playing Snakes and Ladders – they call it “Chutes and Ladders” in this country.  I’m sure you remember it; you throw the dice and if your marker counts over to the bottom of a ladder you trot up to the top of the ladder.  If you hit a snake (or a chute), down you go the length of the snake.  It was frustrating in trying to get all the way from 1 to 100 on the board, too many snakes!  Somewhat analogous to the chances being few and far between of finding a stock surviving to deliver $1 million, 15 years from now, off your initial bet of $10,000 today.  Also some snakes are longer than others meaning corrections can vary, but can hurt you if they turn into a bear market.

Some prefer that the bird in the hand is worth more than two in the bush; never allow one’s hard earned profits to vanish.  I like to have my cake and eat it too.  With that in mind, if a stock has made 50% gain I will invariably take 70% off the table and let the rest run as long as it does not turn into a loss.  Likewise, I need hardly tell you that if a stock is 100% above its 200 Day Moving average (200-dma), it is invariably very extended and most fund managers as a rule of thumb will take half off.  Both examples take your Capital off the table, and what remains is profit to do as you wish.

My so called “Mattress Stuffers” portfolio comes from stocks that have proven themselves over time, but not before I have taken some profits along the way and I then let the rest ride as long as the stock continues to rise.  They remain so until the company, stock, and market tell me to take profits and have the discipline to get back into the same stock when the coast is clear.  Never let your Mattress Stuffers get lumpy.  Let me elaborate:

We must find ways to avoid the snakes and run with stocks when they land on ladders.  At the start of a fresh game, a fresh bull market, one can be more daring in letting one’s profits run.  When the bull gets tired, play it closer to the vest.  Likewise, if a stock or the market has had a good run, the odds increase that it will correct.  It may be a perfectly good company, but if the stock gets ahead of itself or has a climax run, why give up the profits of a sure fall?  Take the money off the table, wait for the pause to refresh, and hop back on when the coast is clear.

This “pause” may be 6-8 weeks, 6-8 months, 16-18 months, or never; depending on the behav­ior of the market, stock, and company. It is easier said than done.  It takes discipline to stick with such a strategy – our biggest enemies, fear and greed, lead us to mistakes.  I believe the High Growth Stock (HGS) discipline enables one to hop on and off the ladders fairly successfully.  Off the ladder, one’s money is parked safely waiting for the stock to refresh, the market to turn from -MMM to +MMM, i.e., from a heavy correction to a new bull rally, or the company to regain its footing.

Of course the best of us can’t time things that perfectly.  But my point is when you give me 15 years to play the ball game with a fresh and young star of a company like XRX or IBM in the early 1960’s and 1970’s, a WMT or HD back in the 1980’s, or an AMGN, MSFT, CSCO and INTC in the 1990’s, having spotted them in their formative Growth Period there comes a time when either the Market or the Stock or both have matured and then turn sour.  It makes no sense to sit tight through Bear Market Corrections that can eat all one’s hard earned profits up in a short period of time.  We don’t have to go back that far; think about QUALCOMM (QCOM) at $960 back in its hey-day before the dot.com bubble burst in March of 2000, or even Google (GOOG) which is the biggest star of this new century, which will surely do as well in time to come. The major dips one avoids will make up for the few rungs of the ladder one may have missed – by far!

As the song goes, “Learn when to hold them, and learn when to fold them”, but always come back to play another day, especially with stocks that have been profitable for you and are just pausing to refresh.  All the more reason to sell, hopping on again later.  Let your profits run or you never get hurt taking profits are old adages in the Stock Market, but don’t play Snakes and Ladders with your money.

The Market Indexes finished the week on a sour note, particularly in the last hour when they sold off heavily.  Both Google and Caterpillar reported disappointing earnings. This suggests that the Markets may have more on the downside at the start of the week.    

Six important things to watch going into this week:

1. The DOW Transportation Index – Must hold at 5225 and bounce
2. The Semiconductor Index (SOX)- Must hold at 535
3. The Nasdaq 100 (NDX) – Must stay above 1995
4. The Volatility Index (VIX) – Must come back down below 15.00
5. The 10 Year Bond Yield – Must stay below 49.50
6. GOOG, RIMM, AAPL and FSLR – Must hold with minor loss.

Earnings reports will play a big part in this week’s movements in the Market Indexes.It goes without saying that we need strong earnings reports to keep the Markets up.

Goldilocks is still dancing and prancing with Rumplestilskin around the Bonfire.  All the recent song and dance about sub-prime rates going to pot seems to have run its course for the moment and has temporarily run out of steam.  Wonders never cease when the Retail Stores report indicated that the losses were not as high as first expected and triggered a 328 point rally on the DOW.  The next day the Retail Stores were reported to be at their worst in two years, but the market still went up since the other euphoria was the Earnings reports were expected to be better than expected. 

I emphasize again that the work I have done on the QID/QLD total dollar ratio has recently reached new high levels indicating to me that the pessimism is so high that the old adage of “the stock market climbs a wall of fear” is still in play.  We have not yet seen the super optimism which is indicative of a Blow Off Top.  Having blown through resistance after a triple top we must now see if it was a quick short term covering phenomenon and fall back into the base or a continuation up for that final blow off.

There is still fire in the belly of this tired market with a 187 point gain in the Dow and a 32.5 point gain in the NASDAQ. All the recent song and dance is about the bond yields spiking up and the Dollar regaining some of its weakness, so it is not difficult to quickly bind the limits of the problem. It goes without saying that the volatility in this yo-yo market abounds on a daily basis now. It has virtually come down to day-trading or very nifty swing trading. In a market like this it is almost better to step aside when one is this confused as to the solid direction of the market. We even had a Eureka signal (my special indicator) which at this late stage of a bull market run usually implies we are headed for a correction.

Then there is the daily volume for the QID doubling that of a month ago delivering 20 Million shares routinely and as high as 31 Million…it has become a serious hedging tool from what I can see. Likewise there are many disappointed souls who feel they got in at the bottom of the QID only to find they were too early on their timing.

….And the beat goes on! The Bullish Action is very strong. On the other hand, the Bullish Sentiment is not yet out of control, which will come when the price continues up on weak volume. The bullish action is so strong that it is overshadowing the potential distribution days. In other words, the herd is still buying on the dips. The bullish reversal on Friday coupled with Options Expiration this coming week suggests the week should be mildly bullish. This could set the QID ETF up for another chance at a sequence run this coming week.  Remember that at this point the QID %B is still positive and must turn negative again to trigger the start of the run. We shall see.

I have turned my attention to the QID and to a lesser extent the QLD, the two power ETF’s that give you double your pleasure and double your fun as you chew Doublemint gum….I couldn’t resist that. I hope you enjoy this piece of research which is in its infancy but looks promising. I struck on the idea of finding the earliest potential turn in the Market using the QID, and I am sure you will be surprised and amazed at the extent of the daily money flow into this Index which bets twice the odds of the NASDAQ going down. It is drawing over 10 Million shares a day with regularity and has become a daytrader’s dream. But so far it has proven slim pickings!