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Stock Market - Where to from here?

(September 16, 2003)

While the bounce off the March 2003 lows were not a surprise to me at the time (Lowry's buying power and selling pressure indicators were at an extreme divergence at that time), it has certainly been a surprise to me that the current rally has lasted so far and so long. True, I did cover my short positions in mid-March, but unfortunately, was not able to take advantage of some of the extreme moves since then, such as the tripling of YHOO, the meteoric rise of NTES from $10 per share, and the most recent speculative interest in nanotechnology stocks.

Obviously, no two stock market rallies are alike, but what is less obvious to the average investor is that there is usually something odd with all stock market rallies (with the exception of broad upward movements such as the "buying stampedes" of 1942 and early 1975 coming off of the bottoms of huge bear markets). Sometimes, these oddities will provide clues to the professional investor that the rally may not last as long as people think or that it may soon top out. That being said, I have noticed a few oddities regarding the current stock market rally:

  • Insider selling has been steadily increasing for the last few months - rising to a sell-to-buy ratio of over 50 for the two weeks ending September 13, 2003. This is most probably a historic high. The sell-to-buy ratio for July and August is 15.09 and 29.76, respectively - both at the high-end of its historic range. During a bull market (especially a new bull market) insider buying tends to outpace insider selling. Not so for the current stock market rally.
  • The mid caps and the small caps have been leading the current stock market rally. During a new bull market, the blue chips and large caps tend to lead, as professionals seek liquidity and put their money into the stock market. Moreover, the Nasdaq has been outpacing the Dow Jones Industrials, signaling a quick rise in speculative interest (this usually only appears during the tail end of a move). The A/D ratio has been making new highs, but the Dow Jones Industrials has lagged. Breadth is important for a sustainable rally, but when the blue-chip barometer such as the DJIA fails to confirm, it is signaling a red flag. There have been cases in history where the DJIA has failed to confirm a new high in the A/D ratio leading to a subsequent decline of the stock market. The stock market rally ending in May 2002 is the most recent example.

    NYSE Advancing-Declining Issues ($NYAD)


  • Lowry's proprietary buying power index has been making new lows as recently as two weeks ago. The only reason the market has been rallying, Lowry's contends, is that there has been a reluctance to sell. It seems like individual investors who are sitting with losses will not be willing to sell until we have higher (or significantly lower) prices. Either way, it is very difficult for the market to have a sustainable rally without substantial buying.

Nonetheless, unless proven otherwise, the current trend for the market and for the major indices is still up, although a few chinks in the armor have been showing since the middle of last week. A notable mention goes to the DJIA's failure to remain above the 50% retracement level of approximately 9,500 (the halfway market between the January 2000 top and the October 2002 bottom) as of the close yesterday (September 15, 2003). (For a more thorough discussion of the 50% principle, please refer to Richard Russell's website at www.dowtheoryletters.com.) Coupled with above-average bullish sentiment and mutual fund cash levels at only 4.4%, this may not bode well for the stock market.

The secondary trend of the stock market remains up, but the author will not be totally convinced until the 9,500 level on the DJIA has been hurdled. In the meantime, one can make a good case for either the bullish or the bearish scenario. Until we see more evidence of an upcoming decline, however, any sellers out there should not jump the gun.

Some comments: I just noticed a money manager today being featured in a magazine article labeling him as a guru just because he had made an annualized return of slightly over 8% for the last few years. And how about this annual contest held by Smart Money every year?

http://www.smartmoney.com/challenge/index.cfm?story=september03

I sit here and wonder: Why do people promote such mediocre results? Have the random-walkers finally gained an upper hand? Maybe these people should all go read Jack Schwager's "Market Wizards" and see what investing/speculating is all about.

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