This was written yesterday but due to technical difficulties it is being published today:
The stock market has snapped back 6.5% from the lows at the end of June 2010. Most technical analysts are considering this nothing more than yet another short covering rally, fueled by earnings season and an overly pessimistic sentiment.
I thought I’d check in with several well known and respected technical analysts to see how they view this market. The list is short: Louise Yamada of her eponymous firm, Paul Desmond of Lowry Research, Helene Meisler and finally, Ned Davis Research.
- rallies are failing - not following through
- we had a rally fail in mid-May to take out the April high
- then the rally in mid-June failed to take out the May high
- so we have to ask if we are once again going to see another failed rally?
- Yamada thinks so based on market internals adv/dec and up/down ratios
- evidence that strength is being sold into
- NYSE Composite long term monthly oscillator is negative and on a sell signal since 2007 top
- came into 2010 believing that the bulk of market gains were behind us
- that this was a cyclical bull market within a secular bear market
- at the end of 2009 at 18th record advance without a 10% correction
- market pushed ahead in 2010 taking that to 13th place (based on historical patterns)
- this secular bear market is akin to 1929-1942 not 1966-1982
- this rally of +70% is reminiscent of 1938’s rally of +60%
- would like to think pivot low is behind us since bear market runs 13-16 years
- but already we have handful of stocks like Baxter and Exxon that are below 2009 lows
- AAA premium Treasury started to lift out of flat trading range
- risk premium has only moved into uptrend during prior secular bear markets
- it is still high, not back down to ‘normal’ levels (which it did fall to 2004-2007)
- all sectors are still underwater from 2007
- babyboomers are moving from equities into bonds as we see from mutual fund flows
- but bond cycle is 29 years old and as we get through risk period, rates will go up
- many people have never experienced a bear market for bonds
- very late in the cycle and we may have a little (5 years) left to go
- peaks/troughs in gold precede those of interest rates by about 10 months
- fallen out of step in this cycle – flight to safety has elongated the interest rate profile
- it has been 100 months since gold turned up without a change in interest rates
- gold benefits in both inflation and deflation
- in a fragile and vulnerable environment for the equity market
You can listen to Yamada’s interview here:
Paul Desmond of Lowry Research
The last time we checked in on the venerable technical analysis firm of Lowry Research, they were calling the May retracement just a healthy correction within a bull market. For the details and a chart of their proprietary Buying Power and Selling Pressure, see the previous link.
Last week’s Barron’s had a brief review of Paul Desmond’s view on the current market. In short, he continues to be upbeat, believing that this is a correction within a bull market and most importantly, that it has ended.
Once again, Desmond arrives at this conclusion based on Lowry’s two proprietary measures of supply and demand for stocks which are continuing to show that investors have robust demand for equities. They are telling him that the retracement from the April top has played out and that we still remain in a healthy and continuing cyclical bull market.
As well, Desmond pointed out that this increasing demand is not just directed at a few market leaders but is widespread as can be seen from the breadth measures like advance decline line.
Desmond sounds incredibly bullish, saying that the risk of loss is “about as low as you can get in the stock market” and that “investors ought to be heavily invested at this point”. Lowry believes that the cyclical bull market has between 1 and a half to 2 years left to go before it is over.
Perhaps most interesting of all is Lowry’s suggestion that investors ignore large caps in favor of small to mid-cap stocks. The rationale is that not only are they able to grow faster (since they start from a small base), but that right now, small caps are relatively cheap now since most investors are hiding out in the perceived safety of “high quality” large cap stocks. This defensive posture usually serves portfolios well during bear markets but during a bull market it can be a drag on performance.
Ned Davis Research
From the second hand indications I’ve read coming out of NDR, they continue to be bullish as well. I must admit that I was surprised when Ned Davis Research went maximum overweight equities in early April - especially since days before I had written that several technical and sentiment measures were signaling a coming top.
NDR also reminds us of the historical cycle cross-currents in the 10 year stock market cycle and the presidential cycle. According to a study on these cycles, the first half of this year has fit the combined pattern remarkably accurately. Going forward, this pattern projects a low for the year in late June and early July.
The first year of the presidential cycle is usually positive and the second year has a small loss. Things perk up once we pass the half-way point of the second year. The strongest time period is the third year of the cycle which we will enter in a few months. Just going by the presidential cycle, the current market can be compared to 1994: it was the second year of a Democratic presidency, it followed after a very good year for the S&P 500 (in 1993) and prices bottomed out at the end of June setting the platform for a rocket ride higher in 1995.
In a recent comment, Meisler believes the technical setup for a pullback (”the resistance, the low volume, the low VIX, etc.”) is too obvious. As well, she points to the remarkable fact that this rally is meeting with severe skepticism. This week’s Investors Intelligence newsletter sentiment results showed a decrease in bullishness. In fact, this week was the first time since April 2009 that the percentage of bulls fell below the bears!
Since newsletter editors are usually a very cheery bunch, bulls almost always outnumber the bears. This week the bulls fell to 32.6% from 37% last week and the bears stayed the same at 34.8%. Also making this week’s result noteworthy is that the last time we saw this few optimists was March 2009.
This confirms what we already saw last week from the NAAIM and AAII sentiment surveys which also approach their March 2009 levels. Last week the Investors Intelligence survey had declined but this week we basically have capitulation. Also irrefutably contrarian is the fact that the II decline arrives after a shallow correction in the medium-term (from April highs) and in the short term, that it is even more pessimistic after a week where the market goes up strongly.
More in Friday’s weekly sentiment review.
Enjoyed this? Don't miss the next one, grab the feed or