Hi Larry, In no other period with this size decline have I seen the IW acting this way. Yes, by this point I usually see all four components dropping to their respective Bullish ranges. Here's what I think is going on inside the IW.....
Relative Valuation:
The 30 year treasury rate has been slowly dropping, but not fast enough to compensate for the rising P/E ratio of Value Line. The P/E is rising, not so much with rising prices, but with falling earnings. Average earnings have been falling faster than the average price per share. With the hacking at the DOW stocks in recent times this, too, may be self-correcting.
Speculation:
The year end sell-off in 2000 took lots of stocks to near their lows. Many of those stocks were sold off along with everything else. Irrational Pessimism. It's now about 13 weeks later and since V/L's Best-Worst list uses that time frame, many of those stocks have now risen back up. This shows up as "speculation" in my index when in fact it's more like just a "snap-back rally." I've seen this many times when we've had a huge sell-off. I can pretty easily predict it will happen again about 13 weeks from now.
The statistics in V/L are a week to two weeks behind reality in this case. It, too, will probably drop back into Neutral or Bullish territory in the next few weeks.
Divergence:
It looks like everyone is finally in agreement that the market is heading down, according to this statistic. This has historically been a bullish sign. This data is more current than that of Value Line and the indicator is of much shorter duration. However, bullish is bullish and I'll take all I can get right now for encouragement!
ZEAL:
We continue to see contraction in the total number of equity issues available for investors. Because the choices are fewer, the money will tend to concentrate in those remaining issues. Historically this is a bullish sign. As we can see, this is a long trend. It also follows that it's a longer term indicator. It's been bullish for a long time even as the market has been pounded. When money starts flowing back to equities in the future, there will be fewer choices available. That will help to make the next bull phase stronger. Since I calculate this on an absolute basis and not a numerical one, it takes into account changes in the economy.
-------------------------------------------
So to summarize, we have two bullish components and two bearish. The IW is near the middle of its Average Risk range. We've yet to see a Low Risk signal which would indicate an end to this huge Bear Market. I've been concerned that we've not had a Low Risk signal from the IW, but it's been faithfully giving us good advice for a long time. Maybe if and when we do get to Low Risk we'll see this hesitation as just what it was, an indication that the worst was not yet over.
In most other periods where we've had Low Risk readings, all four components have had to fall into or near their respective Bullish areas. So far, we've not managed that. As I've said many times in the past, Average Risk doesn't mean No Risk!!!
Best regards, Tom
PS: I'll update the four component graphs at the office today and put the link up here. |
