From this week's (p. 19): The often bearish Ned Davis shares many of these concerns. Nonetheless, the maven of the celebrated market statistical service based in Venice, Florida, is bullish on stock prices, at least through the summer, based on a host of his most faithful technical indicators.
Most important to him are the Fed interest-rate cuts.
"Usually, two cuts are enough to send the stock market higher, and we've had four," he avers in a telephone interview. "Data going back to 1920 show that, in the six months beyond the third rate cut (this year's occurred on March 23), the median maximum gain for stocks is 16.8% while the median maximum loss is just 4%. Thus the potential gains outweigh the risks by better than four to one."
He likewise is encouraged by the action of the tape as exemplified by the TRIN index, which measures downside-to-upside trading volume. This reading broke above the key technical level of 1.5 in early April, which indicated a wholesale, cathartic washout of investor liquidation.
Another bullish indicator is Davis's version of the Federal Reserve Stock Valuation Model, which compares the competitive yield of S&P 500 (the earnings of the index divided by its current price level) to the 10 year US Treasury yield.
By this measure, the S&P is now only about 10% overvalued after sinking last month to a slightly undervalued level. Over the past 20 years, readings in the range of 10% overvalued to fairly valued have yielded average annual gains in the S&P of 18.2%.
Finally, Davis is impressed by the heavy amount of cash investors have built up during the market slide of the past year. For example, money fund assets now stand at 15.8% of the total market value on the NYSE, the highest level since the market low of 1990... |
