Ian Woodward's Investing Blog

I’m sure you are saying “A Trifle Early for the Santa Claus Rally”, but you take it when you can.  However, the message has a different meaning and one that should stick in your memory forever.

My good friend Robert Minkowsky as always is on the ball and wrote:

Ian; For the S&P 1500, %B > 1.0 was 570 yesterday or 38%. There was a Strong Eureka and we had 2 Little Kahunas this week. If we start counting the days of this rally from 9/1 today is the 47^th day. The average of the # stocks > 1.0 during this period is 150. Your chart in the newsletter shows the top rally for the S&P 1500 at 52 days.

It looks as if we will break that barrier with this run that started yesterday and that may turn out to be a climax run.

Any additional thoughts?  Best regards,  Robert

Ah Robert!  You crafty fellow!  When I saw 570 and %B above the 1.25 threshold, I immediately went back to see if there were other recent occasions where that number hit the history books.  Not in my books that only go back to 1999.  However, I was lucky enough to find an article which says there have been three occasions on 11/06/1996, 09/05/1995 and 12/23/1991 on the SPY , i.e. the true days of wine and roses:

So,  if History is to repeat itself, we are golden up to the next twelve days.

But those few readings are not enough to have any statistical significance.  However, as luck would have it here is a sample of events that hit 1.15% for the SPY (not the S&P 1500).  It’s still not statistically significant, but close enough for Gov’t. Work to at least know which way the wind should be blowing:

Again, take this mumbo jumbo for what it is worth, but the message is that the losses are minimal and there is about a 75% chance that the Market will be up about 2% to 5% after ten sessions.  Your observation regarding my point in the newsletter is spot on about looking for a climax run, but let me take you back to an earlier Newsletter where I suggested that when the S&P 1500 reached above 525, that twelve drummers drumming was the answer! I said then:

“You will recall the following chart I alerted you with on the Blog Note of August 8th, just a week ago that gave us the clue that something unusual had transpired on 07/26/2010.   There was a sudden gush of 536 stocks in the S&P 1500 moving in one day to being well overbought and sitting outside their Upper Bollinger Band, from 307 stocks the previous day.”

In that Blognote of August 8th I posted this chart which suggests we have 1 to 13 trading days to the peak after the S&P 1500 Index hits >300: 

It goes without saying that this current “Bump Up” beats all others in strength, and the only caution out of all of this is that the higher they rise the harder they fall.  Remember that the most money is made and lost at the Fat Tails end of the business, i.e., >2 Standard Deviations, so Make Hay while the Sun Shines and keep an eye out for the Drummer Boy in Trading Days!  Now what should you turn to, to keep an eye on EXTENSION…the High Jump!  Corrections there will be, but how much is in the lap of the gods!

I know what you are all saying “So much to remember, Ian” but you must admit I do boil it down for you…if only you would remember!  I will use this in my Blog with a lot more to come and a Partridge in a Pare Tree!  I will do another note this weekend.

Best Regards, Ian.

Now that the Mid-Term Election and FOMC report are behind us, Bulls have breathing room to move this Rally higher.  We are now in the 10th. week, and although it is a long way from the gloom and doom days when the bruhaha on the Hindenburg Omen burst on the scenes on August 12th and 20th., we are now practically into the Santa Claus Rally period! 

We had a wild and wooly ride today and the High Frequency Traders (HFTs) had a field day when the Fed report on QE2 or POMO came out.  They shot the market down, took out all the stops and shot it back up again to finish up eking out a few points on the upside.

…And look what happened to the VIX at the same time.  It finished at below 20: 

The Quantifiable Edges Fed Day Guide suggests that the next ten days are in the Bull’s favor with a minimum of a 63% chance of a winning trade over the first four days and as high as 89% chance for a 6 to 8 day trade.

This market was stuck in the mud two days ago and now it is showing signs of life again.  The underying internals of the S&P 1500 has risen from the teetering stage to at least having some breathing room again, and Grandma’s Pies are a lot tastier and sweeter today, with the Inverse ETFs driven back into their cubby holes:

If we look at the %B for the Nasdaq and S&P 1500, we see they are well into the safe zone having jumped up from around 0.70 to the 0.90 – 1.00 area, which implies the Bulls now have a decent cushion should there be a strong shot across the bow:

You are all familiar with this next Chart as we have faithfully followed its progress for the last ten weeks and we are now coming to the end of High Road Scenario.  As you can see we were on the hairy edge of heading down, and although we are not out of the woods, at least the major divergence I showed in my last note has improved.

…And the last one which we have featured for the same time.  As you can see we are knocking on the door of a double top, which is where this Rally seems to be headed:

So, there you have it…as they said in days past “May the Force be with You!”

Best Regards, Ian.

This Stock Market is stuck in the mud in second gear waiting for the events of this coming week:

We have eked out nine weeks of a Rally, but the internals of the market as expressed by the %B  above and below the Middle Bollinger Band of 0.5 for the S&P 1500 show a major divergence at this stage.  It’s pretty obvious that the Large Caps have led the charge and that coupled with Technology including the Semiconductor Index SOX have kept this rally boyant until now.

The S&P 1500 is struggling to reach a Double Top, but getting droopy drawers in the process:

Note how the %B for the S&P 1500 Index is still at a respectable reading of 0.72, the ratio of stocks above and below the middle BB of 0.5 is decaying:

Grandma’s Pies are beginning to show a lot more red for the S&P 1500, and the Inverse ETF’s Index which I listed in my last blog note is still dormant but beginning to stir…i.e., “Green” increasing

We had a great Seminar last weekend and one of the fruits of our labors was to evaluate different User Groups that showed us the Leading Stocks in the Market.  Here is that quick snapshot using the Percent Change Chart with the Start Date set at the New Base Low of 7/1/2010.  As you would expect, Relative Strength invariably leads the way:

Here is a quick snapshot of the Top 20 stocks in that leading RS 95 Group:

…And here is the overall Index for that Group;  Extended and Fat with Profits.  It should crack first when the market breaks:

AAPL has been the Leading Stock in the market for quite some time, but since its recent Earnings Report came out it has been basing sideways with a 6% drop from Top to Bottom.  %B has been gradually deteriorating as shown on the chart to the point where it is now below 0.5, not a good sign.  It needs to Bounce quickly from this point or it will show us the way down:

And that’s My Story for Today!  It should be an interesting week to come.  Thanks to you all for your support.

Best Regards, Ian

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.