Zeev's Ideas

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ZEEV, TECHNICALS - up to ZEEV:348415, 01/23/05

01/16: (346289) (*COMMENT*)

*****MUST READ Key part of article is just below:
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The percentage of NYSE and Nasdaq stocks below their 10-day moving average is one indicator that he says has given almost perfect signals for the past 20 years, and it is giving a very clear buy signal now: When that number goes below 10% (i.e., 90% of all stocks are trading below their 10-day moving average), the market is typically much higher three to six months down the road. It was at the same level in August last year, and since 1990, the signal has tripped 15 times. On average, the market is up 4% two weeks later, up 11% three months later and up 24% one year later.

Through the end of Thursday's trading session, the number of stocks below their 10-day moving average had begun to hook up despite the decline in the broad indexes -- the type of divergence that sets up reversals.
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Jon D. Markman Amid Naysayers, an Upbeat View By Jon D. Markman RealMoney.com Contributor 1/14/2005 4:41 PM EST

Editor's Note: This is a bonus story from Jon Markman, whose commentary usually appears only on RealMoney. We're offering it today to TheStreet.com readers. To read Jon Markman's commentary regularly, please click here for information about a free trial to RealMoney.
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Virtually every major technical analysis shop and market timer in the country has declared the 2004 rally dead in the water over the past two weeks. But Florida-based Lowrys Reports is one exception. The firm has a great long-term record, so it's worth hearing its point of view.

I have mentioned the institutional advisory firm, of which I am a client, before. It is objectively focused on proprietary equity supply-and-demand measures. It was appropriately bearish during the 2000-2002 bear run and has caught turns back to bullishness beautifully -- first in mid-October 2003 and then with a timely and long-lasting bullish call in late March 2003. The firm was bullish, particularly on mid-caps and small-caps, all the way through the last three quarters of 2003 and into 2004. It remains so today.

I had a long talk on Wednesday with John Brooks, who has been at Lowry's since the early 1970s. He said that his team studies 145 market indicators, and he sees nothing more on the weekly charts today than a normal correction to the bull trend. He says that most of their short-term indicators are four-fifths of the way to oversold or better, and are thus very nearly ready for a full reversal.

Brooks notes that most of his clients, at funds large and small throughout the country, were skeptical of the bull market throughout 2004 and are thus somewhat happy to be vindicated with the recent selloff. In October and even November, amid the big speculative end-of-year run, he said, it was "like pulling teeth" to get people to buy stocks. So it's not a surprise to him to learn that so many managers are exhibiting a morose skepticism today. Confident Against the Herd Brooks is confident that sellers will be as wrong today as they were in October last year. The percentage of NYSE and Nasdaq stocks below their 10-day moving average is one indicator that he says has given almost perfect signals for the past 20 years, and it is giving a very clear buy signal now: When that number goes below 10% (i.e., 90% of all stocks are trading below their 10-day moving average), the market is typically much higher three to six months down the road. It was at the same level in August last year, and since 1990, the signal has tripped 15 times. On average, the market is up 4% two weeks later, up 11% three months later and up 24% one year later.

Through the end of Thursday's trading session, the number of stocks below their 10-day moving average had begun to hook up despite the decline in the broad indexes -- the type of divergence that sets up reversals.

Brooks says he believes the psychology of pros has been negative for a year, and most have wanted to be defensive. This explains why Lowrys' "selling pressure" index has hit record lows while "buying power" never gained a lot of traction.

Major fund managers were holding on to their stocks, expecting higher prices, but they weren't buying a lot of new stocks. That is pretty much the definition of a "wall of worry," and it can be very bullish as fearful investors are slowly but surely tempted to commit more funds to stocks.

Brooks thinks the Dow Jones Industrials will hit 11,700 midyear, then decline and rebound to finish the year at the same level. But that doesn't mean he is a long-term bull. In fact, he believes the market is tracing out secular bear-market behavior, and he believes the current period is more like 1971-1972 -- about a year from the brink of a precipice -- than 1982, the start of a long-term rally.

For now, he says Lowrys' work has shown over the years that you can't get a major decline without a buildup in selling pressure. In the second stage of a bull market, which is probably where we are headed, he says buying power and selling pressure move up in tandem as people are increasingly willing to liquidate positions. But even when selling pressure crosses above buying power, he says that's only a four- to six-month warning of a top ahead.

In sum, Brooks advises investors to stay focused on the healthy weekly advance-decline line, which suggests continued interest in buying a broad range of stocks. "When IBM gets to $101," he says, "every trader who's been sitting on his hands is going to say, 'What do I do now?' And then you're going to get a melt-up. The glass is not half empty, it's half full. .... This is not the start of a bear market. All that has happened is they've taken the cream off the top of the bottle."

If you like Brooks' view better than the nabobs of negativity, here are the big-cap stocks he likes.

Big-Caps Poised to Perform

Company Ticker IBM (IBM:NYSE) Wyeth (WYE:NYSE) Altria (MO:NYSE) Caterpillar (CAT:NYSE) Disney (DIS:NYSE) United Technologies (UTX:NYSE) DuPont (DD:NYSE) Johnson & Johnson (JNJ:NYSE) General Electric (GE:NYSE) Procter & Gamble (PG:NYSE) American Express (AXP:NYSE) American International Group (AIG:NYSE) McDonald's (MCD:NYSE)


(Part 2)
I was asked in a private message to comment on Markman's excessive optimism (#msg-5126546, read Markman (which is listed above under COMMENT, flg) before you read my comment below) and how it relates to my short term optimism (2275) but a coming nassacre following that. Since this is really of much broader interest, and I spent quite some time to back up my thesis, I thought I should make my reply public, here is a copy:

In one of my recent posts (#msg-5129211, and in that post, I erred and meant 10% or less above their 10 DMA, not under), I mentioned the paucity of stocks above their 10 dma as an indicator of an impending rally. However such strings surely are lousy LT indicators, look at #reply-16433472, a string post 9/11/2001 preceding a nice run into January prior to Nassacre 2002. Or the minor local April 2001 bottom (#reply-15677769) signalled with few extreme 10 dma readings, just to peak next 5/22/01. Note in the sox, such a string in early June and July 2002, also followed by a failing ramp (#reply-17699443) on 8/22/02. Many other examples where the 10 DMA was an excellent forecaster of an impending failing run. It is also important to look at when this becomes excessive in the 85%+ range, typical of an impending top. But I still have not found one single indicator that is "good all the time", and Markman's reliance on that one in face of very bullish advisors and generally low epc, is an error, IMTO.


(Part 3)
Using Moving Averages to Determine Long Term Market Bottoms:

Back on October 9, 2002 when the market formed a long term major bottom Les Horowitz's data showed his entire database was 90% below the 10 day, 21 day, 50 day and 200 day moving averages. Page down as there is lots of insight in the data:

http://www.siliconinvestor.com/readmsg.aspx?msgid=20936513

On January 5, 2005 the market closed with 89% of Les's data below the 10 day moving averages. However none of the other moving averages look anything like the major bottom in October 2002. The next lowest number was 79% below the 21 day moving averages with all other numbers being higher:

http://www.siliconinvestor.com/readmsg.aspx?msgid=20952333

Long term market bottoms are formed when the entire market is so oversold that 90% of stocks are below all meaningful moving averages.

However as nice as it would be to believe we can watch this data and know that typically the market will rise after such a notable event as having all the moving averages so low on a percentage basis it just is not a 100% certainty.

In fact on July 23, 2002 the number of stocks above the moving averages was even lower than it was on the ultimate bottom on October 9, 2002. Proving that even a reliable indicator needs confirmation in the form of positive divergences.

Anyway, getting 90% of the market below its 10 day sma is rare but not rare enough to portend a major market bottom. Even having 90% of the market below all its major moving averages will not do that. But positive divergences such as lower prices with more stocks above the 10 day, 21 day, 50 day and 200 day moving averages surely will in my humble opinion.

NYSE and NASDAQ Percent of Stocks above the 50 and 200 Day SMA's:

When only 10% of stocks are above the 50 day and 200 day sma as measured by the record percentage then we can be reasonably assured of a long term bottom. Using the 10 day sma alone would probably work well for a short term bottom but in my humble opinion nothing more.

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(see original post for the links. flg)

This post was inspired by this article which contains data which should be questioned:

http://www.thestreet.com/pf/funds/jondmarkman/10203518.html

(The article mentioned was copied into the top of this segment for your convenience. flg)
(*END*)

but from that July 23rd you got a powerful move to August 22 when once again the short term dma went through the roof, indicating a local top (together with the EPC going to sub .4), where I got back into my bear suit (#msg-472363) after going bullish around July first (partially due to a string of sub 10 in the 10 DMA series and the EPC hitting above 1 late in June, but then chickened few days later, but came back as a bull (#msg-417016) on 7/15. Sure after the 8/22 high, we got another new low in October, but that seven weeks run from early July to October was worth playing. I agree with you that the longer term DMA's indicate we are not at a major bottom, thus, my impending Nassacre.


01/20: (347601) (*COMMENT*)
Are the current put/call ratios at levels that you consider good enough for a bottom that will carry us on the final leg up before the Nassacre?
(*END*)

No outrageous buying of puts, but that you get at major bottoms, not retrenches.


01/23: (348345) (*COMMENT*)
Late to the party...

Donald Luskin - Happy Days Are (Almost) Here Again Monday, January 24, 2005

Valuation and other market measures tell me that stocks are on the verge of a very nice rally....

....One of the things that Fred is looking at now, three weeks later, is a unique approach to put/call ratios. Technicians believe that when put option trading exceeds call option trading, it means investors are getting excessively bearish. Fred goes

http://www.trendmacro.com/a/luskin/20050124luskinSMC.asp
(*END*)

Very interesting, though my on studies indicate no corelation between future market behavior and the IPC (indices Put/Call ratio), maybe his approach of finding divergences between EPC and IPC has a better long term record, I have not looked into that.

In general, however, he agrees more or less with my very short term scenario. Neither he or Fred, however are suggesting a very nasty decline after the coming ramp they expect (Fred even suggests new highs above the December highs, as I do).