THE TODD MARKET TIMER
Prepared by Stephen Todd
Houston, We Have Ignition
We are on record as saying that the bottom seen on October 27 was the absolute low and that the market would work higher from there. The drop in late October gave us an almost historically-oversold market and that, coupled with favorable seasonality, should be a good combination. In addition, we still have low inflation and solid economic background.
Suffice to say that December and January are the two best months of the year. Additionally, we are just coming into a longer-term favorable-seasonal trend. From 1950 to the beginning of 1995, the Dow gained 3856 points between November 1st and April 30th. The other six months gained only a total of 265 points. Since then both periods have done well, but the November-April time frame has still outperformed the other six month period by about 10 to 1. On a very short-term basis, we are pleased to see the high techs begin to kick in. As we go to press on Monday, the software index, SOX is up about 5% for the day. Any rally without the high technology sector, which is the future of the nation, would be highly suspect. We do believe that there is an excellent chance of solid high tech participation since these stocks have been hammered into a major oversold condition over the past few weeks.
Getting back to inflation, the bad news is that the Asian nations may try to export their way out of trouble by flooding the U.S. with low priced products. The good news is that this is apt to keep inflation down as if it needed keeping down.
We are also very impressed with the utility average which is making all time highs. Over the years, utilities have been among the market's best bellwethers and the current action of this group is just one more nail in the bear's coffin.
Are there any negatives? To be sure. It's never a one-way street. There is a possibility that things could get so bad in Japan that they would be forced to conduct a fire sale of U.S. financial assets, primarily bonds. Our best estimate is that this is unlikely. With Japanese interest rates scraping bottom and their stock market in trouble, it seems unlikely that they would dump one of their few well performing assets.
Chart Commentary
Weekly Charts
Chart #1: Isn't it interesting how such a scary selloff as we had in late October looks so benign on a longer-term chart. We have a hard time considering the current market to be anything but a bull just based on looking at the price pattern.
Chart #2: The bearish percentage is somewhat neutral when viewed on a long-term basis. This is also remarkable considering how far we have come. There should be a lot fewer bears at a significant top.
Chart #3: Weekly breadth has barely pulled back. Notice how in 1990, breadth moved down substantially as the averages were holding up. Like the new highs indicator, 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. Now that the rally has begun, we would not want to see it really curl over until it moved above the old highs.
Chart #5: There were recently more bearish advisor's than bullish ones. The last time that happened, in late April, the market took off for several months. Given the favorable seasonality, we think that will happen this time.
Chart #6: This gauge from Consensus Inc. in Kansas City shows a dearth of bulls and from a contrary opinion standpoint, this is a very good sign.
Daily Charts
Chart #7: The advance from the major October low has been very choppy and has kept investors on edge. Nevertheless, it is unquestionably an uptrend and based on other indicators covered in this letter, has quite a bit of life left.
Chart #8: The volume ratio is currently neutral, but the extremely oversold condition from late October and early November should be a support for at least a couple of months.
Chart #9: The five-day m.a. of five-day RSI is just basically neutral at present, so it's not telling us much.
Chart #10: The Big Block Ratio, which measures the ratio of big blocks traded on an uptick to those traded on a downtick, continues to look quite bullish to us. It shows a lot of selling by the big boys and when they show this much fear, chances are very good that we will have a rally as a result. This group is like any other crowd, they tend to be wrong at extremes.
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 on this page 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 fairly neutral, but it was so very oversold, that we still have to grade this indicator to be bullish.
Indicator Summary
The indicators are mainly coming off a very oversold condition and the retest sequence is probably over for now. We have to be bullish on this market.
Random Thoughts
It never ceases to amaze us in disagreements between Wall Street and Main Street, how often Main Street is correct. It is essentially a battle of ideas between average people and elites. Just look at the record.Main Street has been buying the stock market while so many “pros” on Wall Street have been warning us off. This has gone on for years. Main Street didn't want to bail Mexico out. Wall Street did. Main Street doesn't like the idea of shipping our manufacturing overseas while we convert to a “service” economy. Wall Street does. Main Street knows some simple logical truths such as good economic news is really good news. Do you notice how Wall Street starts selling when it learns that more people are employed or more shoppers are spending money? Only with the elites does bad equal good.
The elites are not only on Wall Street. They also run our criminal Justice system and edit our newspapers. Main Street knows its wrong to let violent criminals out because of “overcrowding.” Our elite judges seem to be more concerned about thugs than victims. Main Street knows that schools should be able to expel violent students. Many members of the Federal judiciary seem to think otherwise.
December 1, 1997Stephen Todd
The Todd Market Timer
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