Prepared by Stephen Todd

We were not expecting the latest decline although many of the averages were overbought. Frequently a decline such as this needs a catalyst and that did appear in the person of Fed head Alan Greenspan who again decided to try to talk down stocks. Mr. Greenspan indeed has the power to cause trouble with the markets, but unless he is willing to do more than talk, the impact will most likely not last more than a few days.

This time around, the markets were over extended just as they were in December of 1996 when he made his “irrational exuberance” comments. We have found, however, that the market is going to do what it's going to day and not even a Federal Reserve Chairman is going to stop it by talk. Action is another matter, but as much as he would like to raise rates, it still appears that he doesn't have the cover. The latest consumer price index was quite tame and until the last report, the producer price index had actually shown several months in a row of deflation.

Also getting in its licks was the ghost of 1987.CNBC and other financial networks were busy holding “remember when” sessions and this no doubt made people nervous in spite of the fact that events of ten years earlier couldn't possibly be a tangible market influence.

At press time on Monday afternoon, it looked as if the market had put in at least a short term bottom. We liked the tape action. For the first time in a while, an up opening did not lead to selling within minutes. The gains were pretty much held all day.

In addition, earnings are coming in better than expected. According to IBES International, of 208 companies in the Standard & Poors 500 to report, 61% have come in above expectations while 22% fallen short. This is a better showing than in previous quarters. Also, earnings have increased over year ago comparisons by 11% to 12%. Which compares to a forecast increase of 10.2%.This trend is even apparent with technology stocks with the exception of semiconductor makers.

Of course, sharply rising interest rates can even overcome earnings positives, but putting everything together, we have to remain constructive.

One of the most important developments since our last letter is the very large expansion in issues making new yearly highs. Look at the charts. Note that in the past, when the new highs have had a sharp increase, we were nowhere near a top in the market. That doesn't mean it can't happen. In fact, we did succeed in finding periods when peak new highs corresponded with market peaks, but it was rare.

Peak numbers of new highs is a sign of power and of participation. How many times have we heard over the past few months that the advance is narrow? Certainly not by this indicator.

One measure of interest rates that is close to new highs after coming off the bottom in April is the bond advance decline line. It hesitated in August, but never really dropped and this was one of the elements that kept us positive during that period. We like this gauge because it has a strong tendency to trend. When it turns, it is usually for a substantial amount of time and like a compass in days of old, it is a great guide.

We also note that the twenty bond average, a measure of the corporate market is holding up nicely. Finally, look at the put call ratio open interest in the last chart. It would appear that we may be turning up. The last time that happened was in April right before a major rally.

On this page we comment on the charts shown on pages 6 and 7. If a particular chart looks to be self explanatory, we do not cover it in the interest of space. Darkened areas on the charts indicate buy points.

Weekly Charts

Chart #1: As scary as the latest sell off has been, it certainly doesn't look like much on the long term scheme. Until proven otherwise, this remains the quintessential bull market of the second half of the twentieth century. Chart #2: The advance decline ratio is now headed down. It could hardly stay up at such lofty levels, but the fact that it moved as high as it did strongly suggests that this bull market has a lot of staying power. Momentum peaks come well before price peaks. Chart #3: Weekly breadth has barely pulled back. Notice how in 1990, breadth moved down substantially as the averages were holding up. The advance decline line normally leads the popular averages by a few months.

Chart #4: The shorter-term version of the weekly chart is giving us a series of higher highs and higher lows. Until that pattern changes, we shouldn't have too much to worry about. Chart #5:The Investor's Intelligence survey is now showing considerably more bulls than bears. Keep on thing in mind, it takes a while for this indicator to catch up. The latest decline is not reflected in the figures shown. Nevertheless, the latest surge above the zero line should have given us more of a rally than we have seen so far. Chart #6: The Consensus survey of bullish traders five-week moving average is just curling up from an oversold condition so this gauge is still bullish.

Daily Charts

Chart #7: The decline in the daily chart of the NYSE Composite has, so far, only gotten us oversold by many momentum indicators. While it is possible that this could be the beginning of something substantial on the down side from just looking at the chart, the other indicators are suggesting that the decline is nearly over. Chart #8: The up to down volume ratio is not oversold, but it is at levels that, in the past, has supported near term rallies. Chart #9: The five-day m.a. of five-day RSI is not yet oversold, but it is fast approaching that condition and even these levels have been known to support a rally.

Chart #10: The Big Block Ratio, which measures the ratio of big blocks traded on an uptick to those traded on a downtick is oversold which means that the big boys are selling heavily. When this group acts in concert they are just like any other crowd. Chart #11: The ten-day moving average of the Supply Demand Gauge is moving back toward oversold territory. 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 has been in a while. This should be bullish at some point.

The indicators have weakened somewhat since the last letter, but the main bias should still be to the upside.

The deification of Alan Greenspan by Wall Street is a substantial mystery. This is supposedly the heart of world capitalism, and free enterprise. This is where sentiment runs strong against regulation by government and yet here's Alan Greenspan, a government bureaucrat constantly trying to interfere with the financial markets and everyone reveres him as some all wise Dutch uncle who occasionally has to spank the markets when they get unruly or “irrational.” He also gets credit for the current economic expansion and low inflation. When he starts getting credit for the fall of the Berlin Wall, I am going to give up.

It would be one thing if his record for forecasting was a bit better, but as we have documented on these pages, he is wrong aplenty. For instance, how many times have we heard him darkly suggest that inflation was imminent over the past couple of years? It's our bet that he is looking in the wrong place. Greenspan, like other classical economists on the Fed such as Alice Rivien and Lawrence Meyer thinks that economic growth leads to inflation. Certainly the financial markets sell off at the first hint of expansion. To this we say, No! No! No! Economic growth is not bad. It is good. When people work, they pay taxes instead of requiring services. They buy goods which increase corporate profits. Only an economist could think this is bad. Some of the worst inflation has come about when times were bad such as the mid seventies. Now we know how Cassandra felt.

October 20, 1997Stephen Todd

The Todd Market Timer

26861 Trabuco Road, Ste. E 182, Mission Viejo, California

Financial Commentary

THE ALLENDALE ADVISORY REPORT | STRATEGY FOCUS | WEEKLY OUTLOOK
ECONOMIC PERSPECTIVE | FED STEER PRICES GOING NOWHERE FAST
U.S. ECONOMIC AND INTEREST-RATE OUTLOOK
STICKING WITH THE U.S. TREASURY MARKET | THE TODD MARKET TIMER
CASH AND BONDS-- THE RODNEY DANGERFIELDS OF FINANCIAL ASSETS?
MYERS ON FUTURES | THE COPPER JOURNAL | COMMODITY FUTURES FORECAST WEEKLY REPORT
INTEREST RATE WATCH | NIKKO MARKET COMMENTS

Consensus National Futures and Financial On Line Index

Copyright 1997, by Consensus Inc.  All American and Pan American rights Reserved. editor@consensus-inc.com

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