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Lowry Research’s Intermediate Trend Buy Signal at Trader’s Narrative





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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.

Volume Expansion
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.

Sentiment
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.

Breadth
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.

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16 Responses to “Lowry Research’s Intermediate Trend Buy Signal”  

  1. 1 a52wkhi

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    I think it was financial markets author Gerald Loeb who said a long time ago..”Just when you think you have the keys to the market, some bastard changes the locks on you”.

  2. 2 Babak

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    a52whki, exactly! that’s what makes the market so fun.

  3. 3 Dave

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    “If you’ve been keeping track of these 90/90 extreme breadth days, … then you know that what was once a rarefied event has suddenly become commonplace.”

    Yeah, like dust mites.

  4. 4 Babak

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    Dave, I gave up months ago - just look at the explosion of volatility in breadth!

  5. 5 Dave

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    Babak, thank you for the detailed Lowry info. Usually we only get snippets or a brief paragraph about their thinking.

    Regards,
    dave

  6. 6 Guy Lerner

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    Good analysis! I am amazed at all the work they do and the data they capture and they were unable to capture any part of this market run. With investor sentiment so extreme, fundamentals so poor, valuations high, and the market having run so much, what is the likelihood that we don’t visit SP500 1000 level many times over the next 2-3 years? I would think it is high.

    No rush to buy from this standpoint unless you can get to the exits quickly.

  7. 7 Babak

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    Guy, even the best are humbled by this Janus of a market.

  8. 8 jeremy

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    If they were so wrong before, if have never been interested in Lowry Research, why should we be interested in their sudden Buy conversion now.

    Who needs their expensive and ever so complex research when you can do better at home, with simple trend analysis, it’s looked like a bull market since April.

  9. 9 Babak

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    jeremy, no one has a 100% track record but over all Lowry’sa track record is extremely impressive and it is based on quantified algorithms rather than discretionary methods which will die with any one person.

  10. 10 bazylejska

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    Babak,

    Thank you ever so much for your articles. I am regular reader of your weekend sentiment data.

    I was also very happy to see the article about the “10 day Advance Decline 2:1″ signal of Marty Zweig.

    You present valuable bits of information, while many other market comentators are just trying to influence people.

    Kind Regards

    bazylejska

  11. 11 Babak

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    bazylejska, thank you for the compliments. The recent breadth data was courtesy of Wayne Whaley, another reader like yourself. Having such amazing readers is truly enriching.

  12. 12 PAUL MONTGOMERY

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    Babak [& Wayne]- brilliant thanks.

    Can you see anything in Volume Charts [for example from SharpCharts] that would give us a clue as to what Lowry see ? I have looked, but nothing jumps out at me.

  13. 13 Wayne

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    Paul,

    I really could only guess as to what made Desmond finally come around. One of the traits that a good trader usually has is flexibility. That is the ability to say you are wrong and get on the right side. I have found that most good traders are very humble and tend to keep their views to themselves to ensure that they can maintain this trait. For example I saw Jimmy Rogers on CNBC two months ago, who wouldn’t proclaim his fondness for the market, but when pressed on the matter, he admitted that he was long commodities and this was probably only second time in his career that he wasn’t short some equities. Reading between the lines, I surmised that he was a flaming bull.

    Newsletter writers have the unfortunate task of proclaiming to the world what their position on the markets is on a constant basis. This causes them to often paint themselves into corners that make it difficult for them to maneuver out of. As the example of Rogers above, some of the best Newsletter writers that I know, require readers to astutely read between the lines to find out what they really believe. Watch what they are doing with their money, more than what they are saying.

  14. 14 Senta

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    I wanted to share the following chart with you and your readers.

    This shows monthly cummulative volume index which to my eyes indicates the “buying power” vs. “selling power” (please let me know if I am wrong).

    Anyway the chart illustrates the extreme events we have just come through. The index never fell below 0 in the 00-02 bear but went down deep into negative territory last winter, showing total panic among investors.

  15. 15 Babak

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    Senta, the site requires MS silverlight and since I won’t install it, I can’t see it. But according to the bit I could see, it says that the data is from BATS. If it is just from BATS, then it is incomplete of course.
    Lowry’s BP and SP indices are proprietary - so they won’t talk about what the formula is.

  16. 16 Senta

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    Too bad. MS SL is similar to Flash so I don’t see an issue. The SL graphs are awesome.

    I don’t understand your comment about BATS - could you explain.

    Anyway the point I want to make is that the cumulative volume index seems to be just coming back into normal range and still much below most of 2007 - so concern about the markets being “overbought” may be misplaced.

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