Ian Woodward’s Investing Blog

The black swan theory refers to a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations.  If that’s the case then we have also seen a similar rare event today…a white swan!

I’m very busy getting ready for the seminar and also developing the Newsletter, but here are the historic events of the past week captured on one chart, below.  The Market action has emulated the 1987 movement so far:

Best Regards, Ian.

Yesterday’s Blog was a winner with over 3000 hits for the Day!  One person who commented said he has started a Beer Collection, and another is asking me for any thoughts on Gold?

Here is a quick appraisal based on looking at the Gold ETF shown below.

1. Gold had a great move a year ago for all of six months starting in September 0f 2007.  It was a controlled and tight move.

2. As one would expect, since the Market cratered it started to show erratic volatility, and unless you are a very short term trader, you can see it has become very risky.

3. Using 3 Standard Deviations on the Bollinger Bands as shown above (Blue Lines), you can see that it could have been a great buy a month ago, but note how it dropped about 10% in a matter of days, so it is very erratic. 

4. Since it just bounced off the middle Bollinger Band (heavier blue line), you should watch it for an entry around that area, but I warn you that you will need to watch it like a hawk.  From the gaps in the chart, it seems to me it is being used as a hedging instrument by those who are into short-term trading to protect their positions.  It would seem this is not the instrument you want if you are a long term buy-and-hold type who would prefer to see the ETF rise in the same fashion back in September 2007. 

I hope that helps.  Best Regards, Ian.

I had planned to use this slide as my opening remarks for the Seminar in 2&1/2 week’s time, but after two days of utter chaos in the stock market, I felt a bit of levity would be in order rather than my writing a screed of where we stand.  Who knows…I may still use it?!

To at least give you an idea of the market’s reaction to the European debacle today after their Markets followed suit since our decline after the Bailout Bill was passed, here is what transpired on the DOW:

In a sentence, it is called “Pick up the Pieces!”

Enjoy!  Best regards, Ian.

The much anticipated passing of the “Bailout Bill” came and went with what one would expect…buy the rumor and sell the news.

Here is what transpired on the DOW prior to and after passing the Bill:

If you are a History Buff, on the eight other occasions that the DOW dropped >7% in one day the overwhelming odds from seven of the eight readings is that the Market will be lower one week later.  That means that we should be below the 10365.45 of Last Monday the 29^th of September come Monday’s close.

In a Bear Market, the rule at this stage of the game is to sell any rallies of 4 to 6%.  It is going to take a long while before confidence is restored and it goes without saying that the trend continues down.  Rumor has it that Helicopter Ben is considering a 50 basis point reduction in the rates, but the bigger questions now relate to whether the European Banks will join in a global joint reduction and if they are faced with similar bail out circumstances.  The proverbial Operatic Fat Lady is singing…now is not the time to be dredging leave alone bottom fishing.  Note how the “R” word is now freely bandied about, and who knows when they will turn to using the “D” for Depression word.  The Hindenburg Omen signals way back last November gave you plenty of warning.

There is little more to say than stay in your foxhole unless you are a Moment Trader…even Day Traders get taken to the cleaners in this highly volatile market.

Best Regards, Ian.

As angry as Main Street are they will be a lot angrier if Congress does not act.  It didn’t take long before the finger pointing started after the Bill failed to pass.  The sadness is there will now be spillover to every American, rich or poor, which has already suffered from the experience of the crash of 1987 or the dot.com bubble bursting from 2000 to 2002.  Their hard earned 401K’s have shrunk overnight and it will be years before they recoup that portion of their nest egg which took hard work over years of faithful due diligence to their companies and their families.  Some may be unfortunate to find they have to postpone their intended retirement or go back to work as a result of this debacle.

It is little consolation to say “Been there, done that” when I think back to that fateful day in 1987.  By the looks of things this could be worse, as tomorrow is the last day of the month and of the quarter, and Congress cannot do anything until Thursday.

I have no words of wisdom that I haven’t covered, especially these last few weeks.  In times like these “Cash is King”, but make sure that your money is FDIC Insured in the Bank and that if you have >$100K in the account that it is registered with the Bank as a Trust and that you and your dependents add up to the multiple of $100K that is in the account.  For example, suppose you have $320K in the bank just to pick a number, and you and your wife have named two dependents in the trust; that provides $400K worth of coverage for you, so you are covered.  You should talk to your Bank Manager to make sure your money is safe.

Best regards, Ian.

  3 Responses to “Wall Street Reacts to a Day in the Life of Congress!”

• 1. Hal P. Says:
  September 26th, 2008 at 9:01 am

LOL That was very interesting. It’s amazing to me really that the market is so emotional. But it is what it is.

• 2. Stock Research Says:
  September 27th, 2008 at 8:14 am

Ian, I don’t disagree with your assessment that things will get worse before they get better, but I think that, all things considered, it is good that the market has not over-reacted to the ongoing bad news and uncertainty. I think most of us agree that a measure of debate is good, rather than writing a $700B check with no questions asked.

• 3. ian Says:
  September 27th, 2008 at 10:06 am

Hi Steve: I couldn’t agree with you more. I suppose what triggered your comment is my last sentence on “pussy-footing” as my concern at the time was for an over-reaction by the markets ala 1929 and 1987, which fortunately for us all has not occurred so far. I certainly didn’t mean to imply that they write a blank check, and I am glad to see the subsequent urgency on all fronts to bring closure to a joint solution. I also agree a measure of debate is healthy, and as things have since unfolded there has been sufficient due diligence to buoy the market up from precipitous consequences. If “floodgate” action is avoided we will all be happy until the next time. My emphasis was on the “degree of a sense of urgency”, nothing else.

I have made it a principle of mine not to bring politics into the discussion on this blog, but as I have always maintained, one important aspect of Investing is to understand the reaction of the Stock Market to the action or inaction that the FOMC takes. If you take the time to look at past blog notes of mine, you will see that is the emphasis I apply. That is why I take the time on occasions like this to share five hours of my efforts just catching that reaction, leave alone the additional time to write the blog.

My question of you and the audience is “Was this particular blog note of value to understanding the reaction of the market to important FOMC, Administration and Congressional discussions in helping you be a better student of Investing?”

Best regards, Ian.

Today’s discussion by the Three Musketeers, Secy. Paulson, Fed Chairman Bernanke and SEC Secy. Cox at Capitol Hill was a battle between Wall Street vs Main Street.  It goes without saying that the senators questioning and of course posturing was to make sure that the Tax-Payers’ concerns were being heard, since we will ultimately be footing the bill.  However it was abundantly clear to me that what was originally expected to be a quick passage of the $700 Billion Bill was not likely and as you will see so did Wall Street by the end of the day.  The DOW and Nasdaq closed down another whopping 162 and 26 points, respectively, and so we drift along teetering on the brink of disaster.  Net-net, while Rome burns, Congressmen Fiddle!

I captured the highlights of the action on a timeline relating to the ebb and flow of the DOW during the course of the hearings, and here are the various snippets from the Administration, Congress and the CNBC commentators in the first two hours in the morning:

…And here are the next 2&1/2 hours:

Here is a picture of the internals of the market which showed how these indicators reacted during the five hours I kept an eye on this. 

The only saving grace is that volume was low which signaled a wait and see attitude by Wall Street.

I submit that another day or two of this pussy-footing will see us on the road to the floodgates all opening to the downside as I forecasted yesterday.  Hang on to your hats for a bumpy ride.

Best Regards, Ian.

Editor’s Note!  Please read important discussion in the Comments section of this note to understand the context in which it was written.

I have updated this Blog Caption since I wrote the March 9^th blog over six months ago and that time I did full treatment to using the Limbo Bar (the reverse of the High Jump) to take stock of where we stood relative to 2001.  I’m sorry to express gloom and doom, but if today’s discussions between the Administration and the pussy-footing Congress are anything to go by, that is precisely where we are headed.

As I showed in the March 9^th Blog which asks “Where are we Headed #2?” , I gave full treatment to how I use the High Jump and Limbo Bar to take stock of where we are and where we might be headed.  It’s sad to say that History does repeat itself and what I said might happen has come to pass six months later when I felt we could be headed for a Recession.  Today’s action by the Stock Market is a warning sign that if the talking heads in Congress don’t stop yapping and do something quickly, we will all be up the creek without a paddle, including them.

Forget Bounce Plays and Follow Through Days (FTD’s) for a moment until we see some action from Congress.  What is important now is for me to remind you in four simple pictures of the Value I place on the High Jump and Limbo Bar at times like these to anticipate where we could be headed. 

1. It starts with a slide I used in the October 2007 Seminar where I first posed the thought that we could be headed down to 1150 on the S&P 500. I have shown that several times before in other discussions and in my most recent blog of a few days ago.
2. We then fast forward six months to the March 9 Blog and the March 2008 Seminar to see the status then and the potential place we could end up in two slides from that blog.
3. Now we can take note of the critical Line in the Sand we are at with the Limbo Bar having crossed the “Lower” Target of -15% down from the S&P 500 Index, and where we could end up at -25% down if the flood gates should open due to dilly-dallying by the powers that be.

Of course, if they save the day, we only breathe for a while longer before the next debacle in the Financial System unfolds.  We will be reviewing these charts at the Seminar in October:

The above chart was in the March 9^th, 2008 Blog…Sad to say we are at 1208 right now.

I’m not suggesting that we head down to 800 on the S&P 500 any time soon, but the odds of 1150 is now almost a certainty and again, if we see any signs of bickering in Congress we are headed for 1000 and possibly lower.

Best Regards, Ian.

This is a “You Will Recall” blog that summarizes one year of History:

It finally happened and it isn’t over yet…Capitulation big time!

I’m sure you recall the Thick Blue Pencil Line Chart…it was posted exactly seven months ago as a possible worst case scenario at that time.

That didn’t come out of thin air – there was a Plan set a year ago:

Read the September 20^th Blog - Ignore the Fog and Follow the Signposts

I said at the time “Here is a one page plan that slices and dices the market six different ways, four of which are Technical, one Fundamental and one Folklore, all of which are self evident to the reader.  It is in essence a ready-reckoner that gives you insight to the different Road Scenarios, and shows where the recent Gun Fight between the Bulls and the Bears took place.  Your job is to know which side is winning and act accordingly.  Enjoy!”

 Now the only thing to do is stay in your Foxhole:

I had a nasty feeling when I wrote my last blog of making a silk purse out of a sow’s ear that we were headed for more gloom and doom, and it hardly took a week before it happened.

1. I am sure that after the hubbub has subsided with today’s downdraft on the stock market, there will be ample opportunity for Dredging, Bottom Fishing and Bounce Plays galore for those who haven’t thrown in the towel and given up in utter disgust at the undercurrents that pull one under. 
2. This on top of the dreadful damage that Hurricane IKE has caused in the gulf leaves most of the country with a sense of forlorn that will take some time to weather, but then out of misery and disaster comes hope. 
3. Sad to say it starts with hope and then turns to greed and ultimately to fear and we have come full circle.
4. The gurus of VIX are dancing since they would not be satisfied until the VIX hit above 30 to make it a six-pack of super-fear, and they got their wish today with a spike to 31 and a pullback to 28.32 as I write this blog.

You will pardon me for allowing my personal feelings to creep into this sad state of affairs with regard to the utter debacle that has unfolded and the serious consequences to decent folks who make an honest living and try to leave their children on a higher rung than they and their ancestors left them in turn.  There is a saying used in England to describe the mentality of those who could care less about anyone but themselves.  That feeling seems to have permeated throughout the world, where decency and honesty have given way to selfishness and greed with “Blow you Jack, I’m all right!”

Now the vultures will make hay and ultimately this too will pass but not before the turmoil around the world finds most of it suffering from a deep recession and many in sheer misery.

For those who still wish to dabble in this market, I feel that Ron and I have given you all the tools both in this month’s Newsletter which was out yesterday and in the Seminar to come.  Here is a way of how to find the opportunities both on the long and short side using a Decision Tree:

Best Regards, Ian.