Ian Woodward's Investing Blog

Two Hair Raising Experiences in a Day!  One was on the Market and the other at the DMV.  The good news is we had a Eureka Signal today and I passed my Driver’s Written Test!

I have been spoon feeding you with blow by blow commentary for three weeks now.  So I am going to turn the tables on you and maybe you can take a crack on the highgrowthstock.com bulletin board to see if you agree with my fly specking (looking for minute clues) whether a bottom is setting in or not.  Remember how we were whipsawed with a similar situation in May through July of 2006.  I say it again, trading in moments is where it is at right now, and take your trades off before the end of the day!  Best Regards, Ian

Last week I likened the Fed Chairman to the Grand Old Duke of York.  There is no question he saved the day a week ago last Friday and marched the Stock Market Indexes to the top of the hill.  I also warned that the market may get impatient that the Fed hasn’t done more, and after a week of a decent bounce from their lows, we trotted down the hill today on its way to test the low again. Three news items weighed down the market today: 

1. Merrell Lynch (MER) downgraded three major United States banks, Citigroup (C), Lehman Brothers (LEH), and Bear Stearns (BSC) were all downgraded from buy to neutral, amid concerns over the institutions’ debt exposure.  The downgrade sent financial stocks rattling down, as it brought more pessimism to an already battered sector.
2. The Consumer Confidence Index declined to 105.0 in August from a revised reading of 111.9 in July. Analysts had expected the index to fall to 104.5, so the drop was normal and expected.
3. Then the Federal Reserve released the minutes of the FOMC meeting on Aug. 7th. The release renewed investors’ fears that the Fed will continue to place their emphasis on inflation risks and an interest rate decrease is less likely than previously thought. 

These are examples of a bigger problem that will plague the Stock Market for some time to come, and unless the Fed can pull another rabbit out of the hat, and particularly turn this last item around, it will be rough sledding for some time.  Their cloth is three weeks to the FOMC Meeting.   Now we must batten down the hatches and/or find short candidates while the storm continues to brew.  I have done my job in drawing the lines in the sand at the OK Corral, so I need say no more for now. 

So let the cards play out and we shall see where they fall, but the Bears have the upper hand right now.  Note how the Nasdaq finished right around 2500, and we now wait to see if it bounces or 2500 provides little resistance and the Index continues down. Whether it is a coincidence or not, the lesson learned is to always expect a retest of the lows when the S&P 500 has gone down >8% as it is most unlikely that it can recover with a V Bottom.   Best Regards, Ian.

The Stage is set for the Gunfight at the OK Corral

The Combatants:  Bulls and Bears: 

The Site: The Nasdaq with lines drawn at 2572 for the Bulls and 2387 for the Bears 

Early Signs of Who’s Winning: 

The Bulls:

1. 4-dma, 9-dma come up through the 17-dma; later 17-dma up through the 50-dma
2. A Eureka Signal with a Follow through Day of 35 points up and 2 Billion Shares
3. Directional Movement: Di+ above Di-
4. The Nasdaq Index gets above the 50-dma at 2572 and then above 2616…the Upper BB

The Bears:

1. The Nasdaq breaks down through the 200-dma at ~2500
2. The Nasdaq goes down below the Lower BB, i.e., 2460, and %B goes Negative
3. The Nasdaq breaks the previous low at 2387
4.  The Nasdaq drops over 16% from the High…down to 2290

Best Regards, Ian.

We are in the peak vacation period and much of that is evident in the volume traded this week. 

A week ago last Thursday, we had a roller coaster ride in the Stock Market and then on Friday we got a respite from an even bigger drop when the FED lowered the Discount Rate at the Window!  This week the markets calmed down with a decent bounce but on light volume. The picture above shows how the NASDAQ volume fell off these past five days compared to last week. Much of the early volume was short covering, but I must say that the surprising aspect to me is the recovery of the stronger stocks as exemplified by the Game Plan 18 stocks I gave you over two weeks ago to watch.  These are pedigreed stocks and they have shown their resilience in this see-saw market:

The bottom line from this past week is that round one goes to the FED in settling the Market jitters.  But what do we see for the immediate future… I’m sure you ask?  It’s not difficult to present both sides of the coin to make a judgment call as to what to expect.  But first, we need a recap: 

1. As I warned last week the tom-toms are beating that a Recession is now the major concern.
2. The odds of two consecutive qtrs. of negative real GDP growth is 7% in 2007 and 32% in ’08
3. The pressure is on for the FED to lower the Fed Funds Rate.
4. The FED will hold their annual retreat in Jackson Hole next weekend…key subject, Housing.
5. I say again that the market is in the process of baking in a cut in rates.
6. Labor Day is just a week away, and the odds are the DJIA will be up next week by about 0.5%
7. The Bounce Play has been reasonable so far compared to the targets I set last week   
8.        Index Criteria                                    Low       Target    Actual      % Up   
   • The S&P 500 above the 50-dma      1371      1485       1479       7.9% 
   • The NYSE back to                         8812      9750       9607       9.0%   
   • The NASDAQ must get back to       2387      2575       2577       8.0%   
   • The DOW needs to get back to     13209     13400     13379       1.3% 

   9. With the heavy pounding the Market took the week before this past week, do not expect any major change in the number of New Highs in the NYSE next week.  We need to see around 100 New Highs to 50 New Lows for a 2:1 ratio, before we begin to see repair on this score.  Although the New Lows have arrested at about 50/day, the new Highs are around 25/day, so we have a 2:1 ratio in the opposite direction at present.   

The bottom line is the results are close enough for Government Work that the intent of a decent bounce was met.   I would feel more comfortable with a 10% cushion on the first three Indexes, as this would give us a reasonable chance that the retest under NORMAL circumstances, (meaning no more adverse surprises of a Loans fiasco) will hold at or above the current lows. 

The Case for the Bulls: 

1. The FED has sent a strong signal to the Market it will defend against illiquidity and market chaos.  It should act at the next FOMC meeting to reduce the Fed Interest Rate.
2. Corporate Earnings remain strong (even Ketchup is selling well…a good Heinz EPS report)
3. Mergers and Acquisitions are still active, but not hot as it was a few weeks ago…liquidity?
4. Corporations are buying back their shares, so they feel they are cheap.
5. There seems to be a baton pass from the Financials to Technology, Telecom and HealthCare.
6. With %B of the Bollinger Bands mostly above 0.7 (70%), these Indexes are healthier now.
7. Unless there is a catastrophic negative surprise and down day, that %B gives a cushion to act. 
8. U.S. Job’s growth is still positive, and GDP will continue to grow on average at around 2.5%
9. The inflation (CPI) is not expected to rise above 3.25% by the 4^th qtr. and then decline in 2008
10. The S&P 500 P-E is at a reasonable value below 16, which is not the 32 we had in 2000. 

The Case for the Bears: 

1. V bottoms are very rare and so we can expect a retrace to test the lows.
2. Where’s the Beef – the volume has been relatively low and primarily short covering this week 
3. Given the Fed’s intervention, this has been a tepid bounce and it is time to see a retrace soon.
4. Most Indexes have only just got back to around their 50-dma and this provides resistance.
5. The other shoe has to drop by way of another surprise on Hedge Funds, Mortgages, Carry Trades, Illiquidity, etc. etc.  We haven’t seen a bottom in Housing yet.
6. The Shanghai Composite is an accident waiting to happen and has a steeper rise to 5000 than the NASDAQ did back in 2000.  That could cause a perturbation in Global Markets.
7. The low volume this past week shows there is no conviction by the Bulls and there is more on the downside, with several stocks at head and shoulders tops at the 50-dma or at double tops.
8. General David Patreaus is due back on Capitol Hill with his report on Iraq and that may cause a flurry of discussion between both parties in Congress and stir up the pot in affecting the Markets. 

With regard to the low Volume:  Do not be too quick to brush aside the low volume this past week.  It is all relative to the times.  After all, just look back to this time last year and you will:  

• See a similar seasonal fall off in volume on the NASDAQ
• Recognize that this week’s volume is actually higher than the same week a year ago, i.e., 8.7 billion shares traded compared to 8.2 billion. 
• Not get too hung up on volume; last year for this coming week the volume was only 6.5 billion.
• Find the Avg. Daily Volume these days is automatically expected to be >2.3 Billion due in part to the sell off in the Market.  Last year we were happy with 1.8 Billion for a strong volume day.

As my caption says they are all on vacation at the beach in the Hampton’s.  Watch the market action to see if the Indexes can repair above their 50-dma and above their Upper Bollinger Band and if they can, the re-test to come will in all probability not take out the current lows. The only caveat is a negative surprise, which can always throw a spanner in the works at any time.  I say again, I am pleasantly surprised to see the Game Plan Index still strong.  Likewise, there are many 10% winners each week in the SmartGroups and StockPicker Groups.  Do your homework.  Best Regards, Ian