Ian Woodward's Investing Blog

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.

I have been busy these last few days getting the Monthly Newsletter done and holding the Saturday once a month meeting.  Now that these events are behind us, the question in everyone’s mind is what are the alternative scenarios from here and what do we do about them.  So, as they say in Bridge, let’s review the bidding before we make the call.  Always start with the “Stakes in the Ground”, which are indisputable facts.  We are all familiar with the picture below by now.  They are the Stakes in the Ground, with the demarcations for a Minor Correction of 8% to 12%, an Intermediate Correction of 12% to 16%, a Major Correction of 16% to 20% and a Bear Market of >20%.   I gave you the warning that Big Foot was already out and about and that King Kong and Godzilla are lurking in the wings.  These Measuring Rods are the standards by which HGS Investors measure the depth of the correction: 

This time I thought I would use the Nasdaq Chart to show the boundaries of the Fight at the OK Corral – Round #2, between the Bulls and the Bears:

You will recall that I said the Bears would be back and licking their chops having been thwarted not once but twice by the Grand Ole Duke of York, aka Ben Bernanke, aka Helicopter Ben.  They are in a lot stronger position this time than when I first presented a similar picture back on August 27^th.  Looking at the chart we can see: 

1. It doesn’t take two seconds to see that the Ballgame can go either way…we are at the 50 yard marker, and just above the 200-day moving average. 
2. All the Moving Averages are pointing down, except the 200-dma which is flat and is the next line of defense at 2590.  Ideally, the Bulls need to hold at the psychological 2600 level or Big Foot will be pounding on the door at the 2519 level which is 12% down from the high to complete an Intermediate Correction, and that is again too close for comfort from the psychological 2500 mark.
3. After that skirmish, we can see a Bear Market looming at 2400, which is an easy number to remember   

The net of all of that is a very simple barometer for you to remember, 2600, 2500 and 2400.  What actions you take to the downside is for you to decide, but suffice it to say if you sit around contemplating your navel if it breaks 2600, you are being a trifle reckless.  Just cast your beady eyes over to the first gunfight and you have only to see that it doesn’t take much to be 3% down below the 200-dma which is the usual recent limit of tolerance for the Limbo Bar (the inverse of the High Jump, which was explained in a previous blog).  6% down throws us into a major correction and anything further we are into the depths of a Bear Market on the Richter scale.

Assessment of the Facts Since the Last Correction:    Every word of the above is fact, and at least puts forth the various downside scenarios in a cogent and logical fashion.  The probability of which scenario occurs is in the lap of the gods and that is where I set myself apart from the gurus who are eager to step up to the plate and prophesy one way or another.   My Party’s Over blog of November 12^th was to remind us that fresh out of the October Seminar just two weeks prior the strategy of playing “Nifty Fifty” Silverback US and Chinese Gorillas was over for now, as there are very few of these great stocks that haven’t suffered a minimum of a 15 to 20% correction, and most of them as much as a 25 to 40% correction, if not more.  Just review for yourselves where the five horsemen have been down to in the last week or so, i.e. GOOG, AAPL, RIMM, GRMN and BIDU.  I also told you that the Chinese Silverbacks were down 19% from the week previous where they were down 9% as a group.  Most of these stocks are sitting at the 50-dma and either trying to recuperate or are tasty morsels for mince meat by the bears as they shout charge and go for the killing on head and shoulders chart patterns.  If 2000 to 2002 is in the dim and distant past for you, in Bear Markets few stocks are spared a 40% or more pummeling. 

What are the Alternative Scenarios? 

1. If you are a long term investor then it is prudent to take a defensive posture.  However if long or short, you have several alternatives:  You can move to cash, buy puts or hedge by playing the Ultra Long or Ultra short ETF’s providing you are nimble and at your screen. See below.
2. If you are an intermediate term trader, you might well try your hand at the likes of the QID, SDS, TWM, SKF, FXP if you think the trend is down, or look for ETF’s and/or strong Silverbacks in the QLD, SSO, UWM and UYG.  Strong Stocks are easy to find with HGSI…a quick answer on the fly is to use All Securities in the Warehouse, make a group from list of those stocks that have earnings reports out, so you don’t suffer from bombshells, and use the Gorilla Fundamental Combo to identify the best stocks.  Make a group from that list of say the top 60 stocks and then using those in the Warehouse you can go a step deeper by selecting only those stocks that pass the “Daily Review 9 key” where the prime credentials require Stocks with an EPS and RS Rank of 85 or better.  Out of the kindness of my heart I have done this for you below, but don’t shout if your list is different than mine.  If these don’t do better than the market next week, then we might begin to say “What’s left, but the Party might well and truly be over!”  It’s Always “Your Call”.
3. If you are a day trader, you are well tuned to knowing how to manage this tricky market.

 The Last Dance Iandex

Please note that there are no more than 2 stocks in each Industry Group, we have 19 stocks not counting the Index and there are 16 different Industry Groups represented.  I will call this the Last Dance Iandex for posterity sake and we can keep a beady eye on how it behaves for future reference.  Here is the Chart for the Index and it looks as if it wants to go again.  If we get a Thanksgiving and/or a Santa Claus Rally this bunch may give us an early clue as to which way the wind is blowing.  Enjoy the versatility of the HGSI Software for any market.  Best regards, Ian.

My thanks go out to all of you for your positive feedback.  Just when I felt we had figured things out and the fans were leaving the ball game yesterday in droves…then would you believe it just before they all exited, the Bears fumbled at the 25 yard line and the Bulls have the ball again.  Who said it was easy calling a top or a bottom?  I know I said the “Party’s Over” yesterday, but there is always some fly in the ointment that can make things go the other way.  That fly this time turns out to be an oversold market, and today we have a Bounce Play.  I know most of you were in your foxholes and sleeping well, and those who are daredevils don’t care as they are nimble like Spiderman and avoid being a fool or a pig in the process!  Fortunately the Game Plan I gave you at the weekend included looking at the potential of a Bounce Play, and after four hefty down days that had to be on the cards for today.

Here is the Game Plan and the scenarios I suggested on Sunday and they still hold good, with one addition:

1. Stay in your foxholes until we get a “Bingo” followed by a Eureka signal
2. Find items to short, but you must be super nimble
3. Alternatively, look for Silverback Gorillas least hit for the upside scenario, should the market decide to give us a Bounce Play…don’t bottom fish now; it’s usually a waste of money.
4. Here is a new one…if the market repairs quickly we are into a Santa Claus Rally!  You have to decide when to enter

For those already in their foxholes last Friday, you have the most difficult choice as to whether to stay out or be a Jack-in-the-Box and tip toe back in.  If you are long term oriented, then you will most likely want to see the dust settle and have no part of this yo-yo market.  Those who are swing-traders are the ones who must now be extremely disciplined in your approach, as they are the ones who can get caught in a Weak Bounce only to find they must get out fast.  For sure you should have noticed that the Asian and European Markets had taken a breather and arrested the big downfall last night.  I told you the Chinese Silverbacks I gave you were down 19% from 9% the day previous…one had to expect a total rot set in yesterday or they would halt the rout and these very beaten down stocks would be the tasty morsels for today.  The same could be said of the Gorilla RonIandex so your game plan had to look for entries here first thing this morning, and/or your favorite stocks which you had vacated previously with a good taste in your mouth. 

However, at all cost you cannot have a split personality.  You are either in for a day-trade or at most a two-day trade counting today, (Friday is three days away and you know everyone will be vacating on Friday).  Furthermore, you can’t dilly-dally on the way.  Recall my saying “The Early Bird catches the Worm, but look out for the Hawk above!”  Always try to figure out what your Competition’s next step will be…if you are a Bear, how do you protect your winnings from the last several days and if you are a Bull, where is the next trap my competition will set for me?  I can’t cover all these points in a two page blog, but you get the gist of how you must think before you buy today, Tuesday.  You know that every Technical Analyst under the sun has already concluded that most of the Indexes have developed a Head and Shoulders Top, so the most likely call will be wherever this Bounce Play peters out for them to take another stab at shorting.  If you are accomplished Day Traders then forgive me as you folks can take care of yourselves, but my thoughts are directed to those who have done extremely well this year, especially one person sitting in sunny Alabama and another in sunny Dallas who wrote me notes of encouragement, and I know the temptation must be there to hop in again.  Net-net, don’t get caught between two stools!  Act like Spiderman and use his trump card which is “Nimble”.  He who hesitates is lost.   

With all that said, of course they are right back in the beaten down Gorillas with the RonIandex up 5.31% for the day based on 100 share lots. I also gave you a winky-winky last night…they are heavily into “C” Accumulation stocks today, i.e., those which have solid earnings reports but buying pullbacks!  DRYS heads the list!  All 25 stocks are green for a gain of ~4%.  I trust I gave you a way to focus on a concept.  Most of you use QuoteTracker, so here is what I keep a beady eye on to see which way the wind is blowing in this current market.  You have to act early/quickly, or you get left behind. 

Net-net, the pictures tell me get in fast and early, the volume is solid for today, and the FXP has stayed locked in a controlled zone and is harmless for today.  If it gets above $80, I would begin to take some action.  Tomorrow may be another story but the Bulls made good money today.  With the Nasdaq closing at its high and the DOW up 319 points, we may see a follow through tomorrow.  Best Regards, Ian

Over the weekend I mentioned that “the Chinese Silverbacks I gave you the other day have collectively given up 9.15% in a week”.  Well I have news for you that the same group is down 19% and if you were keeping tabs on these, then you might have been a star performer if you picked up on my other statement which said “Late breaking news says there is now an Ultra Short Chinese ETF called FXP, which came out today.”  Here is its one-day performance:

  I concluded by saying “Net-net, I can’t make a silk purse out of a sow’s ear.  The prudent approach is to wait and see till the dust settles and sit on the sidelines, UNLESS you enjoy volatility and know how to use your trump card which is “Nimble”.  If you do, then sharpen your pencils for both sides of the coin, shorts and longs and you will do extremely well if you make the right calls quickly.  You judge for yourself where the odds are right now with the picture below.  There is more to go on the downside before it gets to the OK Corral again.  Just watch the Red Line in the Sand.”  Well they cut through the red line like a hot knife going through butter and the Bulls are sitting at the 25 yard line as all spectators rush for the exits singing the same swan song “The Party’s Over”. I also gave you the Measuring Rods. 

The Measuring Rods:

As you can see from the above picture, we are practically at the 10% level on both Indexes, with the S&P 500 finishing at 1439.18 and the Nasdaq at 2584.13. Those who made big money today were in the ETF’s Ultra Shorts and especially FXP, followed by QID, SDS and TWM, but the first two have been the big winners.  I’m sure there are plenty of others, but you get the gist of the message.  Complacency is over, buying the dips on the favorite Silverbacks are over and now we have to wait and see if we can spot the rotation, or whether eventually they will come charging back into these beaten down warriors. We can expect the gurus will tout the big horsemen like “GOOG, RIMM, AAPL and GRMN” and of course one should look for a safe entry point on these and other favorites.  At some point these would be a worthwhile gift for long term buy and hold types, but wait till the dust settles…they have lost 15 to 30% from the top.

 For now the Technology Leadership is lost and you can rest assured that the bottom fishing value types will be patiently rubbing their hands and are already making some hay.  Why do I say that?  Well after the dismal performance of those 15 stocks I gave you last night to watch first thing this morning, we quickly got our answer and it certainly was not to buy any of those stocks.  To get an insight on the fly of where the action was today, I took a list of some 635 stocks which have already had their Earnings Reports out since August, 2007.  I then split them into five groups with accumulation “A” through “E” and ranked them using the Gorilla Fundamental Combo which you should all have if you have downloaded Ron’s latest files, and took the top 25 stocks from each Group.  Here is the snapshot of their performance at two points in time, around 12 noon Pacific Coast Time and at the close an hour later:

 It looks like nobody won at the end of the day, but the bottom fishers were out looking for value.  I happened to see the beaten down Fallen Angel VDSI made 14.56% today, and some of the Home Builders were up.  Different strokes for different folks.  Best regards, Ian.

I am often asked “But Ian, how can I find potential candidates in a down market that still may be providing gains on the long side, rather than sitting in my foxhole?” Of course those who just can’t tolerate withdrawal symptoms want to look for the reward and are prepared to take the risk…i.e., roll the dice in the face of a hurricane.  Well, for those who are not feint of heart, here are 15 stocks that have shown the highest count across several HGSI Proprietary Groups. 

Taking a feather out of my associate and good friend Ron Brown’s cap, I felt I might show you the results of the top 15 stocks for the newly developed function in the HGSI Software, called Group Inclusion.  As he showed you in his video today, this new feature shows the stocks with the most hits in selected StockPicker and SmartGroups.  Shown below are the 15 stocks with scores of 6 to 9, and the groups that had 3 or more “hits” for these stocks.  Note…Column C, labeled Count, is the number of groups that had the stock listed, but the total score shown may not equal that shown on any one row, since I had to cut the view off so that it would at least be readable.  For example, SVA is shown with a count of ‘9”, but only 7 are shown on the list; the other two were in the Health Care Sector and Best Stocks under $10.

I have absolutely no idea if there will be opportunities in this Group of stocks, but it gives us a basis to do paper studies at the onset of a bad down-turn to see if there is anything we can glean out of this lot.  I suggest you put these in QuoteTracker or whatever other Real-time on-line software you use and watch how they do tomorrow and through the week.   

One thing which I find gratifying is that those who have been using their favorite Groups to hunt for stocks will find to their relief and satisfaction they are all prominently shown in columns “D” through “I”.  Naturally the HGS 100 should clock up the most hits, but ignoring that one, your best hunting ground for ferreting would appear to be in the favorite groups you already use as shown. 

As far as I am concerned this is a paper study to see if HGSI can find the proper fish swimming upstream against the tide…It is always “Your Call”.  Ron and I will focus on this feature on our newsletter due this week, and maybe we will shed more light on its performance and uses then. 

Please let me know if this blog is of value to you as it took a fair amount of research to make the simple chart above handed to you on a platter.  Or, are you sitting in your foxhole twiddling your thumbs for better times?  Best regards, Ian.