Since the start of the spring rally in March and into July, Lowry Research continued to recommend to its customers that the market would inevitably retest the lows and even see new ones. In June, Paul Desmond declared the impressive rally so far to be merely a bear market reaction and not a bull market. Then as early as mid-July Lowry was continuing to call for lower stock market prices (even lower than March 2009).
Lowry arrived at this conclusion by looking at their proprietary demand and supply metrics: Buying Power and Selling Pressure Index. And not through the by now well known Lowry 90%/90% metric. If you’ve been keeping track of these 90/90 extreme breadth days, defined by Lowry as a trading day where 90% of the volume flows to the stocks trading up/down and 90% of the securities traded finish higher/lower, then you know that what was once a rarefied event has suddenly become commonplace.
Whether the preponderance of extreme breadth days was because of the historic volatility we’ve seen recently or if perhaps it was due to the sudden spike in high frequency trading is of little importance. The only thing that matters is that as suddenly more and more people started learning about Paul Desmond’s research into the role of extreme breadth in creating the conditions for new bull markets, the game changed. And that is the inherent and tricky nature of the stock market of course. If you dare think you have it figured out, you are in for a big lesson.
In any case, now, Lowry Research, the oldest and most respected technical analysis firm on Wall Street, is reversing its position and issuing an intermediate trend buy signal.
To find out why they reversed and what the buy signal means, read on:
The signal occurred as of last Tuesday August 4th’s close. To trigger the intermediate buy signal, on that day, the Selling Pressure Index fell by 32 points from its most recent peak (on July 8th 2009 at 889). In simple terms this means that selling has exhausted itself and therefore, we now have a safer environment for an uptrend to establish itself. Starting in late July, Lowry noted that volume started to expand to the upside, something that was not happening in the early stages of the spring rally.
Lowry is blaming the lack of expansion in volume off March lows as the culprit for skewing their proprietary indicators of demand and supply. Typically the script that Lowry expects to see for important bottoms is for Buying Power expand as Selling Pressure declines. But we did not see that this time around because of a generalized contraction in volume. If this expansion in volume continues, then this intermediate term rally could continue in coming weeks and months ahead.
As we reviewed in Friday’s sentiment overview, we are seeing a lot of unmistakable signs of complacency. From the low put call ratio to the high levels of insider selling to the various sentiment surveys such as Investors Intelligence and AAII with 50% bulls. It is clear that more and more investors and traders are jumping on the bandwagon and not hedging against a decline.
Buy, Buy, Buy! errr… no
A Lowry intermediate buy signal does not mean that you rush out and buy the market. Lowry is suggesting to clients to watch how the market reacts to short term overbought indications from breadth and sentiment. If a correction takes place with low volume and with a modest increase in the Selling Pressure Index, then we have a good entry indeed. As well, August’s seasonality will deliver a tough month for the market. So although we have an intermediate term uptrend signal, we could be in for short term weakness.
According to the advance decline lines, this has been a very broad based rally. Throughout this market rally, when we see short term declines the advance decline or breadth indicators remain strong. This hints that we are seeing selective selling rather than generalized liquidation and is another indication that this rally has room to run.
Since late July, Lowry’s Buying Power and Selling Pressure indices are acting as they would typically in an intermediate uptrend. The volume is now more in line with what it should have been happening off the March low. Lowry believes that deleveraging resulted in diminished volume which in turn skewed their most trusted indicators.
In economic news, things are getting less worse - and the market moves up on that kind of news. So that is a tell also.
Sectors and Capitalization
Lowry is cautious on technology due to recent weakness- especially in the Computer sub-index, which is causing under-performance for the Nasdaq. There is strength in Basic Materials, Energy, cyclical stocks as well as the financial sector, which is showing relative strength.
During the initial phase of the March rally, the small caps outperformed. Now it is the mid-caps (S&P 400) who are outperforming the S&P 500 - particularly through the most recent rally off July’s low. So as this move has matured, money has come out of smaller capitalization stocks and flowed into larger capitalization ones.
Buying Power Index
Also interesting is that taken by itself, the Buying Power Index (BPI) reached a low both in March 2009 and July 2009 which it hadn’t seen since September 1942. The absolute lowest BPI reading came from February 1933. Usually when Lowry’s Buying Power Index reaches an extreme low, that is by itself a very good indicator of an upcoming massive rally.
But while initially the Buying Power Index lifted off the March lows along with the market, it came back down again. This is probably why Lowry is still not ready to relinquish the bearish camp just yet. You see, since Lowry began collecting market data going back more than 75 years, no new bull market has ever given up all its initial gains in Buying Power as this recent rally has.
To clarify, Lowry tracks the relative position of both demand and supply metrics and does not go by either one alone. But nevertheless, it is interesting to look at the BPI in a vacuum like this.
The above covers everything and more but if you like, you can listen to the Bloomberg radio podcast below:
Press play, wait for it to fully buffer to the 32 minute mark. Then you can either listen to the whole thing or skip the US retail sales interview part by forwarding to the 16:30 minute mark to get to the interview featuring Tracy Knudsen, senior market analyst at Lowry Research.
Enjoyed this? Don't miss the next one, grab the feed or