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"...investors
holding equities should be on high alert."
"When the mid-July’08 market low was being formed, we noted that
the forces of Supply and
Demand in evidence at that time did not favor the start of a major
advance. But, the upswing has now lasted almost four weeks, and the
explosive rallies on Tues and Fri appeared to many investors as a decisive
sign that a new bull market may be underway. As a result, a review of
current probabilities for a sustained advance may be
appropriate:
Following the last bear market rally, from Mar to May’08, we noted
that bear markets over
the past 80 years that produced one 2-month rally usually contained a
number of similar rallies commonly lasting from one to three months,
followed by new bear market lows. Thus, the current rally, which has
lasted almost a month, is a normal bear market rally in terms of time. The
300–point DJIA rallies on Tues and Fri are also not unusual events in bear
markets. History shows these were the 7th
and 8th times that the DJIA gained 300+ points in a
single day since the broad market peaked in July’07. Each previous case
was followed by new bear market lows. It is also notable that, in terms of
Advancing Issues, Points Gained, and Up Volume on the NYSE, the Aug
5th and 8th rallies were the
weakest of the eight cases. If the six stronger cases did not result in
sustained uptrends, it is unlikely the weakest cases will prove the
exception.
As a matter of interest, days of extreme volatility appear to be
common in bear markets but rare in bull markets. During the 2000-03 bear market,
there were 16 occasions when the DJIA gained 300+ points in a single day,
all followed by bear market lows. Yet, during the bull market, from Mar’03
to our Intermediate Trend sell-signal
on July 26, 2007, there was not a single case of a one-day
300-point DJIA rally. Thus, based on past experience, it appears far more
likely that the rallies on Tues and Fri were part of a bear market, rather
than a bull market.
As noted earlier, virtually all of the major market bottoms during
the 75 year history of the Lowry Analysis have been immediately preceded
by a period of panic selling as reflected in a series of 90% Down Days.
This panic selling exhausts the desire to sell and drives prices down to
deep discounts that can attract renewed investor Demand. As the market
dropped to its mid-July’08 low, the nearest 90% Down Day was recorded
three weeks earlier, on June 26th. Thus, the
final drop in prices lacked the kind of panic selling found at major
market lows. As a result, our Selling Pressure Index, which usually drops
sharply during the early weeks of a new bull market, rose to a new high on
Thurs, Aug 7th. Similarly, our 30-day moving
average of Downside Volume is very near to its bear market high, showing
that sellers are still dumping stocks into this rally at a very aggressive
rate. Of equal importance, none of the rally days since mid-July,
including this week’s two 300-point rallies, have been strong enough to
generate a 90% Upside Day. Thus, there has been no tangible evidence of
the kind of broad, dynamic buying enthusiasm normally found during the
early days of a new bull market. This relatively weak Demand is confirmed
by the very sluggish gains of the Adv-Dec Lines for our OCO universe, for
the S&P 500, 400, and
600 components, as well as for the Nasdaq Market. While these indicators
typically explode upward in a new bull market, most have made only nominal
net gains since the July 15th market low,
reflecting a selective rally.
In summary, the evidence indicates that current market strength is
a rally within a bear market. Although further gains may occur, our short
term momentum indicators are near their most overbought levels since the
mid-May’08 rally peak. Thus, investors holding equities should be on high
alert.
Short Term
Considerations: A conventional short term
buy-signal was registered on July 22nd, when our Short
Term Index rose more than 6 points from its recent low. That buy-signal is
still in force. But, with the stochastic near overbought levels, and
a
potential negative divergence emerging in the % of stocks above
their 10-DMAs, caution appears
warranted." |