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05/18 08:19
Sy Harding, Right in 2000, Says Sell Shares Again: Taking Stock
By Josh P. Hamilton
New York, May 18 (Bloomberg) -- Sy Harding's calendar and stock charts say
it's time to sell shares again.
The publisher of the Street Smart Report newsletter, who correctly predicted
stocks' 2000 swoon and their April rally, says the Nasdaq Composite Index is
headed for a 40 percent slide. The Standard & Poor's 500 Index and Dow Jones
Industrial Average will take hits of more than 20 percent, he says.
``We won't see the low until October,'' Harding said in an interview.
``Perhaps 8000 on the Dow, 1200 on the Nasdaq.'' He predicts the S&P 500
will slip to 980.
While Harding isn't alone among stock strategists in forecasting a decline,
his methodology, which blends two strains of ``technical'' analysis, may be
unique.
Technical analysts use a stock or index's past performance to project future
moves. Harding, whose 1999 book ``Riding the Bear: How to Prosper in the
Coming Bear Market'' forecast stocks' tumble last year, said recent changes
in indexes' moving averages and ``seasonality'' tell him stocks are about to
fall.
After the Nasdaq's 34 percent surge the past six weeks, investors may be
tempted to think the worst of the recent selloff is over. That would be a
mistake, said Harding, who on Sunday urged subscribers to his newsletter to
switch all of their stock holdings into money-market funds.
In 1999, when the S&P 500 returned 21 percent, Harding says his system
yielded 27 percent. Last year, as the S&P 500 handed investors an 8.9
percent loss, including dividends, Harding's system lost 7.3 percent. For
the period 1997 through 2000, the S&P 500 paid investors a total of 42
percent, while Harding's strategy returned 66 percent.
`Sell in May.'
Harding's strategy begins with the Wall Street saw ``sell in May and go
away.'' Stocks tend to rise from November through April, according to this
``seasonality'' theory, while they tend to fall from May through October.
According to Yale Hirsch, publisher of the Stock Trader's Almanac, an
investor who placed $10,000 in the S&P 500 in 1950, shifted to fixed-income
securities on April 30 each year and back into the S&P 500 each Nov. 1 would
have pocketed $363,353 over 50 years.
Investing $10,000 in S&P 500 stocks from May through October during that
time would have returned only $11,574, according to Hirsch.
Harding refined this theory to derive exactly when to sell and buy by
applying a measurement of recent changes in a stock or index. Called
``moving average convergence divergence,'' this analysis detects shifts in
market momentum.
Enter MACD
The first sell signal from daily MACD after April 1 prompts Harding's
recommendation that investors swap stocks for cash. That signal has come as
late as July, he said. A buy indication after Oct. 1 gives the all-clear for
investors to return to stocks. That has occurred as late as December.
The system appears to work. When Hirsch re-ran his numbers on the S&P 500
using Harding's refinements, $10,000 invested in 1950 grew to $901,761
through 1999, more than double the return of the simpler ``best six months''
method.
Last Friday, the favorable season for stocks came to an end, as MACD showed
that momentum turned negative for the S&P 500, Harding said.
To be sure, Harding's view is probably in the minority.
``Everything I look at says we're on the threshold of a major bull market
that could last three or four years,'' said Richard Eakle, a strategist at
Morgan Stanley & Co. until 1988, when he left to run his own hedge fund,
Eakle Associates Inc., in New Jersey.
Other Technicals
While Eakle says seasonality and MACD are powerful forces, other technical
and fundamental measures are more compelling right now, including that ``the
S&P 500 got more than 20 percent below its 200-day moving average,''
suggesting an undervalued market.
Also, the number of stocks gaining every week versus those falling hit an
all-time high a couple weeks ago, underscoring the market's strength, Eakle
said.
Harding, a 65-year-old engineer who built and sold two manufacturing
businesses before founding Asset Management Research Corp. in Meredith, New
Hampshire, 14 years ago, is convinced he knows better.
``You go back and find out what's worked in the past and you try to find
changes that will improve it,'' he said.
Harding tested the prevailing investment theories alone and in combination
and found they only worked during certain periods.
Coming Back
``I kept coming back to seasonality,'' he said. ``I wasn't willing to accept
anything on the theory alone, I had to know why it should work.'' Aside from
the numbers, seasonality made sense because it's explained by the increased
flow of money into the market in part from pension-fund contributions and
year-end bonuses from October through April, he said.
He discovered the combination of moving-average analysis and seasonality in
1998, when writing ``Riding the Bear.''
While Harding uses other market and economic indicators to predict
short-term trading opportunities and calculate the likely magnitude of the
market's moves, he swears by his system as a basic investing strategy.
He said, ``I was quite surprised myself just how persistent the pattern
is.''
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