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Lowry Research Update: Just A Bull Market Correction at Trader’s Narrative

Ever since switching sides (rather late) to the bullish camp, Lowry Research has stuck with the thesis that while it will be interrupted with short term volatility, the primary trend is up. This was the case the last time we checked in with Richard Dickson in March, when he was expecting a correction due to the overextended nature of the market. And it was also the case in late April when they shrugged at the negative seasonality that was imminent with May’s arrival: Lowry Research’s Take On “Sell in May and Go Away”

So not surprisingly, now that we have a correction (boy, do we ever!) Lowry is sticking with their oft repeated position. But they aren’t being adamantly tenacious for the sake of not changing their minds. Their conviction is based on the same technical indicators, proprietary and ordinary, that has guided their clients for decades.

A few days ago Bloomberg’s Pimm Fox sat down with Richard Dickson, Senior Market Strategist at Lowry Research, to chat about the technical aspects of this market. They covered into other topics but the main thrust of their exchange was whether the recent market weakness represents the start a new bear market or is merely a correction within a bull market.

You can listen to the interview at the bottom or peruse a the following quick notes I took from the interview (and don’t miss the accompanying chart after the jump!):

  • “This (market weakness) is still within the parameters of a correction.”
  • Since 1940’s each bull market has one major correction
  • In general they retrace 10-12% with the worst a 16% decline
  • As of today (May 24th) the market has fallen 12%
  • As of yesterday’s close the S&P 500 was down 14%
  • So based on that, we are still within the definition of a bull market correction
  • Beyond that, Lowry has had no indication of a major top
  • None of the measures like market advance/decline lines, new high/lows, buying power/selling pressure, Lowry’s Average Power Rating index, etc. that Lowry relies on as indications of an impending major market top are saying otherwise
  • The question is, is this time different?
  • So far we’ve seen a normal correction, which may have a little bit more to go
  • Also consider that we had a torrid rally from March 2009 to April 2010
  • Going back to the 1940’s the average gain in a bull market for such a time period is 36% (median 33%)
  • In contrast to that historical behavior, this time we had a 71% rally or double!
  • So if we overshot on the upside, it is natural to expect the market to overshoot during its correction
  • Still in a primary uptrend for stocks

  • Naturally, during the decline we’ve had an increase in Selling Pressure and a drop in Buying Power
  • But even so, BP is well above its February lows and SP is below the peaks at the same low
  • Meanwhile, the stock market indexes themselves are clearly testing the same support area
  • Since neither the BP nor SP have new low/new high both are still trending
  • And based on this, the main demand/supply balance is pointing to a continuing uptrend
  • Even so, don’t expect a “V” bottom, we could see the market work lower in the short term
  • Generally, it takes time to repair the damage done by such a retracement
  • The market put off a major correction for so long that it became a violent one
  • It has been an intense sell-off but we’ve seen these before without them becoming bear markets
  • If you go back to the 1940’s, there’s never more than one ~10% correction
  • And after each one of those was followed by higher prices
  • The changing face of the market as retailers exit and HFT dominate trading
  • Environment is different but every time it is a little bit different but not enough to say “it is different this time”

Click to see larger chart in a new tab:
Lowry buying power selling pressure May 2010
Source: Lowry Research

Richard Dickson of Lowry Research:
Press play and let it buffer, then jump ahead to the 24 minute mark to listen to the complete interview of Pimm Fox with Richard Dickson of Lowry Research (Please note this was recorded on May 24th 2010):

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7 Responses to “Lowry Research Update: Just A Bull Market Correction”  

  1. 1 Oexrex

    The Bull may still be alive but unlike Lowry’s I notice a technical difference on this correction that is unlike past corrections going back to 1900.

    That difference gives me concern that either, 1) we continue down to 8 - 9K on the Dow from here w/out an oversold rally or 2) we get a weak rally for a month or two then rollover into a Bear w/ the same target.

    Unless I see a breakout above the old highs I am looking for #2 as likely scenario

    By the way Jack Ablin @ Harris Trust on CNBC announced a change in outlook to reduce stock exposure based on their technical indicators

  2. 2 Avi

    thanks for the great post… i appreciate how you keep on top of Lowry reserach .. they are an invaluable source of technical data


  3. 3 PEJ

    The question is, is this time different?

    To answer their question: no it’s not different, it’s never different this time.
    It’s the same as the 1932->1940 period.

    They are comparing against the wrong benchmark I believe…

  4. 4 WimpyInvestor

    Compare the chart of FXI vs. SPY and you may see that FXI has been a leading indicator for SPY.

    FXI has been in the $37-$47 trading range for about 1 year, since entering this range around June 2009.

    Perhaps SPY trades between $105 to $122 until around Oct 2010 (1 year after entering this trading range in October 2009).

    As long as FXI doesn’t break below $37 level, it may signal continued global growth (e.g., soft landing in China), thus providing some support to the key sectors within SPY most tied to global growth (XLB, XLE, XLI).

    SPY trading between $105 and $122 will also map out very well against the 2004-2005 playbook scenario, or the 1976-1977 scenario.

  5. 5 Tony

    well, speaking of leading indicators.. I like to watch Copper
    see it for yourself..
    BTW, my other leading indicator, the Russel2000, was repelled from it’s 200MA, bad thing to do in the middle of the week..

  6. 6 william

    definitely interesting chart for copper. one thing that I would like to add is the consistent increases in productivity for US employees and the cotinued expansion of hours worked. So far, more individuals went from being part time to full time, and productivity continues to expand. with these metrics preceeding a hiring boom, it seems logical that the labor market would rebound slower than prior recessions as employers won’t be able to employee more people while current laborers are not receiving full time status. It wouldn’t surprise me if we were to see some large gains in the labor force sooner rather than later.

  7. 7 Babak

    william, thanks for the comment but I think you mean to write it here since that post is on the labor market, instead of this one which is about Lowry’s technical take on the market.

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