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NDR, Lowry, Yamada & Meisler’s Technical View at Trader’s Narrative

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.

Louise Yamada

  • 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

S&P500 April correction Jul 2010

  • 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.

S&P600 index small cap Jul 2010

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.

Helene Meisler
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.

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12 Responses to “NDR, Lowry, Yamada & Meisler’s Technical View”  

  1. 1 thunderbird

    Re: Ned Davis: picking max overweight at the market top in April, instead of early July, shows that even if their opinion is right, their timing was wrong to the tune of a 25% loss; we can thus dismiss them as not having the slightest clue what they’re doing.

    Also, re: Ned Davis: they’re justifying a position based on “presidential cycles” when it is thoroughly contradicted empirically, both by technical information like Yamada’s market internals and by fundamental info like the BDI or the pullback in base metals. Unless you can demonstrate a possible mechanism by which the US President will double the number of ships carrying goods in the ocean and increase worldwide demand for zinc, this “presidential cycles” crap is about as useful as a $50 session with a tarot card reader.

    When ooga-booga tea leaf reading crap is contradicted by reality, reality should be recognized as the victor. I really don’t understand how anyone gives this “presidential cycles” crap the time of day. At best, it’s a suggestion that there is maybe an 80%-90% chance that the next 6 months end up SOMEWHERE within the total range of all the previous data sets, ASSUMING that this time it’s not different.

    Worthy of note: the market doesn’t have to switch back to bear mode. We have a third option: the market goes nowhere for a year or two. Equities will then have to re-price a little bit to correct previous rosy overshoot; but ultimately they can go simply nowhere. That’s Ritholz’s prediction right now.

    And of course in this boring future there is still money to be made - just not in the USA. No prediction of the future is worth a whit to us investors unless it is from an ex-US viewpoint which takes into account the fact the rest of the world exists, and that this rest of the world has a much rosier future than the US.

  2. 2 Tony

    the future is not what it used to be…

  3. 3 Wes


    You’re right about the Investor’s Intelligence group being a cherry bunch. In fact, they are about a 25% perma-bull group.

    In this light, the 32.6% bullish reading, down from 37% last week means that about half of the remainder capitulated this week.

    By the way, the smart OEX options traders broke a 14 consecutive day streak of buying more calls than puts yesterday, buying 102 puts per 100 calls.

  4. 4 Steve

    Regarding Ned Davis going maximum overweight in April.
    They went maximum overweight in June of 2009 and remained so until late June into early July when they cut exposure. They remain overweight by 5%. Ned himself was writing bearish commentary into the April top and still is. Tim Hayes runs the allocation decisions.

  5. 5 riodogg

    Wes commented above regarding the string of OEX put/call ratios that were below 1.0. I track those OEX data, and a 10-DMA of them hit 0.70 on 7/9/2010. That was the lowest reading in my data going back to Oct. 2002. The previous lowest reading occurred on 2/11/2009, a month before the equity markets indices’ lows to that point.

    It is impossible to get excited about a single datum, but if the OEX players are the so-called “smart money,” then I would have to judge the OEX action as bullish.

  6. 6 Oexrex

    If I found the map to the “Lost Dutchman Mine”, would I go online and tell everyone where “X” is?!

    Hmmm, is there an analogy there?

  7. 7 ryan

    It looks like the experts are as confused as I am.

  8. 8 Double R

    “It looks like the experts are as confused as I am”

    that’s the sign of the bear :)


  9. 9 Ed M.

    Having trouble playing Louise Yamada interview. Anyone else experiencing difficulty?

  10. 10 John Doodle

    Looking at the daily charts since start of 2010, swing traders should note the 3 lower highs and 3 lower lows. And volume much higher on down than up. That is money talking. Sentiments and tea leaving I have noticed on this site, has not proven to be useful lately.

  11. 11 thunderbird

    John Doodle: it’s obvious, therefore true. Let’s hear the theorists explain their way out of a downward trend with distribution. I’m pretty sure that’s not the definition of a bull market.

    Rule #1: don’t ignore empirical reality.

  12. 12 Wes

    @John Doodle, thunderbird

    When negative sentiment combined with an oversold market two weeks ago (as was pointed out on this site), we rallied hard. That should have been an easy trade for you.

    As to rallying on reduced volume and declining on increasing volume, I agree this is unusual, but we did it all through last year’s market rally. In physics, we have a saying that if something happens, it must be possible.

    Perhaps the increased volume on down days is caused by (panicky) public selling of stocks. There is ample evidence that the public has been selling the market and withdrawing their money from stocks for some time, now. And John, I agree that public sentiment has been unreliable lately and I think this is the reason.

    Concentrating on indicators like Rydex traders and OEX option traders, as well as overbought/sold indicators has proven fruitful in the past during the absence of the retail trader, and probably will in the future.

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