Ian Woodward's Investing Blog

I can tell from the “hits” I get on the blog that there is a faithful following that enjoy my blog, and I hope the picture below assures you that I had not forgotten you, but I was extremely busy doing the October Seminar:

We are now less than a week away from the mid-term Election and regular visitors to this blog know that I set the stage to watch three scenarios over eight weeks ago.  We have seen both the Low and Middle Road strategies end and we are now on the last leg for the High Road Scenario:

…And here is where we sit right now.  You can see that just today the NYSE is now precariously close to the Lower Middle Bollinger Band at a %B of 0.53:

Here is the orginal “Template” for what we should expect for the High Road Scenario.  This is a depiction only, but it is important to note that the Rally was nine weeks up before it faded and that seems to be the time when things peter out.  As you can see we should fade anywhere between tomorrow and next week if it goes according to form:

…And you can see we have had a good run, though we have not reached the old high for a double top.  273.03 is last night’s number and we are currently at 272.33 for the S&P 1500:

The % of stocks above %B >0.5 is a weak 62%, so we are knocking on the door of heading down, and there is a strong possibility of a big fall in Bucket Skipping as shown below in red, unless we see a strong come back tomorrow:

Here is the Late Breaking News from today’s action as the %B is down to 0.63, and that is on the hairy edge of falling down.  We really need a strong day tomorrow or the Bears will have a field day and we are due for a correction.  Of course we know that the Large Players are beginning to sway to the Short side, but it is not convincing yet:

One way we can tell that things are stirring to the downside is to watch how a Portfolio of Inverse Ultra Shorts along with the VIX are beginning to come off the bottom.  With sincere thanks to my good friend Chris White who is the CEO and owner of his Edgerater product, here is that picture which is worth its weight in gold:

Well there you have it; stay on your “Light Feet” and watch tomorrow’s action like a hawk.  The Bulls had better push back hard tomorrow or we head down.

Ron joins me in thanks to you all for your support and good wishes at the Seminar!

Best Regards, Ian

New Readers to my blog will need to go back and see the thread since September 5th to understand where we now stand since I suggested a Three Road Scenario for the Stock Market to take leading up to the Mid-Term Election.   As a brief reminder we had three main dark clouds over the market’s head at that time:

1.  The big fru-frau of the Hindenburg Omen raising its ugly head that had the Internet abuzz since August 12th.

2.  The second year of a Presidential Cycle is the most susceptible to Bear Market Corrections.

3.  We had 60 days or so to go to the Mid-Term Elections, which always cause concern in the Stock Market.

With that in mind I suggested that based on recent rallies which varied from a Fakey or Bull Trap of  just 10 trading days for the Low Road Scenario, to 20 days for a Middle Road Scenario, and finally as much as 40 or more trading days for the High Road Scenario would get us ultimately past all three concerns.

Two weeks ago we killed the Low Road Scenario as discussed in my blog note of September 21, and today Case 1 of the Middle Road Scenario is now officially dead and behind us as shown in the following slide:

Mind you the Bears made a valiant attempt at killing the Rally just this past week on October 4th, when they provided a shot across the bow with several well known leaders getting slammed for big losses, noticeably in the Technology Arena where I pointed to the droop in the Nasdaq 100 (NDX).  Fortunately the internals of the market were still strong and in fact are getting stronger, so the Bulls came rattling back the very next day with a strong Eureka and drove all Market Indexes back above the 0.83 to 0.97 arena for %B to finish the week on a strong note.

Along the way, I pointed out that Uncle Ben was dropping his leaflets again by firing up POMO, and it is painfully obvious that the Fed and the Administration will do everything in their power not to let this market slide into another deep correction until the Mid-Term Election is over.  So now we embark on Case #2 of the Middle Road Scenario which should take us into the weekend of the HGS Seminar from October 23 to 25:

Understand that the purpose of showing this depiction is to suggest that if there is to be a correction it should happen in the next two weeks.  If  it doesn’t happen then we move into the Long Road Scenario which will take us into the Election and if that scenario holds up, then at least the concerns of all those dark clouds for an impending huge double dip before the Election will be blown away.  It so happens that the % of S&P 1500 stocks above the Middle Band of 0.5 is 83%, and my good friend Paul reminds me that it would pay to watch the overbought bucket of stocks with %B greater than 1.0 to make sure we do not get too overheated…so here is that picture:

I am sure by now that you have understood that a 1-Day reading of >300 for %B >1.0 shows strength and you need to see many of them during the course of a rally.  However, there have been three occasions in the last 20 months where %B >1.0 recorded over 500 stocks.  The measuring rod is that once that occurs, the days for the rally are numbered.  Expect the market to die within 12 to 15 days of such an event.  Building on Paul’s idea, I have developed a chart of  the number of Trading Days that each of the 5 Rallies have recorded since %B first hit 100 stocks in the >1.0 Bucket until the last time it hits 100 stocks in the same bucket.  It usually takes another 2 to 5 days to die after the trading days recorded as shown in the table, i.e., more stocks <0.5.   My point for all of this is that I repeat again this business of fast dropping %B and Bucket Skipping gives one a very quick early warning of impending major turns in the Market.  Here is that picture:

Contrary to what most believe this has been a powerful rally so far based on using the criteria I mentioned above.  During the period from September 1st to now, we see that the # of stocks in the S&P 1500 which have sat above a %B of >1.0 is 9.20% for that period of time, and it has done it in 26 trading days.  The chart also suggests that there is upside potential for the %B >1.0 to still grow 1.5% to 2.0% if the rally is to continue.  That implies we should see more occasions of hits above 300 stocks in this bucket and hopefully culminating in 500 or more.  Then we will for sure know that this market is truly overbought and it will be high time to think of serious corrections to come.   By the way, QE 2 (Quantitative Easing) or POMO (Permanent Open Market Operations) is again in full swing.   Heaven help us when that stops and rates go up, but that is a story for another day.   In the meantime, enjoy looking for the pony or ponies in this market! 

Ron and I look forward to seeing you all in a couple of week’s time.  Those who haven’t signed up yet had better shake a leg.

Best Regards, Ian.

Question from Hsin who was concerned about the weakness in the NDX these past few days as shown by the %B being down at 0.58:  Does it mean the larger the drop in the NDX, the higher it bounces?

Hi Hsin:

By all means watch the %B, but ALWAYS Understand “From Whence the Market Index Came”.  To illustrate what I mean you must look at the most recent Base Low (The Stake in the Ground) and the extent of the move to get perspective on whether the NDX remains the Leader, pauses to refresh, or dies and drags everything else with it:

1.  The NDX has been the leader over all the other Indexes…hence we have seen the Large Caps the dominant leaders the past month.

2.  Notice it has been hit the hardest the last three days…and so the %B is the weakest of the bunch.

3.  Therefore, it is natural that it should be the worst based on very short term measurements with %B at only 0.58.

4.  However, it is therefore at the crossroads…another bad day can throw it into the dumpster and the rot sets in.

5.  That leads to one of three scenarios:

    a.  It bounces back and gets back above 0.70 in a hurry, in which case the Rally continues

    b.  Because it was so strong it pauses to refresh further but not into the dirt (i.e, stays above 0.4ish)…the RUT picks up the leadership

    c.  It dies and the Rally is over and all markets head down…Leadership is lost

    d.  The measuring rod will be the number of Buckets the Indexes Skip from here…since most dropped at least one today.

The bottom line is watch the NDX and the RUT…If both die, this market is dead.  If the RUT stays strong there’s hope.

What a Difference a Day Makes…24 little hours! 

The following Charts say it all…you have seen them before and the recovery today leaves us in a strong rally:

Best Regards, Ian.

I don’t often start with a Caveat, but I sense we have the makings of a decent rally.  However, as you well know, tricky as this market is, it can turn on a dime and fade next week.  We dodged a bullet on Friday when we had a very strong 2% move in most markets which triggered the fourth Eureka in this past month.  So enjoy the information below and use it as you see fit:

You are familiar with the following chart, but I thought you would like to see what has transpired with the Index of the Top 20 Market Indexes and XL Series ETF’s since last I posted this chart.  Note how it dipped into the “Yellow” zone on Thursday, but shot right back up on Friday back into the “Green” zone by skipping a bucket in the process. 

In the course of this recent rally we have had three days when the S&P 1500 had over 300 stocks with %B >1.0…the Upper Bollinger Band (BB).  That is 20% of the stocks and is an indication of confirming the strength of the move.  In addition we now show that the number of stocks with a strong ERG of 270 and higher recorded 46 stocks for those that also have a strong Bongo Weekly, i.e., Green.  I show a sample list of the types of stocks that are leading the Market:

We will soon know if this Rally has some stuffing by keeping an eye on two important items.

1.  The first is that we are at a critical juncture in terms of the Rainbow Charts for the swat of moving averages around the 17-dma, 50-dma and 200-dma, as depicted by the green, blue and red “waves” respectively.  Note how they are about to go through the 200-dma to produce a Golden Cross.

2.  If we look at the High Jump for the 17-dma and 50-dma together we can see that current reading is at around 13% above.  We need to watch if this Index can stay up for either 3 or 6 weeks to give assurance that the Index continues to hug the Upper BB as it goes up:

Now I am sure you are wondering what has caused the sudden change in the mood of the Stock Market when it seemed inevitable that we were headed down into a further Bear Market of 20% down with gloom and doom of a double dip Recession.  It will not be a surprise to you that the Fed has started up the Quantitative Easing (QE) one more time with what is called Permanent Open market Operations (POMO).  You remember the following chart which I have used back in 2008 and then again when POMO was introduced in October 2009 to explain the real reason for why we had such a remarkable rally through 2009:

It will also not surprise you that the fresh start on POMO began on August 17, 2010 just a couple of weeks before the fresh rally took off.  The graph shows there was a nine month hiatus and the pumping of liquidity is off and running…the big winky-winky of the week:

Now let’s review the bidding in the “Harnessing the Hindenburg Omen” saga which I started a few notes back, and remind you that Scenario 1, the Low Road is defunct and we are now on the Middle Road, Scenario #2.  Here is where we currently stand:

Case #1 which may peter out in a couple of weeks takes us into early October.  Since %B for the S&P 1500 is back up at 89.7% (0.897), the Market has a fighting chance of staying up for the next week and then trailing off as depicted below.  It is meant as a pictorial of what to expect and by no means am I soothsayer:

…And here is Case #2 which extends the rally into the 3rd week of October, just before the Seminar: 

I’m sure you get the idea of what I am inferring as this would take us close to the 40 days or so since the last Hindenburg Omen fired.  Let’s see what transpires.

Best regards, Ian.

An appreciation from Paul, whom I have known for 15 years:

Ian, Your work with %B is simply marvelous! The new ability to use the Spectrum Analysis for %B outstanding!

Quick question, where did the term “buckets” come from?  I know how and why you slice things, but the origin of the “buckets” term baffles me.  Perhaps I missed the origin in a news letter or blog post.

Hi Paul:

Thanks for the feedback on %B which has moved the bar a notch higher.  Here are the Golden Rules:

1.  Having sliced things you put them in boxes or buckets.
2.  Having used Boxes before with the nine box matrix which you learned about 15 years ago, we put these %B slices into buckets, <0, >0 <-0.1, >-0.2 <-0.2, etc.
3.  The two most important are <0 and >1.0…they tell you whether the tide is out and all boats are stuck in the mud or the tide is in and all boats have risen to the point we are overbought.
4.  Use it with the S&P 1500 and you won’t go far wrong.  Any reading for %B >1.0 above 300 (i.e. 20% of the stocks) is good especially if it repeats itself frequently to prove the rally is still strong.  Anything for a one day reading of %B>1.0 above 500 is rare and tells you that the Market is topping and within 12-15 days you should see it fall.

5.  If you want to know the strength of the move, compare those in buckets >0.7 to those <0.3!
6.  Bottom line:  Think and sing “Ebb-Tide”.

Normally in the Days of Wine and Roses, with breakouts like yesterday, we would be off to the races and expect that it was the signal for a long and decent rally.  After all we have had three Eurekas with the last one triggered on yesterday.  Again if you trot back to March of 2009, we would be cheering and saying that at long last we have come out of the gloom and doom of 2008 and starting a new rally.  However, just look at the yin-yang today…that’s life in a jittery market.

Whether this is a continuation of the new Bull Rally or a Bull Rally in a Consolidation Phase of a 17-year Locust like Bear Market I leave to the pundits.  What caused the sudden euphoria?  Yesterday’s news by the pundits that the GREAT Recession was behind us in June of 2009!  Yet one in seven are still without a job.  Hence the jittery market we live in, and that is what matters.  Seven years from now we will look back and say “You see, the Locusts do count in this Investing Business!” 

But who cares?   This is not 2003, or 2007 or for that matter 2009.  We are in the midst of harnessing the Hindenburg Omen Scenario which I covered with three roads in my last blog of September 5th.   Don’t tell me you didn’t take stock of it…Here is the picture to remind you of the current state of affairs in a Jittery Market.  It’s called the 20-day, 30-day and 40-day cycle (trading days) as shown below.  The logic being that as each scenario is past in its trading days, the less the likelihood of that wretched beast the Hindenburg Omen poking its head up.  Go back and read that blog, because that is the path we are on:

So where do we stand right now.  Not difficult;  After four months of a Bull-Bear fight, the Bulls have it for now:

…And where have we come from and where are we headed in relation to %B and Buckets:

…And how do we confirm that this rally is currently as strong as March 2009?  The evidence is three >300 days with %B Bucket >1.0 and the Current %B of the S&P 1500 these last two days up at 94.2% and 91.0%, respectively, which is very strong.  In addition, we have had three Eureka Signals in the last three weeks which are essential at the start of a fresh rally.    Therefore the Low Road Scenario for the Hindenburg Omen Harnessing is dead:

Now look for the Middle Road Scenario to happen…don’t know when and hence I have included a gap before it begins to fall.  When that will happen is in the lap of the gods. The two snapshots show what to expect, but from a timing standpoint given we don’t have an utter collapse,  this should play out around the Mid-term Election timeframe:

 But, as I have shown you, keep an eye out for when the stocks of the S&P 1500 top four buckets, i.e. >0.7 drop below 500 and those below 0.3 increase above 500! The longer it stays up, the Middle Road Scenario eventually gives way to the High Road Scenario.  But let’s stay focused on the Middle Road for now.  If it plays out, then it should bottom around the time of the Mid-Term Election:

 Of course the Market is extended, but extended can get more extended until it dies.  %B gives us the early warning signs usually before it does.  You will learn all of this at the seminar in four weeks time.  Hurry, hurry, hurry and sign up!

Best Regards, Ian.