Ian Woodward's Investing Blog

We have had a few ho-hum days after the shot across the bow with the Dubai Caper a week ago, and as I pointed out in my last blog note, the market has hit its head against an Immovable Object of 1111 on the S&P 500.  Net-net, we are back to playing Snakes and Ladders and even the most seasoned of Day Traders are cautiously looking for any clue as to whether they should go short or stay long.  Given the dismal volume it seems that many have even decided to move to the sidelines to wait for a definitive signal of which way the wind is blowing.  Yesterday we had a second shot across the bow with Phoenix yet again after the Dubai one, so caution is the word of the day. 

The Dubai Blip set the parameters of the current playing field and as you can see from the chart below of the S&P 500, it is stuck in a tight Darvas Box from 1089 to 1111, with 1100 conveniently being the half-way Line in the Sand.  Until there is a breakout to one or the other side of these two numbers, the Market will continue to yo-yo every two to three days in a trading range.  Only very short term players need apply, and Type 3 and 4 Players can snooze.

The Leaders in this market since the Base Low of 667 in early March of 2009 have been the Russell 2000 and the SOX, so the Small Caps have been  the primary action these past nine months.  It was only natural that these same two Indexes gave up the most ground during their recent correction which bottomed on 10/30/2009.  Since then the SOX has been on a tare, and at long last in the past couple of days the Russell 2000 has woken up again and produced a Big Kahuna on 12/4 to show it again is gaining momentum.  Whether it can catch up to regain the lead from the SOX remains to be seen:

The Bear Camp:

1.  Market is in an Ascending Wedge which usually resolves itself to the downside
2.  Psychological Indicators show the Bull: Bear ratio at a five year low, hence bearish
3.  NR7 tight signal suggested initial breakdown, but watch out for a fakey
4.  The market is slowly producing a rounded top…Tops take a long time to establish
5.  At 64% up from the Base Low, the S&P 500 is now at initial Viagra Rally levels.
6.  Bears are cautiously optimistic, but caught once too soon so are not pounding yet
7.  A second Phoenix in seven days shows Bears strengthening
8.  Market Internals are starting to slump and show signs of weakness

The Bull Camp

1.  Traditional Seasonal Rally still looks good…”let’s keep it up till fat bonuses at hand”
2.  Bernanke soothing the markets with no tightening yet and focus on two criteria:
     a.  There are no deflationary cycles
     b.  The financial system is stable
3.  Although both the SOX and Russell 2000 were hit hard, they are recouping fastest
4.  Technology and Transports strong with a preponderance of leading stocks
5.  QID/QLD total dollar ratios are at lowest levels; will take a while to emerge

The Bottom Line is the Bulls win if we move up with momentum above 1111, and the Bears will at long last Get Out of Jail Free if it goes below 1089.  The second Phoenix yesterday says the Bears have control so watch out until we see an Eureka…The RoadMap to Hog Heaven is still working!

Best Regards, Ian.

The Market is marking time waiting for the Unemployment Report due out tomorrow, and by the looks of things it seems we may have had a leak that the numbers are not going to be good, given the late sell off in the last half hour.  Neither the Bulls or the Bears have been willing to make a major commitment and the Line in the Sand these past 16 days has been at the convenient easy number to remember of 1111.

The Bulls held a slight edge with the S&P500 sitting at 1110 until the last half hour drove it down to just under 1100. Fortunately we have a tight Darvis Box around the last 16 days trundling back and forth between 1110 and 1085, so it is not difficult to make a call to the downside if the report is wishy-washy and the S&P500 breaks 1085 to the downside.

At times such as these where the market can go either way, it pays to think out of the box and find a set of old and new Leaders based on their recent performance.  I have picked four distinct groups of five stocks each, and those that follow my blog will soon understand why.

There are plenty of new name leaders that have been making a move, including CAAS, HEAT, RINO, TSTC, and MELI.  Likewise, the likes of AMZN, REV, MED, LFT, and CREE have also shown their stripes.   Yet again some old favorites which have been basing and yo-yoing for the past few weeks are poised to go again such as SXCI, CRM, FIRE, VPRT, and RHT.  Throw in the Old Silverbacks like AAPL, GOOG, BIDU, PCLN, and ISRG which have been relatively quiet of late and we have an Index that will quickly tell us which way the wind is blowing.

Naturally, this group is heavily biased towards Technology, which is always a favorite Sector to lead one out of the doldrums.  However, the Index provides a good cross-section of 16 different Industry Groups and no more than two stocks in any one Group.  If the Santa Claus Rally is on, be rest assured this Index will be really fat with profits and leading the way.  If not, it should give an early warning since it is already fat with profits anyway.  Here is what the Group Index looks like:

Now don’t all shout at once…yes the HGSI Team is working on goodies for the next seminar in March 27 to 29, 2010 and I am giving you a peep show of just a fraction of what we will have for you. 

In honor of a very fruitful luncheon I had with John Bollinger this past Tuesday thanks to my good friend Chris Wilson making a charitable donation for “Take a Technician to Lunch”, we have now incorporated a couple of ribbons which are new to the “wc” chart you are all familiar with.  This work is in beta test at the moment, so NO amount of yelling and screaming will give you what you see. 

However, take it as the HGSI Team’s early Santa Present for you to drool over as we raise the bar one more time in March.  Yes, it is hard coded in the software so it comes up in a flash, and there will be no more excuses not to use the RoadMap to Hog Heaven with the wc chart!  Lurkers…it’s time to buy the software.

Good luck and good hunting.

Best Regards, Ian.

My good friend Kevin from Qatar wrote me a note and a question, so I just could not resist answering him with this caption:

Ian, When I chart the money flow index against the market ETF’s like DIA, IWM, QQQQ, MDY, and SPY, I think I am seeing negative divergences with the Money Flow Index generally peaking July 28-30 and since then a series of lower highs and lower lows (QQQQ being something of an exception).  If not broken, would it not at least indicate that the uptrend has substantially weakened?  Or maybe the better question is: What is the implication of the negative divergence?

Best regards, Kevin in Qatar

Hi Kevin: It’s good to hear from you and as you correctly point out…this market is suffering from “Nasal Catarrh”…only you and I can share that joke from a year ago, with you coming from Qatar.

Ron’s Weekend Movie addressed the problem of the divergences in volume these past few weeks and it certainly means that both Buyers and Sellers have pulled in their horns at this time of the year.   Part of the problem is seasonal in that the holidays and half days can throw one off, but I have noticed that this second up-leg in the rally after the June/July hiatus of a 9% correction has been a lot weaker.

It was just as well the market was closed for Thanksgiving as much of the Dubai shock was absorbed by the global markets while we enjoyed Turkey.  It was pretty obvious that the big gap down on the opening was inevitable and the mood by the time Friday came around was that this was a buying opportunity, which is essentially what happened albeit on a shortened 1/2 day to play, and hence the light volume.

None-the-less, your overall observation that the Market is generally running out of steam is correct and there is at long last an awakening by the herd that the pumping of “QE” aka, Quantitative Easing, aka, Monetization Program, aka, POMO and other such gobbledygook for Fed Speak is fast coming to a close…though there are whispers of a QE2, mind you!

To confirm what you have observed, just trot over to the last blog note I put up for Thanksgiving and you will see that the Black Swan/White Swan Scenario is petering out and I purposely drew the channel lines to show a bending of the curve.

Likewise, there is a certain rhythm to the behavior of the market these last three months where it tops around the 3rd week of the month only to find a bottom by the 1st of the month…and it looks as if we are headed that way one more time.

There is no better way to show you the underlying jitteriness of the market than to use the wide swings in %B of the Bollinger Bands for this second leg up compared to that of the first leg where the swings were all contained in the middle to upper BB’s.

My work tells me that if we have two little and/or big Kahunas in a week followed by a third one soon thereafter that the party is over. Also, watch out for a %B reading of worse than -0.2 as that spells disaster to come.  Expect at least an initial drop of -5% to -7% in a matter of 10 to 15 calendar days.  So, you are all forewarned.

But first, the primary focus is “Let’s keep the ball rolling upwards, so that we can all collect our fat bonus checks, then we will worry about the inevitable swoon…All for one and one for all”!  It will take more than a Nasal Catarrh to break this theme. 

Best Regards, Ian.

It hardly seems another year has passed since we, the HGS Investor Team, wished you a very Happy Thanksgiving with our special thanks to you all for your continued support.  This time last year we were all in the doldrums but there was a ray of hope for a Santa Claus Rally.  It seems we might have a similar opportunity this year.  At least that is the wishful thinking of the Bulls.

The “Hope” is that the Market is in a similar Bull Rally to that of 2003 and early 2004 when it had a run for 15 months.  So far the Market has rallied over 60%, has taken a breather for the last month struggling to get its nose above the old highs and seems to be trying to make another run.  In the chart below I show what the NYSE has to do to repeat 2003 in the bottom right of the chart.  With luck the NYSE can drive for 8000 if the Rally is on:

At the October HGS Seminar, I suggested that since the Nasdaq had broken through the 200-dma High Jump of 25% up, the next Target would be best measured by using the 50-dma High Jump and offered 2200 as a likely target. We got close when it hit 2190 a couple of days ago, and if it can break through again, the next target is 100 points higher at 2300 as shown:

However, as we can see from the next chart, the Challenge is getting tougher as most of the opportunity from the free fall this time last year has been recovered and we have almost recouped the volume vacuum that the Black Swan gave us.  Also the Permanent Open Market Operations (POMO) which the Fed pumped in since March is now over, so we have only the usual Santa Rally to hope will keep this market up.  Don’t forget that it behooves Wall Street Fund Managers to rally this market until their Bonuses are assured, but after that there are slim pickings:

All the best to you and yours fror a Happy Thanksgiving.

Ian.

I haven’t gone balmy, but I couldn’t resist using the latest crazy novelty from Hollywood to make a point about nuddling your 401-K.  I know you enjoy the “cartoons” I use to give the gist of the message…it takes me more time to scour the Internet looking for ideas to fit the message than it does to write it!

Anyway, my last few messages have been a trifle up beat with the Santa theme, but let’s not get too carried away with irrational exuberance, though it is a joy to boost our spirits with something positive to say at this festive time of the year.  Even the disappointing news on the Housing Market was sloughed off today, and the VIX hit a low of 21.63 at the close to add to the calm.  Of course all the pundits keep shaking their heads in wonderment and indicating that some day the Yo-Yo Market with an upward bias will slowly but surely come to an end.

Ron and I gave full treatment to both the upside and downside at the Seminar, and it goes without saying that the airwaves are full of scenarios for both, particularly when this market stubbornly inches higher.  The intra-day and few days trading artists are quick to point out that we now have an Inverse Head and Shoulders Bottom on the VIX and that is true as shown below.

I have shown the yo-yo picture for the VIX umpteen times before now as to the lines in the sand and so there it is one more time.  As you will see nothing has changed; we still oscillate between 22ish and 30ish with monotonous regularity.  Nimble-be-quick will always get a short term trade one way or another when we get the famous Connors 10% above or below the 10-day MA good stuff.  So what’s my point?  This stuff becomes regular fodder to chew on, as short term artists will always know which way the wind is blowing with these wind gusts for such moves. 

But what do the Type3’s and 4’s do with all of that?  Nothing…they either get whipsawed, stay out and wait patiently, or have given up waiting and get in biting their finger nails.   The higher it goes the worse it gets the later they get in.  Eventually, the Big Players are pulling out when the Little Players are frothing at the mouth and falling all over themselves to get in.  In times of long rallies in the market over several years as we enjoyed during 2003 to 2007, it was easier to spot this phenomenon and it can be said in two words that saved our bacon, i.e., Hindenburg Omen.  It is most unlikely that we will see that Indicator sprout up at this stage of the Market Recovery.  However, as HGSI Users we are a lot stronger in spying early warnings of what to look for.  Let me demonstrate that to you with just three charts. 

This chart draws on our experience of how the Kahunas have behaved these past ten months.  A Kahuna is a 1-Day Change in %B of the Bollinger Bands of 0.24 or 0.40 either up or down:

Note that the chart covers the period since the Base Low, i.e., the full Bull Market Rally so far.

1.  The Up Kahunas with a count of 12 to 9 are a few more than the Down, and is reasonable since the bias is up.

2.  When the market corrected in June/July by about 9%, we had three shots across the bow where I note that we dodged a bullet

3.  Also take note of the two Kahunas essentially within three days on two occasions in the second leg up of this rally which assured the direction would remain up.  The Bears did not have the support either back in July or in these last few days to assert their authority and drive the market down.  The overall sentiment is still up for now.  It will not change until Wall Street Bonuses give way to Jobs, Jobs, Jobs as the hue and cry!

I say learn from those signs and when we see the reverse happen get ready to run for the hills as it will be one of the earliest clues we will see that things have reversed and that the Bulls have no further answer up their sleeve to thwart a Bear assault.  But that in itself will not be enough, so let’s look at the next chart which shows the roadmap signs of what to expect:

There are six points to be made from this chart as to what to look for given a Correction:

1.  The first clue will be at least two if not three unanswered Kahunas to the Downside in quick succession as mentioned above.

2.  Although late, probably the best clue that things are going wrong is a Bongo Weekly Red

3.  Prior to that the HGSI Indicator scores will be at least -4 and trending to -6 or more

4.  The %B will have rapidly descended and will stay below the Bandwidth

5.  The Correction on the Major Indexes will be > -8%

6.  The Kahunas will oscillate back & forth between Blue and Red, indicating Bulls and Bears are fighting for control.

Finally, the above chart of Chaikin’s Money Flow is looking a trifle precarious and needs to show a lot more strength.

I’m not saying this will happen, but anticipating what must occur provides an “On Guard Plan”. 

We shall see how all of this unfolds down the road.

Best Regards, Ian.