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This is a guest post by Wayne Whaley (CTA):
I have written over the last few months on the importance of the historic momentum thrust that we have experienced this year and how they could possibly push the market higher than most would anticipate.
Today, Sept 16th, 58% off the lows of 666 on the S&P, I am rolling my eyes, looking to the heavens in disbelief and sharing with you that today we had the third “Ten Day 2:1 Advance Decline” reading in the last 6 months. The previous two were on March 23rd and July 23rd. I haven’t had a great deal of time to study it yet, but it appears unprecedented with really very little to compare too. But I would caution against interpreting this as a sign of an overbought market. As I have shown in the past, single 2:1 advance decline thrust signals are very bullish. Two in a short period of time, even more so, and I am assuming until I find evidence to the contrary that a third is bullish as well. Since I have no tri-signal data, let’s take a look at the three other occasions where there were double signals in a short period of time.
The table below shows the three previous double signal dates, followed by the percentage change in the S&P 500 and the returns 3, 6 and 12 months later.
Double Ten Day 2:1 Advance Decline Signals in less than six months:
Note that these three previous double readings occurred in different decades and notice that although the second reading came well after the initial advance was launched, the S&P 500 gained an average of an additional 26.37% over the next year, with nary a less than 24.28% gain. The S&P 500 index is currently up 9.5% since the second thrust that occurred on July 23rd, 2009.
This market is similar to all three of these markets in some ways. But appears to correlate the closest with 1975, which similar to this rally followed a 48.4% sell-off in equities that lasted 20 months; was often postulated to precede the next great depression and was accompanied by massive federal stimulus.
For much of the last 6 months, analyst have compared the recent rally to the bear market rally that took place between November 13th 1929 and April 17th, 1930 - rising 48% over five months. One can not totally rule that possibility out, but a major difference was the fact that in 1929, the preceding sell-off in stocks occurred in only two months, while the current rally followed a 15 month long bear market. It seems that in just in the last few weeks such comparisons have dissipated.
I understand that it works against human instinct to buy the market this high off the lows, but I assure young readers that investors in 1975 and 1982 had the same dilemma. If you have been waiting and are tempted to reenter, I suggest dollar cost average into it.
I see a lot written on indicators that are at historic levels with many interpreting this market as overbought. But if you look back through history, anytime there is a 50% or more move in the major indexes, the oscillators, sentiment indicators, etc, that are bounded from x to y are going to be tested repeatedly. Divergence analysis between range bound indicators and a potentially rangeless market tend to mislead at such times.
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