Ian Woodward's Investing Blog

It’s no news to you that we had a Climax Run blow off on 05/22/2013 when most Indexes hit new highs and then the next day we had a knee jerk down.  However as you will see, the Correction so far has been orderly and has found temporary support.  This week will be critical to determine whether we continue downwards to arrive at the first downwards target of -4% from their highs, or we find new support and press upwards to either a double top or push on through to the next target higher:

Here is the usual picture of the eight Market Indexes which show at a glance the action in unison of them:

…And here is the Russell 2000 which shows the drop of over 16 points in one day for the Knee Jerk:

My good friend Mike Scott keeps a beady eye on the McClellan Oscillator and Summation Index and sent me his usual update which he has done for over 20 years.  Here is his summary thoughts on where we stand today:

Here is the supporting evidence that the Correction has been only four days and orderly so far:

Grandma’s Pies show we are at the Crossroads:

Now that we have reached a top with regard to meeting the Highest Jump Plus Targets (except for the Nasdaq and NDX which we know have lagged all along due to the hammering AAPL took earlier and its heavy influence on these Indexes), I show the Highs reached on 5/22/2013 and the extent of the decline so far which is approximately -2% on average:

Now here are a series of charts which hopefully you will find are “Good Stuff”.  It picks up on the theme of the High Jump which clinches that plus or minus 12% from the 200-dma is the Caution Signal for the S&P 500…Enjoy:

…And here is a closer in view which shows the last 13 years.  Please note the Caution on the chart:

I felt we should turn our attention to the XL Series of ETFs and show you a snapshot of their performance over the last month.  I have indicated what I feel are the ETFs that are extended and also those that may still be playable provided the market turns upwards yet one more time:

Here is the History for the Healthcare ETF XLV, which shows this one is extended and well overbought:

…And here is a chart for the Technology ETF XLK, which may offer an opportunity if the market has more to the upside:

I trust you all had a good Memorial Day and remembered our troops in your thoughts and prayers.

Best Regards,

Ian

It has been a couple of weeks since I posted a blog note and I thank you for being patient, as I am sure you have constantly been reminded that this Continuation Rally is coming to an end.  I also remind you that as long as his nibs, Uncle Ben, keeps printing money ala Q-E 3 and doesn’t throw a monkey wrench in the pot by announcing that interest rates are about to be raised, we will continue to be confounded.   I hope you find the wait has been worthwhile as I feel I have some “good stuff” to show you in this blog note.  Give me feedback, please.

The Market Indexes are emulating 1995 when they also defied the saying “Go away in May and come back in October” , but we shall see how much longer this steady climb can continue as I see the first signs of being truly overbought and I will show you why I say that:

The RUT has just today broken through the 1000 Barrier so the beat goes on:

The VIX remains quiet despite bulletin board chatter that tries to turn the tea leaves for any sign of a change in Volatility:

…And as we would expect the Accumulation vs. Distribution Ratio continues to improve though slowly:

Likewise, Grandma’s Pies continue to rise to being overbought with a 90:10% ratio:

After the Whiplash where we suffered the 7.6 Buckets down in one day on April 15th, the %B is back to highs:

Now we are reaching for New Highs and you will be glad to see that I feel that I have broken the code for when to be really cautious based on the fresh work I have done since my last blog note, which has kept me busy to hopefully keep you on the right side of the Market.

As we can quickly see we are now reaching new highs on most Indexes and that led me to a brainwave to show the relationship between the S&P 500 and the % of the Index from the 200-dma through the period from 2008 to 2013.  Note how one can readily see that both on the High Jump and on the Limbo Bar (the downside) that the key point for CAUTION is when the % from the 200-dma is + or – 12%, respectively.  Note that the scale on the right for the % from the 200-dma is in increments of 4% and that gives us the clue for the next three charts!

As we well know, 2009 was the year we came out of the Black Swan swoon with a brand new Rally, so it is not surprising that we stayed above 12% for several months, but since then note how few times we broke above 12% for 2011, 2012 and just this past Friday in 2013.  So I say now is the time for Caution…but we need to build on this idea in the HGSI Software so that we can immediately see when we measure the degree of extension with a color coding requiring 4% increments as shown.  The whole intent is to make life easier and know when to really be uptight for potential corrections.  Hopefully the Blue arrows on this next chart should stiffen up your backbone that some form of correction is imminent whenever the % from the 200-dma gets above 12%.  Of course, it doesn’t tell us how much the correction will be, but at least the warning is consistent.

Note the color coding goes in steps of 4% and we are able to show both the High Jump and the Limbo Bar on the same chart so that we have a good feel for where the market is sitting over time.  I’m sure by now you are saying “Show me what the 2000 to 2007 period looked like before I am convinced”, so here it is.  The surprising conclusion is that the days of Wine and Roses back then was far less Volatile…you judge for yourself:

With this chart in the HGSI Software which will soon be incorporated we not only can look back in time with the S&P 500, but with any of the other Market Indexes and in a wink know when to be really cautious and when to play with impunity!

Enjoy, with best regards,

Ian.

I need hardly say that any of us expected we would be hitting new highs with a resounding move upwards for the Bulls to continue this long Rally essentially since mid-November.

…And here is the picture of the Market Indexes which show the explosive breakout the last couple of days:

As we well know the Small Cap Stocks have recently been sluggish but the RUT is recovering and above its old high:

The Accumulation to Distribution ratio has now improved to 3:1, but we have a ways to go to show a 4:1 ratio:

The %B for the S&P 1500 is now back in safe territory sitting up in the 0.8 to 0.90 Bucket, so again we have a cushion:

…And the twin picture of the %B Net Score continues its upwards journey:

Now for the High Jump Spreadsheet which has served us well during this extremely difficult period of staying on the right side of the Market.  I have not seen such knee-jerky action in several years…this is a very tricky market, especially for the Bears.  You will note that we are now to the point where five Indexes have surpassed their Highest Jump Targets that I set back on 1/25/2003.  So that we can continue this process to show the High Road Target, anticipating that the Rally continues upwards, I have added a further couple of columns for what I have called “Highest Jump Plus” Targets which adds 4% to the 200-dma Stake in the Ground numbers shown in red as a reasonable next jump target.  Please also understand that I have shown a different method lower down and you can take your pick, as these two approaches give us a range of 1636-1646, to 1666 for the S&P 500.  When this plays out and we finally have a correction, we can then determine the best approach to use in the future.

For this second approach, I had a brainwave to use  a 50-period Bollinger Band with 2, 3, and 4 Standard Deviations, and as you can see I feel I struck oil.  The S&P 500 Index hugs the 50-period 2 Std. Dev. line and the entire envelope is tracking up in similar fashion to the 17-day MA.  In this next slide I took the past snippet and attached it to now to show the expectation over the next couple of weeks if the Rally continues upwards.

Going back into history, it suddenly struck me that the last time anything like what we have seen continue with the Rally far past May was in the Days of Wine and Roses back in 1995 when INTC was declared the World Leader in Semiconductors:

So what’s my point…it has happened before and Wonders Never Cease so don’t be surprised if it happens again.  In this new example of addressing Targets, I have taken the latest numbers as of 5/03/2013 (Friday) and applied them for the Higher and Highest jump records during 2012, so that I am using recent ratios and prorating them based on current performance:

I hope all of this is of value to you…so far it has proven worthwhile, and hopefully has kept you on the right side of the market.

Best Regards,

Ian

Every time the Bears feel they have collared this Market by the neck, it bounces back to the point where Fat Tails in the Bollinger Bands vernacular are now gradually turning to Long Tails.  Here we are but a week away from May when the traditional saying of “Go Away in May and come back in October” is much on the lay peoples’ mind like you and I to make sure we protect our well earned nest egg.  We are looking for every clue that finally the Big Guns have lowered the Boom and to avoid being trampled on when there is a mass exit.

Not only do we see whipsaws with 1 Week Up, 1 Week Down and then 1 Week Up again, but one can’t help being whiplashed and only very short term players are making good returns if they can consistently stay on the right side of the Market.  The chart patterns for the Market Indexes show the quandary of either hitting a Double Bottom or a Head & Shoulders Top.   Each Blog Note I suggest that surely the next week will resolve the direction only for us to find it is drawn out for yet another week, while the Market Indexes continue to inch up and regain the losses of the previous week!   Rounded Tops is the name of the game, but this time these Fat Tails are gradually giving way to Long Tails.

I have laid out the High, Middle and Low Road Scenarios using the Nasdaq in the following chart.  I have shown you that -4% is the first port of call to the Downside and that is exactly what happened in the drop from the high of 3307 down to 3166, which was just below the previous low.  This leads to the simple technique of using the Thick Blue Line to draw it from the Low back last mid-November to the recent high and then one down as shown , since it broke the previous low of a couple of weeks ago.  If the Market trots down again, that yardstick of 3166 becomes the Middle Road Scenario.  Anything below that level we look to the Low Road Scenario at around the -8% mark which also happens to be around the 200-dma.  The High Road requires us to get above the previous old high and aim for the Higher Jump Target for the Nasdaq at 3333…a convenient number to remember.  Anything less is essentially tantamount to Head and Shoulders Top…between friends!

I spoke of Whiplash earlier…well there it is staring us in the face with both Up and Down Small and Big Kahunas.  Now cast your beady eyes on the window with the High Jump and note how the line is essentially flat while the Index itself has trotted upwards.  I infer that this Market is under tight control and that by and large the giddy ups and downs are completely News Driven almost from day to day.  With the little guys essentially out of the market, given the Low Volume the Indexes record each day, the High Frequency Traders are having fun especially when we see what happened in the Market Indexes over 4 minutes due to a false rumor of an attack on the White House!

Again, the Russell 2000 (RUT) shows the struggle it has had over the last couple of months, and unless there is a decisive breakout above 953, we will head down into the doldrums again:

It is no surprise that the Accumulation versus Distribution is back once again to a 2:1 ratio, but the yin-yang is very evident now:

This next chart needs no explanation, as it shows the whiplash we have suffered this past month:

…And this chart confirms the struggle the S&P 1500 is having as it drives to new highs:

I felt you would like to see an update on the High Jump progress, and the bottom line is that we are back to about where we were two weeks ago with most Indexes having got back past their Higher Jump Targets:

Finally, I hope this last chart will bring a smile to your face as we look at how to measure GREED in Market Rallies by both Time and the High Jump.  Note that the 2009 to 2011 era was much more rewarding and robust than the past two years and especially right now for all the reasons I have shown you above.  The numbers are meant to be illustrative and not precise though they attempt to show the two different eras based on past history:

Good luck in the coming weeks, and let me know if this has stimulated you in your own research as to where we stand in this foggy Market!

Best Regards,

Ian.

After a week of turmoil both up and down, today’s action has given control to the Bears, but with the craziness of the Market we shall see where we go next:

Yes. most of you understand that Emotion Rules the Market, and the pictures I use to define Greed on the one hand and Fear on the other, but as you well know when the floodgates open to the downside, your Nest Egg gets killed:

It goes without saying that I have built much of my process based on John Bollinger, and it didn’t take me long to see that the big pay dirt is at the Extremes of Fear and Greed.  We know how to perform in between, but the stomachs come into play at the extremes , and I hope I help you most at such extremes:

A year ago, John Bollinger reminded me at times like this when markets get Overbought or Oversold they can remain that way for long periods of time before they break or rise again, and he calls them Fat Tails…so I fed him this as my version with tongue in cheek!

We have not seen a Market like this and short term Players can enjoy the volatility of a totally news-driven Market:

Let me show you the Explosive Growth we saw in the Indexes just seven days ago and then what transpired since:

Just focus on the columns I have highlighted to get the pulse of the Market in two minutes.  Here is Five days later:

The very next day, the Indexes bounced back and things were looking better for the rally continuing:

…And here we are one day later and completely down in the Doldrums again:

Net-net, this market is in total oscillation and wildly so…results not seen in 13 Years of History;  this speaks volumes:

…And here is Grandma’s Pies just back to two days ago:

…And finally, here is the spaghetti of the A+B vs. D+E scenario…back to Stalemate:

Keep your Powder Dry and the Best of Luck,

Ian