The Consensus Index Of Bullish Market Opinion
THE TODD MARKET TIMER
Prepared by Stephen Todd
Choppy Uptrend But Still Quite Bullish
The Dow and S&P have been trying to come out of the recent correction and we think it is only a matter of time before they succeed. There are two main reasons for thinking this way. One is the very strong internal picture of the market. While the Dow and other listed indices have been mired in a correction, the advance decline line, both weekly and daily have been relentlessly moving to new highs. Tuesday was a good example. The Dow was down almost fifty, the S&P and NASDAQ were getting clobbered and there were over three hundred net advancing issues. This isn't just a one- day occurrence. It has been going on for months.
The other major bullish factor is sentiment. The Consensus Index Of Bullish Market Opinion figures and Investors Intelligence figures are in a buy zone.
Does this guarantee the market will advance from current levels? Of course not. Interest rates could surprise us. But even here, the sentiment figures are bullish. The Consensus Index Of Bullish Market Opinion figures are telling us that the bears are sold out. Again. No guarantees, but the odds strongly favor higher prices in the weeks and months ahead.
The Consensus Index Of Bullish Market Opinion
There are peripheral positives that are not as compelling as the above considerations, but still suggestive of higher prices. The utilities and transports have been making new highs during the last many months and these indices are certainly pleasant company to have along. Ditto for the European stocks. London just made another all-time high and when our closest world relative is going gang busters, it probably bodes well for our markets. At the very least it shows that we are not on the dance floor alone. Are there negatives? Of course, there always are. This month we have heard several earnings warnings. In fact, there have been more than in recent history. Also, the charts show some fairly solid resistance in the low 8000 range for the Dow and slightly above current levels for the S&P. Since this is a level that turned back the markets before, we have to respect it.
In addition, even though rainy September is over, October is just starting. In other words, seasonality is still negative. October has seen the most famous declines of this century. The silver lining is that it has also seen some of the most significant bottoms.
Putting it all together, the bullish case still far outweighs the bearish case although there are, as always, concerns.
Short Interest Ratio
Another encouraging sentiment number is the short interest ratio. It has backed off a bit, but from an historical standpoint, it is still very high.
Years ago, we did a study and found that whenever this ratio was over 5.0, the Dow tended to have about 1000 points ahead of it. Well, we're happy to report that it now rarely gets as low as five. We think that this portends good things for the market.
Bond Advance Decline Line
After a hesitation of a few months, we are quite pleased to see the bond breadth chart moving to new highs in spite of the fact that most bond averages are lagging a bit. This is probably quite bullish, but we found that it is even more positive for the stock market. We're not sure why this is so, but it's a welcome addition to our quiver. The bond advance decline line anticipated the last major decline in April and its relative strength this time around helped give us confidence that the drop would be shallow.
Chart Commentary
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: This is a textbook picture of a long-term bull market. The old adage that a picture is worth a thousand words couldn't be more apt. The Dow's chart would not show all-time highs, but as long as the troops are leading the generals, we don't think there is a lot to worry about.
Chart #2: Look back in 1991, the last time the weekly advance decline ratio five-day moving average got this high. Then look how long the uptrend lasted. This is what we mean when we say that momentum starts to drop well before the averages.
Chart #3: Weekly breadth just keeps on keepin' on. The daily version is just as impressive. As the Dow and some of the other listed indices have languished in recent weeks, these indicators have continued to power ahead. About 95% of the time, this is an indication of higher prices ahead.
Chart #4: The shorter-term version of the weekly chart is giving us the same bullish message. Up and away with periodic pullbacks.
Chart #5: A few weeks ago, the Investor's Intelligence survey showed more bears than bulls. There are still almost as many and when you count up those looking for a correction, an astonishing 65% do not consider themselves bullish. This in spite of all time highs in breadth and with many averages.
Chart #6: The Consensus Index Of Bullish Market Opinion is echoing the Investor's Intelligence figures. Look at the dark spots and then cast your eyes to the top chart. There is an excellent correlation with bearishness and impending rallies.
Daily Charts
Chart #7: Unlike the weekly chart, the daily chart of the New York Composite does not quite show an all-time high, although with Monday's action, it is within a whisker. Certainly it is within shouting distance and the fact that breadth has already done so, is a strong positive.
Chart #8: The up to down volume ratio is pretty neutral at present. This location used to hold the near-term indicator, but we have now replaced it with the similar, but more extensive composite indicator.
Chart #9: The five-day m.a. of five-day RSI is also somewhat neutral after having given a good buy signal in mid- August.
Chart #10: the big block ratio, which measures the ratio of big blocks traded on an uptick to those traded on a downtick is just coming off an oversold condition. This indicator laid an egg back in August. It was suggesting a rally when a top came in instead. We suspect that this was because of an unusual circumstance, the carnage in Asia.
Chart #11: The five-day moving average of the supply/demand gauge is still in buy territory. In fact, if the depth of the oversold condition is any gauge, we should soon embark on a major uptrend.
Chart #12: The PSE net change five- day moving average, which measures the strength of participation by the high tech stocks is basically neutral at this time.
Indicator Summary
The longer-term sentiment gauges are presenting a strong case for further rally, perhaps for a number of weeks. This is partially offset by chart resistance just above current levels.
Random Thoughts
We really don't understand why speculation that the British will join the European monetary union was so positive for the London Stock Exchange. Actually we doubt that it will ever take place. The elites of Europe have joined thrown their weight behind monetary union, but the people are not at all sure. We lived in France and the we can tell you that the French are not inclined to go about joining organizations that dilute national power. We also doubt that the German people will readily go along either. Would they really give up their stable mark to buy a pig in a poke?
Elites and academics everywhere seem to want to coalesce political units. Reduce local and national power they say and make ever bigger organizations. Like the U.N. and the Soviet Union. But, when the people have a say, they want smaller units and more local control. Witness the recent breakups of the former socialist republics like Yugoslavia and Czechoslovakia. We suspect that Maastricht was hatched in the head of an economist. That would explain a lot wouldn't it?
September 30, 1997Stephen Todd
The Todd Market Timer
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