Found this in Monday's Barrons...
MAY 7, 2001
Merry Month
Will May defy history and the bears this time?
By Jonathan R. Laing
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, 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.
Davis' data going back to 1948 again show a reward-to-risk ratio of four-to- one for stocks following such a washout. In the the subsequent six months after a 1.5 reading, the mean maximum gain was 16.5%, compared with a maximum mean loss of 4.4%.
Another bullish indicator is Davis' version of the Federal Reserve Stock Valuation Model, which compares the competitive yield of the S&P 500 (the earnings of the index divided by its current price level) to the 10-year U.S. 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 of the stocks on the New York Stock Exchange, the highest level since the stock-market low in 1990. The subsequent annual gain in the Dow Jones Industrials has averaged 18.2% since 1980 whenever money-market assets rose above 13.07% of Big Board capitalization.
Davis Research's statistical surveys of weekly rate of change in gains in money-market assets further show the potential for even frothier annual stock gains. For the most recent week, the rate of change rose 34.2% on a smoothed annualized 13-week rate of change. Readings above 28.6% in rate of change since 1985 have spawned average annual gains in the S&P of 30.8%. Certainly there's no better sentiment indicator of investor pessimism than such a cash build-up. Cash is to bull markets what blood was to Dracula.
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