THE TODD MARKET TIMER
Prepared by Stephen Todd
The Bull Still Lives
Since about 1940, the kind of smashes seen on October 27 have tended to be buying opportunities, especially if they occur during bull markets and make no mistake, this is still a bull market. Excellent earnings growth coupled with low inflation have been the fodder of bullish trends for decades. In addition, in prior issues we have documented the fact that high momentum seen just recently in the number of issues making new highs and the very positive breadth is also buying additional time for the bull. Momentum gauges tend to peak out months, and sometimes years, before a major downtrend in prices begins.
S&P 500 and 9-Day RSI
Of course, there are potential negatives and we can never be 100% sure, especially since there could be a real threat of deflation, something not seen since the thirties. In this business we deal in probabilities not certainties. But in our estimation, the turmoil in the world will actually benefit the markets of stable countries, like the U.S.
Remember, the major crises of the past have tended to mark tops in interest rates and bottoms in the stock market. Reflect on the Penn Central bankruptcy in 1970, the demise of Franklin National Bank in 1974, the Mexican debt crisis of 1982, the October market panic of 1987, the Mexican devaluation and Orange County bankruptcy of 1994.
Of course, no two situations are exactly alike and it could be different this time. Instead of bringing money to our shores, the Japanese and other Asian parties could start selling our bonds instead to meet their other obligations. This is the risk of high spending and a trade deficit which ends up making us beholden to foreign countries or as Blanche Dubois said in a Street Car Named Desire, “dependent on the kindness of strangers.”
What really happened in Asia? Since everyone else is venturing an opinion, I may as well have a go.
My feeling is that China is at the bottom of the problems. Think about it. For years, Japan and various Southeast Asia countries have benefited enormously from exports to the West. But now comes China. Go into a department store sometimes. Note where all the small appliances come from. They used to come from other countries, mainly Japan. (Way back, they were made in this country, but that's another story.)
This is why Japan and other countries in Asia have hit a rough patch. Competition from China. Simple isn't it?
Chart Commentary
Weekly Charts
Chart #1: The latest selloff has a lot of pundits proclaiming a new bear market, but looking at the long term one certainly couldn't come to that conclusion. Other considerations strongly suggest to us that this is not a bear market.
Chart #2: The number of issues making new yearly highs recently hit a peak. Carefully look at the chart. Note that peaks in the issues making new yearly highs tend to precede major tops by a considerable amount of time, frequently years.
Chart #3: Weekly breadth has barely pulled back. Notice how in 1990, breadth moved down substantially as the averages were holding up. Like new highs, the advance decline line tends to start dropping well before the popular averages.
Chart #4: The shorter-term version of the weekly chart continues to give us a series of higher highs and higher lows. Until that pattern changes, the long-term trend is well intact.
Chart #5: The investors Intelligence survey is now showing more bulls than bears, but a that wasn't the case a few weeks ago and we should be entitled to more of a rally than we have had so far judging by previous instances of this happening.
Chart #6: The Consensus survey of bullish traders still in the low 40s and readings at this level tend to support rallies of intermediate term proportions.
Daily Charts
Chart #7: The decline in the daily chart of the NYSE Composite has certainly been extreme. The bounce was extreme and now the retest sequence looks to have taken hold. We doubt it will carry very far before the uptrend reasserts itself.
Chart #8: The up to down volume ratio recently reached an extremely oversold condition. This should provide substantial support in the days and weeks ahead.
Chart #9: The five-day m.a. of five-day RSI is just turning up from a modestly oversold condition. This also should be a positive for a number of weeks and months.
Chart #10: The Big Block Ratio, which measures the ratio of big blocks trades on an uptick to those traded on a downtick has also turned up from an oversold condition. It looks as if the big boys have sold and sold and sold. This gauge is also a fine contrary opinion indicator and should be a major positive for the foreseeable future.
Chart #11: The ten-day moving average of the Supply Demand Gauge is one of the few gauges that one could actually consider overbought at present. This is more short term than most of the indicators and may be only coincident with a pullback or retest sequence.
Chart #12: The PSE net change five-day moving average, which measures the strength of participation by the high-tech stocks is as oversold as it normally gets. High techs has been clobbered and they should be about ready to turn. This in turn should also be a positive in the period ahead.
Indicator Summary
The indicators are mainly coming off a very oversold condition and once the retest sequence is over, the market should power mightily to the upside.
November 10, 1997 Stephen Todd
The Todd Market Timer
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