Ian Woodward's Investing Blog

IAN: IS THIS A CUB BEAR MARKET OR A FULL SIZE BEAR. i.e. HAPPY DAYS ARE HERE AGAIN???  XLF OFF TO THE RACES??   Bob

Hi Bob, let’s review the bidding: 

1. We are already in a “Full Size Bear”, i.e., >20% down from the high last Oct 11
2. We just finished a Bear Market Rally of ~15% in two months from March 17 to May 19
3. We have just had an Intermediate Correction on top of the Bear Market of ~17% down for two months to July 15, so this “cub” is a trifle bigger than we wish!
4. We had Capitulation on July 15, where the XLF bottomed and produced $8 Billion Dollar Volume
5. XLF bounced with last week’s shoring up by Bernanke and Paulson of Fannie May & Freddie Mac
6. Whether XLF fully recovers or is just a bottom fish Bounce Play depends on the Markets.
7. The Markets have bounced mainly on Short Covering these last three days
8. The Markets recovering are dependent on:     

• OIL continuing to drop     
• The Dollar rising     
• Strong EPS Reports over the next three weeks, beating estimates     
• Institutions buying into Finance, Technology, Health-Care to replace loss of leadership in Oils   
• Global Stability   
• Inflation controlled, including Energy and Food Prices, which are killing the public at large 

Now that we have temporary Capitulation, What are the clues to look for in a Bear Market Rally? 

1. A Strong Follow Through Day (FTD) with >2.5% rise in all Indexes and Nasdaq Volume >2.5 Billion
2. This MUST occur in 3 to 12 days from the Low of July 15 
3. HGS Investors will expect at least 2 or 3 Eurekas along with Kahuna signals
4. By that time the New Highs on the NYSE must show at least 100 New Highs and <30 New Lows
5. Ideally the New Highs should rise above 150 for several days with New Lows down at <30
6. Technically we must get above the 17-dma, then up to 1334 on the S&P to the 50-dma
7. That requires a 10% Bear Market Rally which is the minimum, since >15% is considered normal.
8. Otherwise consider anything less as a Bounce Play and expect a retest of the lows

Net-net: Don’t expect Manna from heaven any time soon.  It will take a long time for this market to repair, and don’t be surprised if we trot down to 1150 on the S&P 500. 

Best Regards, Ian. 

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke explained the plan to prop up troubled mortgage-buyers Fannie Mae and Freddie Mac to members of the Senate Banking Committee.

• They faced questions about the cost to taxpayers, but Paulson didn’t put a dollar amount on the proposed aid, which gave some senators pause.  He drew the analogy of requesting a Bazooka in his pocket rather than being given a squirt gun. 
• Congress must approve the plan, hammered out over the weekend by the Treasury and the Federal Reserve.
•  “I think you could be risking the taxpayers’ dollar here,” said Sen. Richard Shelby, R-Ala. the panel’s top Republican. “To give you a blank check…I’m not sure.” 
• With that remark, you can guess where the plan will end up…IMHO on the shelf with more trouble to come. 
• Ask the stock market which once again yawned at the Administration and Congress’ stalemate in getting anything done.  It’s a sad commentary.

SEC to limit naked shorting of Fannie, Freddie, brokers 

• Christopher Cox, chairman of the Securities and Exchange Commission, said on Tuesday that the regulator will try to limit so-called naked shorting of shares in Fannie Mae, Freddie Mac and primary dealers. The SEC will issue an emergency order stating that all short sales of shares in these companies will be subject to a “pre-borrow” requirement, Cox explained. The SEC is also planning more rule-making focused on the broader market, Cox said. 
• Naked Shorting has been illegal for years, but the SEC has turned a blind eye to it until now when their hands were forced, and then only in a limited sense.  If history repeats itself this too will be forgotten when the hubbub dies down. 

Crude Oil Down >$6 a Barrel 

• Crude futures Tuesday closed down more than $6 a barrel, the biggest daily drop in more than 17 years, as concerns that slowing economic growth will dampen oil demand triggered a broad sell-off in energy commodities.  It buoyed the market for most of the day, but then with that big a drop and the dollar bouncing back a little, the market died in the last hour and was down 93 points!  It shows how weak the market is.

The Banking ETF, XLF hit a New Low and a New High in $ Volume! 

• The Banking ETF, XLF, went in sync with the day’s speeches and confirms that there was a ray of speculative hope that a bottom had been reached, but then it swooned.

The VIX is moving towards a high 

• The VIX bounced to 30.55 within 35 minutes of the open and it looked as if it would spike up to the 34ish that all are looking for to see a full capitulation, but no such luck with it backing off to 28.54 at the end of the day. 

Intel Ray of Hope for Technology stocks after hours 

• Intel came in with a 25% rise in profits, Revenues of $9.47 Billion with Gross Margins of 55% in their after hours EPS report and may offer a ray of sunshine for the Tech Sector tomorrow. 

 Net-net…we should be thankful for small mercies that Crude dropped, the Dollar rose, and INTC had a blockbuster EPS Report.   Best Regards, Ian.

It’s an uncertain week ahead for U.S. stocks, as IndyMac Bank falls and jitters slam Fannie Mae and Freddie Mac. Still to come: testimony from Bernanke and crucial financial results from top investment firms and tech giants.

• Reports that the Treasury Department and the Federal Reserve may be planning to rescue Fannie Mae and Freddie Mac were flying around in the media and in the markets late in the week, although most were officially denied or never completely clarified.  Unfortunately for the Stock Market and for the US Economy these latter two are the big fish in the pond, and unless there are quick announcements to shore things up the Stock Market is in for a bumpy ride this coming week.  My good friend, Maynard Burstein says it best…“My hope is that they announce whatever they are going to do prior to the market open.  If not rumors might cause “bad stuff” and it won’t be capitulation.” 
• Editor’s Note:  Late Breaking News on Sunday Evening!  Maynard called it right on the nose…Treasury Secretary Paulson has made an announcement that might have just snatched this Market from the Jaws of Death with proposed solutions for Fannie Mae and Freddie Mac.  Of course it depends on how Wall Street views the medicine, but at least there is a positive change to the futures markets, where the DOW at 5.00pm Pacific time is showing +86, the Nasdaq is +16 and the S&P 500 is +10.20.  It may give us breathing room at the open, and give us a chance to flip to Scenario 1 when it looked as if we were headed for Scenario 3, below.  Good luck to you all.  Ian.

  If it were not for this latter problem, the good news is that News of Bank Failures has invariably signaled a capitulation and a strong reversal in the Stock Market.  There have been five Bank Failures since 1974, and here is the S&P 500 performance later:

      

  I am not suggesting that history will repeat itself this time as the situation of the Indymac Bank pales in relationship to a debacle in Fannie-Mae and Freddie-Mac.  We will have to wait and see how Monday unfolds, and again it all depends on what happens before the open or soon thereafter in what the FOMC and Treasury do.  At times like these, Cash is King for most.  The Three Road Scenario is simple from here: 

  1. High Road…Capitulation, Reversal Day, Bounce Play from an oversold situation 
  2. Middle Road…Fluctuate between 1200 and 1250 on the S&P 500; most unlikely 
  3. Low Road…Down to 1150 as the Next Target as I posted in my February 17th…And 2010 for the Nasdaq as posted in my blog of February 23^rd.

     

     

     Best Regards, Ian.

Just when the Bears felt they had this Stock Market in their teeth, up pop’s Fed Chairman Helicopter Ben and Treasury Secretary Henry Paulson to save the day.  The “Duo” is due to testify in two days before the House Financial Services Committee on suggestions of shoring up the weaknesses of the federal financial regulatory structure.  The one-two punch worked as the market first responded positively to Bernanke’s assurances to extend the time frame for embattled brokerages to tap the central bank for emergency funds.  It then turned around and went on a rollercoaster ride up and down 100 points to finish over 215 points from low to high and come roaring back when Henry Paulson suggested that the “The prices homeowners realize when selling their home may not be as depressed as the headlines suggest.”

1. Net-net, The Dow pops as crude oil drops $5.33, the most in nearly four months. $9 in two days.
2. Alcoa came through with better than expected earnings and was up after hours.
3. The market should follow through tomorrow when 2^nd qtr. earnings are a concern
4. Japan Nikkei 225 advances on U.S. Gains up over 1.7% in early going.
5. From my Smorgasbord of items to watch, let me remind you I have been on target:
6. The XLF bounced from its low of $19.08 yesterday to $20.53 with an up Kahuna
7. The TKC Dredging is finished for now with a strong bounce from its low of $13.43, which broke the Lowest Limbo Bar I suggested at $14.54 and then closed at $14.49 all on the same day four days ago to now be at $15.68.
8. Having broken 1257 on the S&P 500, the next in line was 1241.61 in the Twilight Zone and it hit 1240.68 yesterday for a low before bouncing back to 1273.69 today.
9. Essentially all the Major Indexes are down ~ 20% from the October Highs and below their 17-, 50 and 200-dma so there is a lot of work to do to even think that we have begun to repair the damage of the last month.
10. We can chalk up a POTENTIAL reversal day off the bottom and now we wait for the next set of signals, including the signs of a follow through day with simultaneous Eureka and Kahuna signals required to trigger in the next couple of weeks. 
11. Understand that we are no where near on the start of a fresh bear market rally and the best we can expect is a short bounce play until the drastic oversold situation and short covering is over only to find another test of these lows. 
12. “V” bottoms from such an oversold condition are rare so one must always expect a re-test.  Likewise with the Distribution %E at 25% which is a record reading since many a day, it is most unlikely that we can expect recovery at this depth without some more Bear activity to drive the market down again.  Some of this excessive oversold number has to be burned off to bring %E to between -17% to -7% for a better assurance of having a successful rally attempt. 
13. It would seem that unless and until the price of a barrel of oil can be driven below $100 for good measure, we will continue to have a see-saw market with more blood-letting to try and open the floodgates to the downside.  
14. The target is $1150 on the S&P 500 which I first signaled many moons ago as being a distinct possibility with my blog of the “Thick Blue Pencil” of Feb 17^th, 2008…remember that.  In that note I defined the four types of trader/investor, and cautioned that the only ones who have a fighting chance of making good money were Types 1 and 2! 

We have come full circle to that scenario six months later where frankly only moment and day traders can do well if they are really nimble. Best Regards, Ian.  

You are either tired of this tricky Market and have already capitulated or you are all prepped for a Bounce Play.  It goes without saying that we are back to the critical Line in the Sand:  Do we hold the line at 1257 on the S&P500 or do we head down for the 1150 Target I have offered several times before on this blog and in the March Seminar Targets?  It is Nail-Biting Time and the question is “So you think you can dance” in this Difficult Market?

1. If you are an ardent follower of this blog, then I have provided you a Smorgasbord of items to watch this next week based on what I have taught you that are important in the Principles of HGS Investing. 

2. With the HGSI Software we provide the investor the ability to practice several styles from Bottom Fishing to Momentum, from Trading in Moments to being patient, prudent and pouncing when the time is right. 

3. We define opportunities that have MOMENTUM in Strong Fundamentals as its first and most important ingredient coupled with strong Price Gains in tune with the Market Direction.  Our approach is based on providing alternative scenarios that draw Lines in the Sand. 

• We have had two Bingo Signals on the NYSE which suggests A Bottom…not necessarily the Bottom. 
• All Indexes have Bongo Signals “No”.
• We now wait for a Eureka within the next 12 days.  

I trust that the following snapshots from the past will give you what is important to look for at this critical juncture…I will let them speak for themselves, but it is always “Your Call.”  For those who attended the March Seminar, I strongly recommend you dust off the HGS 701 PowerPoint presentation.

     Best Regards, Ian.