Ian Woodward's Investing Blog

Over the course of the last four months I have shared with you many of the Principles I espouse for High Growth Stock (HGS) Investing, and I hope you have begun to see a pattern in how I approach the Market, the Industry Groups and the Stock Selection.  I covered many of these principles during the three day seminar we held last weekend and it seems fitting to recap a few of them that are most pertinent now. 

1. Never try to second guess the direction of the market…let it tell you where it is going. However, that does not mean that you do not prepare yourself for the direction it takes by at least identifying three scenarios for up, down and sideways.   
2. Skeptics say that History never repeats itself, and they are almost right, but it is uncanny how the lessons learned from History give us certain rules of thumb in order to develop a game Plan.  I use them all the time to tell which way the wind is blowing, the size of the current ballpark in which the game is being played, and where the important boundaries are for reasonable next moves.   
3. I call them Stakes in the Ground, and time and time again these simple stakes give me a compass for the direction of the Market and the decisions I must make to buy, sell or hold.  More importantly it tells me the shades of grey to apply, i.e. whether to lighten up or jump in with both feet.  Black or white decisions are easier to handle than the numerous shades of grey we face every day in our lives.  At this juncture, the Stock Market has played into our hands and we have two Stakes in the Ground depicting the black and white: 
4.      The recent bottom that occurred on August 16 which we call the Base Low
5.      The most recent top which happens to be slightly higher than the previous one 
6. It’s amazing what one can do with those two simple stakes to determine the size of the ballpark in which the tug-o-war between the Bulls and Bears are currently playing, and who has the upper hand depending on whether we are above or below the 50-yard line and who is carrying the ball at the moment.  I’m sure you now know that the Fight at the OK Corral is always between the 50-yard line and the Base Low.  All of this may sound very elementary to you sophisticated Technicians who use Fibonacci, count Elliott Waves and spy various proven shapes and forms, but it is always surprising to me that so many make such a big deal out of trying to decide whether to tip toe into the market or get out when the market reverses direction.  What I am referring to is indecision, that Ready, Aim, Aim, Aim and never “Firing” syndrome we are prone to get into when confronted with the important decisions. 
7. At this juncture, you must realize from all the past notes that we are cautious and sensing the possibility of a major correction since there has not been one since 2002. Hindenburg Omens are more frequent these days and although they don’t promise more than a 5% correction to come in the S&P 500, they usually appear at Market Tops signifying irrational exuberance by the amateur and stowing away the profits by the professionals. Furthermore, when we look at the so-called Internals of the Market, we note there are more “E’s” than “A’s” for distribution and accumulation, respectively.  This in turn implies that the market is gradually coming down to a select few stocks that are the gorillas still leading the market upwards.  Fresh from the Seminar where a young tiger sitting in the front row coined the term Silverbacks immediately taught this old dog a new trick…and silverbacks they will be from now on.  These are different from run of the mill leaders in that they are stocks that have reputation, have halo, are names instantly recognizable.  The key ones this time are GOOG, AAPL, RIMM and GRMN.  But there are others which have established a reputation for being the top two stocks in their Wolf Packs, such as DRYS and EXM in the Transportation – Shipping Industry Group, and POT and MOS for Chemical – Specialty, as examples.  The most important trait is that they are all rising above their 9-dma and invariably above the 4-dma for short periods, meaning they are the most in demand.  Net-net Silverbacks rise above the 4-dma.  Note that GRMN has recently broken that trend.    
8. I know there is a dear lady with her husband sitting in sunny Florida that now fully understands the meaning of playing Snakes and Ladders with their money, but still need a guiding hand to show how I think in sifting difficult problems into threes to determine the best path to take. So, before this note turns into a bunch of platitudes, let me show you where the ballgame is being played and when to turn from bullish to bearish based on the Base Low and the recent Top.

The Playing Field for the S&P500 is the Top with a stake at 1576.  The Critical Line in the Sand is the red line at 1490, just above the 200-dma at 1476.  The fight at the OK Corral is between 1490 and 1425, the New Base Low until and if that Stake is uprooted. I used the 1/8^th tool in HGSI for the demarcations…I wish they were tenths which would make it a football pitch.

1. Your job is to decide when your Portfolio has taken a sufficient haircut that you can’t sleep at night and your stomach (meaning your risk/reward preference) can’t take it any longer. Usually by then you will be saying “shoulda, woulda, coulda”.
2. The Bulls still have the ball just above the 50-yard line; they nearly fumbled it on Friday.  Notice how they have always recovered it from the Bears at that line going all the way back to June.  Always look for STRONG support lines and that is now at 1490.
3. The Last Call is always at the 200-dma which is at 1476.   
4. After that, which tool helps you the most…the Low Jump or Limbo Bar?  3% down from the 200-dma takes us to 1442 and 6% down is 1387, so it will be right down to the Base Low at 1371 …between friends.  Now you have a Game Plan and the only job for you is to execute.  An exercise left for the student is to do the same thing for the Nasdaq and show it to your spouse!   

Best regards, Ian.

Having given us a treat yesterday of the expected ¼ point cut in both rates which the markets enjoyed for all of one day, the FOMC injected some $41 Billion into the system today that sent all markets reeling on its heels, especially with the downgrading of Citigroup today.  It’s tough to win in this yo-yo market, and it goes without saying that the Chemicals Specialty and Transportation Shipping got whacked again today for -4.94% and -2.33%, respectively.  This was on top of yesterday’s -9.00% and -2.14%, respectively, as I reported in my “RoughSeas” Blog.  The Nina, Pinta and the Santa Maria are in very rough seas right now, as DRYS, NM and EXM took another hit today.  Down nearly 14% and 4.5% for those two Wolf Packs says they are licking their wounds and maybe the signs of topping for them. We are inclined to forget that the leaders in them which I gave you delivered about 50% each as selected Wolf Packs and only focus on the downside when they break.  That’s par for the course. 

My question yesterday was “Profit Taking or First Signs of Rotation?”  I think we will have our answer in one more week if not tomorrow!  One clue that suggests this may still be major profit taking is that the volume today in the Transportation Group had only four stocks above average daily volume, so you know full well that unless there is a major collapse tomorrow, the “buy on dips” types will be back in full force…i.e., more complacency.  But while that formula is still working that is where you make the money PROVIDED you are nimble.  The Chemicals Specialty got hit a bit harder…due mainly to FTK taking a shellacking on very heavy volume.  

Wolf Pack Hunting…at its best with HGS Investor (HGSI) Software! 

But from the Pain, now comes the Joy.  It is the beauty of being able to spot the rotation of emerging or discarded Wolf Packs so easily with the HGSI Software!  You will recall that all of five weeks ago I gave you Energy – Drilling, and quickly told you to forget it, as the stocks did not fire up during the following few days as we watched their behavior.  That Wolf Pack turned out to be a mighty hungry pack these past five weeks.  It may be early yet, but there are the first signs of life due to two things…one is that the likes of RIG and GSF have both delivered stellar earnings, and the other is the news that there is a shortage of supply of crude oil.  Pick your spots carefully and keep a beady eye on the market as most boats sink in extremely heavy seas.

Another Wolf Pack that was making noises of stirring was the BusSvc – Education Group which we spied at the Seminar just finished.  Although the leaders got hit today, they are certainly worth watching if this Market is to continue upwards and does NOT give up the ghost.  I’m sure you understand by now that these are only pointers for possible fresh opportunities and nine tenths of their success comes from the “Wind being at your Back and not in your Face”.  Whatever the immediate results, I ask you where can one find a software product like HGSI which serves these tidbits up on a silver platter?  

Best regards, Ian.

Here is a bonus blog for you tonight…there is another one right behind this one!  We have had five Hindenburg Omen signals trigger in the last two weeks so be warned that we can expect at least a 5% correction in the S&P 500.  Three of these signals were “Strong” as shown by the dark red lines in the lower window of the HGSI stock chart.  Now the only question is how far can the drop go?  We may be lucky to get a Santa Claus Rally in which case the downdraft of yet another 362 point down day is just a blip due to Citigroup downgrading and credit fears.  On the other hand, there is more than usual hits being made on the Leaders, though the really solid Gorillas as I gave you in the RonIandex Gorilla Index a few weeks ago still seems intact.   

Since we are having a good deal of success in milking the process I developed over 15 years ago of having an Index of really strong leaders act as a surrogate as to when the market will topple, Ron and I have built on work the participants did at the stock seminar to identify Chinese Silverbacks!  The claim to fame for these stocks is that they were selected from the list of ~ 75 stocks we identified at the Seminar, but we have pruned them to consist of stocks over $20 and are still above their 4-dma as of last night.  In addition to all the work we did on suitable Wolf Packs at the seminar, this gives us a further dimension in embracing the very hot Chinese Market.  Ron and I strongly suggest you put this Chinese Silverbacks list in your User Groups and keep a beady eye on them as our Winky-Winky to you for whatever you wish to do with it.  It’s always “Your Call”!

Have fun and keep your powder dry!  Best regards, Ian.

A quick heads up on the fly…The Hindenburg Omen Strikes again.

Ron and I are feverishly working on getting the Seminar DVD’s completed, but I felt I should give you a quick picture to chew on. 

Best regards, Ian.

On Sunday I told you watch these Market Leaders to see which way the wind was blowing, and I am pleased to say so far so good.  The numbers speak for themselves.   

Lest we get too euphoric, let me put some perspective on this picture. If I use a simple filter of  $3, and 40,000 average daily volume on the data base, I see that there are 241 stocks with an “A” Accumulation and 492 stocks with an “E” for Distribution.  So what you ask?  One item we watch is that when the number of “E” stocks are greater than “A”, and as you can see by a factor of 2 to 1, be careful of the underlying internals of the market.  Note also that we are back up to over 2200 on the NDX, so you might want to go back and look at the Fly Specking I gave you on that number several blogs ago. 

More importantly, when you look at the Gorilla Index where it was down over 3% the other day and it comes back to deliver all stocks up with 5.48%  it is showing that these extended stocks are getting more peaky.  Yes, I know it is not equal dollar weighted, but that is not the thrust of my point.  It reminds of the days when we had the Nifty Fifty…probably before many of the young tigers can remember.  They can go on for ages, but then the majority of them die never to be heard of again.  So if you want to make good profits quickly you know where to play, but play close to the exits.  I say yet again “As GOOG, AAPL, RIMM and GRMN go, so goes the market”. 

I note that AMZN got hit hard in after hours, so you might expect another see-saw yo-yo affair tomorrow.  One day up and the next day down is what we have come to expect.  Well folks, this was a quick blog note to keep you tuned, but Ron and I are already working feverishly to put our Case Studies together for the seminar, so I will wind down for a few days as I would rather tell you than disappointment you when there is no blog.  I’ll be back when I can. Best Regards, Ian.