Ian Woodward's Investing Blog

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.

As I showed you in the note of July 26 Musings two notes ago and below, the group of stocks I was following to determine the top in the market is now broken.   There is one last chance for a last dance that my good friend Robert Minkowsky has suggested which is to take those stocks that have bucked the trend and are still heading northwards against the grain.  Watching a small list of these stocks which have already reported their earnings will give us a clue as to whether the recent drop in the market was like February 27^th for a week or so or whether this time we are headed down for a decent clean out.   Below is the list of eleven stocks to follow and the Index of these to show you that the Index is above the 9-dma (pink line).  If this Index breaks down, the party’s over!  Enjoy

Prior to the Market opening this week I said in my Musings note of the 22^nd July (see notes below) that we were probably due for a down week.  Sad to say it happened. 

For your convenience I show the table below of then and now (shown in red)

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 (23July):                                     

                                                                                                                            26July

1.  The Down Jones Transportation Index – Must hold at 5225 and bounce up        5069.43

2. The Philadelphia Semiconductor Index – Must hold at 535                                 511.94
3. The Nasdaq 100 Index – Must stay above 1995                                               1970.97
4. The Volatility Index – Must come back down below 15.00                                    21.65
5. The 10 Year Bond Yield Index– Must stay below 49.50                                       47.92
6. Watch GOOG, RIMM, AAPL and FSLR – Must hold with minor loss.
7. As we can see only one item is not broken…the Ten Year Bond Yield (TNX), which will be good for equities but bad for the bonds.  The triple A’s are running into trouble.

    

   The $64 question now is what’s next.  The answer is simple…the numbers shown above must quickly turn back above the “Lines in the Sand” or we are headed down for a decent correction and a further clean out.

    

   The Twenty Stocks I recently follow shows the Index has turned down drastically, so all-in-all we have a bleak outlook:

    

Warren Buffet once said “You don’t know who is swimming naked until the tide goes out”. 

At this very moment in time there are only two things playing tug of war in the market that matter: 

1. The Earnings season is in full swing and by and large there is no question that the earnings are showing strong results especially in the technology arena.  That on top of the fact that the Tech Sector has been dormant coupled with a weak dollar has given a fillip to the Large Cap stocks. However, I don’t have to tell you that the Small Cap Russell 2000 is being hammered.   

2. The sub-prime fiasco is not behind us by any means.  The latest casualty is Countrywide Credit.  In addition, it seems that the credit market is finding difficulty in closing the Chrysler deal which suggests there is a lot more bad news which will take longer to unwind and will last a lot longer than next week when the majority of the EPS reports will be out.   Let’s cut to the chase as to what matters of all the things that can affect the stock market in the next two weeks:  

1.  The strong Earnings Reports confirm that I was right in the July Newsletter to raise the year-end estimate for the S&P500 Growth Rate from 10% to 15% over 2006.  That is the fuel that is keeping the stock market up, because the P-E is at fair market value.  That is the only reason that this market keeps chugging along at this point in time.  However, that swan song cannot last forever without a pause to refresh.     

2. There is a major disconnect in the opinions of the gurus on the sub-prime stuff regarding the size of the potential damage:

    a. The administration including Ben Bernanke implies things are under control though admits there is a problem.

     b. Bill Gross who is the Bond King has turned bearish and you can read his stuff to your hearts content at pimco.com or look him up on Google.  For him to turn bearish raises most eyebrows, including mine.   

    c. If the markets come to a grinding halt on getting the Chrysler deal together that will favor Bill Gross’ point of view, as that spills over into more than sub-prime alone.  Late breaking news says “The backlog of buyout debt just got a few billion dollars bigger. Chrysler has postponed a $12 billion financing intended to help fund its pending sale to Cerberus Capital Management”.  

My point is that we have only about ten days of grace before we begin to see the tide go out on the former and maybe the latter.  So be patient and play close to the exits and you will soon see which one or both are naked…but, make sure you have your swim suit on and protect your Capital! 

Meanwhile, take great comfort that the EPS Reports are strong and play the long side with stocks that have strong earnings already out and bucking the current volatility.  Or seek out those stocks that have disappointed and are vulnerable.  Never short a strong stock till it is wounded.   However, I note that some stocks such as GOOG, MICC, SNHY, BTJ and SPWR which have all been recent leaders are looking a trifle droopy and that is invariably the best clue that a correction is imminent if not already underway.   It’s always “Your Call”.  

Best regards, Ian.

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.