Ian Woodward’s Investing Blog

A picture is worth a thousand words, so I hope you will agree the picture sums up the Message. 

Talk is cheap but let’s “Cut to the Chase”:  There was a strong reaction today to all the talk that led the market to go up.  Whether that will last or not is for another day?  What is far more important on this long weekend is to take stock of the targets we set a while back, see how we fared compared to a strong or weak bounce and assess the alternative roads ahead.  I reviewed the progress in my August 25^th note and update it now:  

      Index Criteria                                  Low     Target    Actual     % Up    8/31 Actual     % Up

• The S&P 500 above the 50-dma      1371      1485       1479       7.9%          1474           7.5% 
• The NYSE back to                         8812      9750       9607       9.0%          9597           8.9%   
• The NASDAQ must get back to       2387      2575       2577       8.0%         2596            8.8%   
• The DOW needs to get back to      13209    13400     13379      1.3%         13357           1.0% 

You will recall in the August newsletter, I talked to the importance of “Change Management”. So the assessment over the last week is essentially flat.  I also said that we should feel more comfortable once we get over the 50-dma and have a >10% bounce.  The numbers themselves are not the end; they are the means to the end.  These benchmarks are tests-of-reasonableness that determine which way the wind is blowing and which way the psychology is shifting. Going forward into next week we remain with a stand-off at the OK Corral, as neither of these two hurdles has been crossed.  

A Fundamental Principle of HGS Investing is the use of Stakes in the Ground.  You measure against known Benchmarks based on past experience as you walk through history over the years, and you know when to tap them in lightly or firmly or uproot them based on performance.   I know that some people love numbers, others hate them.  So I will simplify the targets for those that can’t remember numbers.  For the NASDAQ, I gave it to you ages ago, 2400, 2600 and 2800.  For the S&P 500, 1485 is key, but I will simplify it again…call it 1500.  If it is 1600, the Bulls will be standing on their heads and clapping their feet!  If it’s 1400, watch out below, the Bears have it.  Others who are adept at Technical Analysis will tell you where Fibonacci meets up with Moving Averages and High Jumps and Limbo Bars and folklore, but it all comes down to the same thing. My Way is to do the detail analysis first and then simplify it to the bare essentials.  

Listening to the jabber-jabber-jee of the CNBC gurus can have your head spinning, but if you cut all the noise out and bring what the market is telling you down to your terms, then you will not get flummoxed and make a hasty and/or wrong move.   

Please understand that as participants of either the Bull or Bear Camp, we are assessing the degree of negativity relating to the spill out of the housing mania into the lending markets which manifested itself as a liquid market turning 180 degrees to an illiquid one.  How the Fed deals with bolstering the confidence of the Stock Market is front and center right now, but the negativity will remain part of the inherent concern for the next three to six months.  

The saving grace this time with the Housing bubble is that we do not have an exorbitant P-E accompanying it as we did in the dot.com bubble.  But don’t take too much comfort from that as Fundamentals will take a back seat to Technicals right now, until there is a general consensus that the Gunfight at the OK Corral was won or lost by the FOMC’s action or inaction.  

Since it is a long weekend, I will give you a double dose and follow this with obvious winky- winkies you should have caught from my previous notes.  There is always a method in my madness. The only way I know of to read the tea leaves is with little stakes I put in the ground along the way, and then revisit them later to see if there are any nuggets or just pebbles. 

I will tell you ahead of time to re-read “Stocks are Like Wolves…they hunt in packs”,  “Looking a Gift Horse in the Mouth”, and the Game Plan List (of 18 stocks) for the Short Term.  That latter was written one month ago, and if you are not watching it, you don’t understand the key principles of HGS Investing.  

I leave you with a fitting thought for this Labor Day Weekend, as my good friend Manu Kapadia reminds me:

Have a great weekend and enjoy your family.  Best regards, Ian.

If only we knew, but then it is unlikely anything will come of it other than:

 So, it is time to take a break and smell the roses in my Wife’s Garden. 

Have a great long weekend and keep your Powder Dry! Best Regards, Ian.

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.

Doodling on a lazy Sunday afternoon while watching the golf, I struck on an old idea of using the Ranking Module to ferret for Wolf Packs, i.e, stocks that are hunting in packs.

I applied the 0a Key to All Securities and was struck by the number of Chemical Specialty stocks that were high up on the list.  I counted ten in the top 20.  The Combo Rank attached to this filter brings stocks with strong 1 and 5 Day Industry Price gains to the top, so one knows we are working with stocks with strong current momentum.   In addition the Group Rank using Ian Slow is a healthy 92, so it has long term Group Rank Performance.  However, here is a group that has recently been trashed, but is coming out of the ashes.  So I applied the Ranking Module view using Accel/Vel/RS as the view.  The crafty thing is to scrunch the view down to just show the single Industry Group one is interested in the view as shown below: 

Note that the setting for the numbers shown is for the Percent Change for the past three weeks, and one can quickly see that although the group has been trashed, it is rising from the ashes very rapidly.  Here are the top 10 stocks for Chemical – Specialty which look very powerful for beaten down stocks:

Understand that this is a Case Study to help you use the HGSI Software tools to ferret for strong Wolf Packs, which may provide opportunities if the market settles down.  Just look at the number of Box 7 stocks – there are seven of them.  Also note the %E/P, Rev/Share and ROE for all these stocks.  No wonder they have high ERG!  It’s always “Your Call”.

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         

Today was a ho-hum day with the Stock Market taking a breather, before the tug-of-war between the Bulls and Bears resumes. So let’s “Review the Bidding” as bridge players would say:

1. The Bank of America making a $2 billion investment in Countrywide, the large mortgage company that is suffering a liquidity squeeze, is a significant signal that Bernanke’s strategy is working over the short term.
2. It shows that stronger firms can become part of the financial adjustment in the markets by making investments in weaker companies at this illiquid time without the Fed having to immediately lower the federal-funds rate. 
3. Understand that the Fed is on notice to lower this latter rate and the markets are already baking some of this anticipation in as we near the September 18th FOMC meeting.
4. Easing too quickly can then give license to other sloppy lending practices by credit-card and auto financing companies.  

Net-net, it seems that Bernanke’s Fed is walking a fine line between Volcker and Greenspan, a balance between avoiding a recession versus dropping the rates at the drop of a hat.  The $64 question is whether the Stock Market is patient enough to wait until mid-September, for what now seems an inevitable reduction by then…or the disappointment will be enormous and the market will react negatively. Don’t forget that Wal-Mart and Home Depot are red flags to show that the 25% who are the working poor have been hurting for a long while with high gas prices.  

Meanwhile from a Benchmarking and Target Setting standpoint we are at the half-way house and mark today down as the “Pause to Refresh”, before the tug-of-war between Bulls and Bears goes one way or the other until mid-September:

1. The Bulls are happy to see that after several days of short covering that the Bears were not able to drive a dent in the bounce…not yet.  The Market jitters have calmed for now. 
2. However, the Bears are quick to point out that most Indexes are hitting their critical resistance levels which are essentially struggling at the 200-dma or trying to get to their 50-dma averages.  With the strong up day yesterday, the Bulls are desperately looking for the follow through day to give them a signal to go full speed ahead and darn the torpedoes.  The Bears point to the tepid volume and cry “Where’s the Beef?”
3. The only saving grace for the Bulls is the Game Plan Index of 18 stocks is holding above the 17-dma, which as you all know by now is a good sign, as all good leaders rise above the 17-dma.

As my caption shows tonight it is a toss up between the Bulls and Bears Tug-of-War.   Best Regards, Ian. 

We, the High Growth Stock Investor (HGSI) Team have made life easy for our investor clientele. Not only do we provide you the software to ferret out the best stocks at any given point in time, but also through our StockPicker and SmartGroups we give you stock selections on a daily basis to suit different Investor Styles.  

During the past three weeks I have concentrated on giving you the blow by blow account of how to evaluate the Market, to understand the Process for Benchmarking and Target Setting, and to relate to the current pulse of the market in terms of the news driving it up and down.  Needless to say this is a strong up day, the kind of day one looks for when the market is trying to repair, as I covered in my note of yesterday.  Maybe the Discount Window trick of the FED has calmed nerves for a while.  The volume picked up today. 

For those who are not familiar with our products, here is a sampling of the types of Portfolios of ten stocks each we select on a daily basis for you to narrow down the stocks you prefer based on your Investor Style.  Naturally, today is an up day in the market, so one would expect stock selections to be up.  However, you know as well as I do that one doesn’t blindly pick ten stocks and buy them as a bundle…you do your homework. As I have warned, only Moment Traders make good money in this market. It is always “Your Call” as to whether you nibble or let the grass grow under your feet. 

On the day, depending on how the wind is blowing you can in real time rifle shoot the Best of the Best using HGSI.  Here is a sample of different types of portfolio from last night’s selections.  The results are based on buying 100 stocks of each selection in the basket, but obviously one would tailor their needs to equal dollar weighted, and of course you can always do that using the Group Performance Analysis (GPA) tool in HGSI.

As Always, Best Regards, Ian