After missing the March 2009 market low, Lowry’s returned to their usual form in early August 2009 with an intermediate buy signal. Since then, they’ve offered very good guidance on the market. Their track record spanning 77 years is impressive enough to warrant my undivided and devoted attention. Their last update, in mid January, told us to watch for distribution and correction ahead. That was right on the money of course.
So let’s check in with what they are saying now. With the arrival of the correction, everyone wants to know if the recent January 2010 top is a significant one or if this is just another run of the mill correction. While market lore tells us that bull markets are peppered with 10% (or larger) corrections, according to Lowry’s profit taking of this magnitude is actually quite rare. According to Paul Desmond:
Since the 1942 market bottom, there have been 16 bull markets in the Dow Jones Industrial. Of these, only nine have shown corrections of 10% or more. And there was never more than one 10% or greater correction in any one of these nine bull markets. So rather than being commonplace, pullbacks of this magnitude are relatively infrequent. As such, it is possible to see how they could be interpreted as the initial phase of major-market declines. This would be especially true when the correction occurred at the mid-point or later in the bull market, as was the case in six of the nine sell-offs.
On the S&P 500, the correction (from January 19th’s high of 1150.45 to February 8th’s low of 1056.74) took the index down -8.13%. If we instead look at the lowest intra-day close (on February 5th 2010 - 1044.50) it represents a 9% correction. See chart below for details.
One reason that Lowry doesn’t believe we have seen a major top is that such deep corrections (10% or more) usually occur when we’re already in a well establish down trend with increasing supply, as measured by their proprietary Selling Pressure indicator. Since Lowry’s SP metric is now heading down, they believe that the chances of such deep corrections is low. And if it does come about, then the key will be looking at the underlying breadth and supply and demand to gauge whether it is a precursor of a larger decline or just a deep correction.
With that, let’s move on to the recent podcast with Tracy Knudsen, VP at Lowry Research. Here are my notes:
- since 1930’s Lowry’s has been computing their proprietary indicators of Buying Power and Selling Pressure
- the two indicators measure the trend of investor supply and demand
- Buying Power recently rose above its January 2010 peak
- that’s telling Lowry that investors are continuing to investing in the stock market
- at the same time, Selling Pressure has fallen to new low - even lower than the March 2009 bottom
- sellers are not active — demand is overwhelming supply and driving the market higher
- small to mid-cap stocks outperformed in last few weeks indicating that investors are again comfortable with risk
- at the beginning of February we had 90% up/down days - these 90-90% days indicate investor panic
- February 4th: 90% downside day - when downside volume is 90% (or more) of total of downside plus upside volume and points lost on day is 90% (or more) of points gained plus lost
- 90% downside day is a signal of extreme investor pessimism - when a selloff has been overdone
- every bottom since July 2009 has been established with 90% downside day quickly followed by 90% upside day
- that combination is when investors panic and drive down prices low enough to generate enthusiastic investor demand
- after the downside day, 7 trading days later on February 16th, we saw a 90% upside day
- this provided evidence that a sustainable low had been established
- Buying Control is a Lowry trading signal, last one was on August 4th 2009 - an intermediate buy signal
- the recent low in Selling Pressure combined with Buying Power continuing higher reaffirms this intermediate buy signal
- Q re volume: some concerned that volume is high on down and low on up days
- people concerned about this are looking at total volume, Lowry looks at the ratio of volume for each day
- during rallies, up volume is proportionally larger (compared to total volume) than down volume in declines
- Lowry believes that a major top is not in place
- several AD lines are at new rally highs
- as well, the already mentioned BP and SP indicators are telling us the rally has further to go
- after the rally we were short term overbought (last week)
- Russell 2000: investors are less risk averse, getting into smaller capitalization stocks which are leading the market (higher relative strength)
- Lowry looks at NYSE all issues Advance Decline line as well as Operating Company Only AD line
- many of the major index AD lines have confirmed rally and moved to new highs, including the S&P 400
- the fact that so many various indexes are showing the same strength tells us that support for higher prices is widespread
- Lowry monitors for any divergence - when market moves to new highs and AD lines roll over with less stocks participating (4-6 months before top) as well SP would increase and BP decreaes
- those signs are not present - instead we are seeing the opposite
Here’s a chart of the NYSE cumulative common stock only advance decline line (click for larger version):
Source: Technical Watch forum
Also, this recent note from Lowry’s pointing to the inherent strength underlying the index reminds me of the breadth data which Ned Davis Research pointed out (High Low Index) as reason for a continuation of the rally. The 10 day moving average of this breadth index is now back up to 92.5%, after dipping to 55% during the correction. And if I may toot my own horn a little, here’s what I wrote on February 10th: Equities At Important Low… If This Is Still A Bull Market.
Tracy Knudsen of Lowry Research:
Press play and let it buffer, then jump ahead to the 29 minute mark to listen to the complete interview of Pimm Fox with Tracy Knudsen:
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