Ian Woodward's Investing Blog

In my last blog I said “My take is there are very few Bulls with conviction at this point in time to provide a strong rally. So the conclusion is that some outside powerful surprise EVENT is all they can hang their hat on…” and sure enough we got that event today!  U.S. stocks bounced higher for a second day this Tuesday morning, with investors drawing a psychological lift from billionaire investor Warren Buffett’s proposed buyout of municipal bond insurers’ liabilities and another round of cost-cutting by auto giant General Motors Corp.  Billionaire investor Warren Buffett is offering to help out troubled bond insurers by offering a second level of insurance on up to $800 billion in municipal bonds.  Just when things were looking a trifle tepid by way of the Bounce Play, this surprise news gave the stock market a 200 point lift first thing this morning.  Whether it will hold is another matter, but it is a step in the right direction to get this Market off its lows.

Late Breaking News as I go to Press: It held, but it was a disappointing day with the Nasdaq finishing flat and the Large Cap NDX got hit hard after a promising start.  It is a trifle discouraging to say the least, when the Market seemed to be shaping up for a further follow through Eureka day to finally finish as a fizzle, giving up the 30 point gain that it had during the day.  Unless we see immediate excitement by way of “oomph” tomorrow, we can write this bit of news off as a one day wonder and I am sure the Europeans who seemed to take kindly to the Warren Buffet news must be wondering what happened here across the pond.  We badly needed a 2% point day for the follow through and all we got on the DOW was half  that.    

The Bulls really need another strong follow through Eureka Day to propel the Nasdaq up to the 50-dma at 2540 BEFORE there is another drive by the Bears to take it down to test the Recent bottom at 2270.  The opportunities for the Bulls have been in essentially three different buckets according to your fancy: 

1.  Value and/or bottom fishing “dredging” on beaten down Industry Groups such as Home Builders, Financial Groups and some Retail.
2. Growth Bottom Fishing with Fallen Angels on beaten down past leaders who have lost >30%.  They include the likes of AAPL, BIDU, GOOG, GRMN and RIMM.
3. Old and Emerging Wolf Packs with Coal the best of the bunch recently, and other faithful groups such as Chemical – Specialty, Steel Producers, Alternative Energy and Gold. 

Although there have been some excellent short term gains to be made to the upside, the best tactics right now are to play the short term to the upside and take what you can get.  Of course, the market will fool you every time as the expected play is another test to the downside in what is still a Bear Market and until the market Internals show us a markedly improved scenario, the retest of the lows is the general consensus.  Allen Nevalainen on the Yahoo HGSI bb has been doing intense work around potential upside and downside targets and I see he likes the Measuring Rod (MROD) technique of simply displaying the various levels that come naturally to HGS Investors, so here is the latest update on that picture.  He had tagged 1333 as a key threshold for the S&P500 and we seem to be through that barrier for the moment.  The “50-yard line” in my OK Corral picture is always a key level especially when it coincides with a key moving average like the 50-dma, and Allen has taken to it as a duck takes to water.  He applies that concept to the intermediate rallies as well to show potential swing trade pivot points where the Index must hold for the short-term bias to change.  He does good work. At least we have been spared from a rout to the downside for now, and hopefully any retest will abate at or near the Current Base Lows shown in the chart above.  Please realize that we will need a 25% return from such levels to just get back to the old high, so that a very strong rally is needed to achieve such a target for the upside when and if we launch a strong rally.  Let’s take one small step for the bulls by holding the 200 point gain established first thing this morning, then we can worry about one giant leap for the Stock Market out of this mess.   Unfortunately, it was not to be. Best regards, Ian.

In my previous note I indicated that the Credit Crunch has caused at least three conditions to exacerbate the way one engages this market: 

1. Extreme Volatility leading to Moment Trading Intra-Day, leave alone Inter-Day

2. Nervousness for both Bulls and Bears when we are on the verge of a Bear Market

3. The Market is EVENT driven where every little nuance of news causes perturbation 

I also gave you seven Principles of HGS Investing that provide the foundation to successful Investing and above all Preservation of Capital.  Please read that companion note again to refresh your memory of what I said.  I will now dig a level deeper to address the factors that will state the requirements for the Bulls and the Bears to judge which way the wind is blowing at this stage.     

• The Requirements for the Bulls: 

  1. The “W” Bottom:  The Nasdaq must hold at 2200 and the S&P 500 at 1270

  2. The 200-dma High Jump (Limbo Bar) is no worse than -11% for these two Indexes

  3. The New Highs must quickly repair to over 150 for several days on the NYSE

  4. The 50-dma flattens at 2500 and 1425 for the Nasdaq and S&P 500 and then slopes up

  5. The 4-dma and the 9-dma get above the 17-dma and then pierces up through the 50-dma

  6. The Nasdaq and S&P 500 breakout above the stiff resistance from the Declining Tops Line at the highs (the 405 Freeway) and 200-dma at 2600 and 1483, respectively

  7. All Indexes return to their Previous Highs and then the question is whether we move on to New High ground or invariably get pushed back at or around a Double Top to start the whole process once again. 

I have news for you…this is unlikely to happen for several weeks from now.  Understand that currently this would be one of the lightest Bear Markets in History, and hence wishful thinking.      

But I am no soothsayer, so let’s look at the possible Scenario for the Bulls in trying to gain ground back in the to and fro fight with the Bears: 

• The first snap back rally must be at least 15% up from the Base Low to confirm strength which suggests it needs to get back to 2540 for the Nasdaq as shown in my Blog of Round #3 for the Gunfight at the OK Corral.  Unfortunately, the best it has done so far is 2419, so there must be a bounce to eradicate the effect of these last three strong down days.

• The retrace must be <50% which puts it at around 2370 where it must hold.  Instead, we are already down to 2279, so the message is it needs to again bounce quickly…like tomorrow.

• Then a reach for the 200-dma to get above 2600 for a further 20% move…between friends. After all that effort, the Bulls would be sitting above the 200-dma at 2600 faced with all the over head resistance 100 points above it and still be over 250 points from the old high. 

Of course all of this is pure speculation, but if one doesn’t have a Stake in the Ground with which to measure against, then you don’t know how to Manage Change!  I’m not saying this is what will happen, but that this has to happen to have a chance for the Bulls to get themselves out of this mess.  Then ask yourself the chances of it happening and the answer is slim to none UNLESS there is some earth-shattering news by way of a pleasant surprise.  My take is there are very few Bulls with conviction at this point in time to provide a strong rally.  So the conclusion is that some outside powerful surprise EVENT is all they can hang their hat on, and we see from my earlier companion note that may not be on the cards.    

• The Requirements for the Bears: 

1. The first Target is to retest the Lows of 2202.54 and 1270.05 on the Nasdaq and S&P500.  The Bears have already got back down over 50% of the way in three days!

2. The next target is to head down to 2100 and 1225 for a -20% drop from the 200-dma. Anything as low as 20% down from the 200-dma is tantamount to the start of a severe Bear Market, the likes of which we have not seen since March of 2000

3. The news along the way to these lows will be accompanied by more poor reports on the Economy, the Earnings Reports and the Credit Crunch all wrapped together.

4. The Banks are reluctant to give loans and until the trust between them improves this problem will be major for the FOMC to overcome. 

5. New Lows will again start to rise as the next level of casualties gets slaughtered.  New Highs will stay dormant below 50 and more likely below 25.  Both New Highs and New Lows have been down below 20 for the last ten days.

6. The Global Contagion takes hold and starts with major drops in the Hang Seng and follows through to Europe to then hit the US Markets for more – 200 point days on the DOW.

7. The Fed is unlikely to reduce Interest Rates before the next FOMC meeting in March, if then given there is now growing concern that Inflation is also a concern within the FOMC members. 

I’ve tried to lay out the two scenarios as fairly as I can, so you be the judge and make your own mind up as to what must happen soon for the Bounce Play to continue up with fervor. My own judgment is that the Bounce must hold here or we are down to test a double bottom and then if it doesn’t hold, the floodgates will open again to the downside for a bigger Bear Market than we have had so far.   Best regards, Ian.

The Picture says it all…The Bears are winning Round #3 of the Gunfight at the OK Corral so far: 

1. We had a Bear Market Correction of 23% when it went down to 2203, the recent low
2. The Bounce so far has been WEAK with just a 10% retracement back up
3. The Nasdaq and all other Indexes paused to refresh today, but it had 30 points down
4. The Bounce Play must carry on through the Resistance as shown at 2540…between friends
5. It must at least give us a 15% Bounce for us to feel that any retracement can be held
6. That would give us a Double bottom and a chance to drive up to the 200-dma red line
7. Otherwise we are headed down to test the low and maybe breakdown further
8. THE KEY to all of this is that the 50-dma blue line must first bottom and then turn up
9. NO RECOVERY WILL OCCUR WITHOUT THE 50-DMA TURNING UP. It’s currently pointing down – blue line 
10. The Bulls will not gain control until the 17-dma green line turns up through the 50-dma
11. The only saving grace so far for the Bulls is that the Market Internals have repaired fast
12. % E’s are down to a trickle, Industry Groups have gained strength quickly, but the drive must continue for this to be a real rally and not a Bear trap.
13. The Five horsemen are essentially all being hit or gasping trying to find a Base.
14. Rotation is on into beaten down Industry Groups and stocks and I have already mentioned these previously. 

The hour is late and I must toddle off to bed.  Nimble is still the trump card.  Best Regards, Ian.

1.  With its second rate cut in nine days the Federal Reserve continued one of its most aggressive monetary easing campaigns in recent history as it seeks to nip an incipient recession in the bud. This 1.25% cut in nine days is the biggest change since 1990, but the Market yawned.  The Jobs Report this coming Friday is the next big factor to drive the momentum one way or another.  We are also in the height of Earnings Reports season and Google announces tomorrow, so keep an eye out for the reaction to that report.  It is down 20% ahead of the Earnings Report so be careful.
2. The Fed lowered its short-term interest rate target 0.5 percentage points to 3%, and left the door open to more: the statement accompanying the move said “downside risks to growth remain” and the Fed would “act in a timely manner as needed to address those risks.” Investors expect the Fed to cut the rate to 2.75% in March. 
3. The stock market rallied but saw its gains erode following a half percentage-point cut in the Federal Reserve’s key interest-rate target, an aggressive follow-up to its move last week to spur the U.S. economy and fend off recession.  Just look at the reaction in the DOW to the announcement where it rose about 210 points and then gave it all back and then finished negative for the day at 12442.83 down -37.47 points for the day. 
4. Meanwhile, back at the Ranch, the Congress has approved a $157 Billion stimulus package, so we shall see what we shall see on that count.  I thought you would like to see the action in the DOW over the past four days where it formed a Deep Cup scaring the bears to cover their shorts, and then went sideways in a tight Darvas Box type flat base of a handle, waiting for the Fed announcement.  It blew out of the gate on the expected 50 basis point cut at 1.15pm EST, and then the DOW gave it all up in the last half hour.  I tell you this is a treacherous market and you would be well advised to sit this crazy nonsense out until things settle down one way or another. 

I say again, I would not hold your hopes up too high until we see >150 New Highs and that does not seem to be on the cards until we see a major follow through day with aggressive buying by the bulls and rapid quick covering by the Bears who are hungry for more lunch. For your benefit the New Highs for the last few days have been a paltry 35 today and worse yet as low as 15 or less for each of the past seven days.   Meanwhile it is a tight rope walk as to which way this will go in the next few days…thanks to the picture sent me by David Schoon sitting out in sunny China, a supporter of many years gone by. 

 Tomorrow’s action suggests the DOW must hold at 12,410 for the Bulls to have any continued respite from the tepid rally of the last few days, and the Bears can taste raw meat just waiting to pounce on all sorts of Right Shoulder set-ups off Head and Shoulders patterns.  

The Eureka: The Eureka uses a set of conditions based on the ARMS Index which usually indicates that the Bulls are sufficiently exuberant that they are pushing back on the Bears to initiate a bounce play from an oversold condition or to start a new rally.  Let me quickly add:

1. It does not mean for one minute that the direction has changed from Bearish to Bullish 

2. It can mean a respite for a few days where we have the prospects of a turn-around 

3. We will have to see if there is a strong follow through day with strong volume and a further Eureka which would at least indicate that a Bounce Play and/or a reasonable move up is on.

The intent is to identify the market bottom which I call a “Base Low”.  I use the Arms index to call the actual day of the Base Low before waiting for the follow through days. The concept uses specific value combinations of the Arms Index components to determine the Base Low.  There may be several Eurekas before the market bottom is confirmed, but consider the first one as a sigh of relief that at least there is potential respite to the downward spiral that can occur. Since we have just had two Bingo Signals indicating lower and lower deterioration in the market, the first ray of hope and move back should start with a Eureka.  I ask you to please go to the blog I wrote on January 18^th, which shows the past relationships of Bingo and Eureka signals.  I won’t belabor the point further except to say that I doubt we will be out of the woods until we see at least 150 New Highs and then repeated confidence in this number staying above this level to confirm the rally is strong.

Let us see how the week unfolds as we have the FOMC meeting tomorrow and many, many Earnings Reports due out in the next couple of weeks.  There is a long road back to gain the high ground, but in a Bear Market there are always rallies within further legs down.  No one knows where this will end, so play if you must to put food on the table in several beaten down Industry Groups including Energy – Coal (which is white hot), Homebuilders on a bounce off the lows one more time, Financials, Cap Goods, and Consumer Services.  Otherwise, take this as a heads up that better things may come and this is a first step, but be very cautious not to be the early bird who gets swallowed by the hawk above. Best Regards, Ian