Zeev:
Don Hays so bullish, he can hardly stand it.:
A New Model—Part II
All Legs On The Ground
Okay, I’ve caught my breath; so let me ramble a few more paragraphs to fill in the cracks from this morning. First let me include a graph that shows that time in 1962 when the 10-day Arms index gave two signals in relatively close proximity.
As you can tell from this graph, that particular high stress time in 1962 proved to be a fantastic time to be buying stocks for the next four years. As we look back on that period, let’s refresh our memories about the encompassing environment. By October 1962, when the 10-day Arms index once again moved above 1.5, the environment was extremely nerve-wracking. If you are old enough to remember those times, it was in the most intense part of the Cold War—a period when bomb shelters and air raid drills were still very popular items. It was with Nikita Khrushchev taking off his shoes at the United Nations meetings and beating them on the table as he was trying his hardest to threaten the U.S. and the world in the most violent ways. It was at the height of this concern, that Kennedy blockaded off Cuba, and dared Russia to try to cross that blockade. It was at a time that appeared to be extremely vulnerable to a breakout of the war of all wars between the two big nuclear powerhouses. It was the time when the Berlin Wall was being built, as a serious symbol of the big divide between Communism and Democracy. And Democracy did not seem all that great either. The steel industry was trying to raise prices to combat the growing inflation and labor union forces, and Kennedy scared the market out of its skin by confronting their ability to do so. Leading up to that period, the Dow Jones Industrial Average had made its all-time record high, but then had endured a serious recession in 1957-58. But the market had escaped from that recessionary period in 1958 and rallied from 416 up to a high of 739 by year-end of 1961. But then with all the international and economic stress, the bull market suffered very sharply falling from that high to 524 by the end of June 1962. The headlines were devastating, and not just worries about the economy, but serious concerns that the end of the world could be imminent if this U.S.-Soviet confrontation continued to escalate.
Do you get the setting? At the best, the world believed that another major World War was on the horizon. At the worst, Armageddon.
What would your reactions have been? In hindsight it is easy to say that you would have bought stocks, but does your recent record of emotional stress confirm that? Well, if you could have followed the 10-day Arms index signals, that were flashed, first on May 21, 1962, and then for a second time on October 7, 1962, you would have reaped tremendous rewards in the next four years.
It is important to remind you that the immediate aftermath of these great signals from the Arms index have had all kinds of short-term personalities. In some cases, the market immediately begins to rally. But in many cases, it might rally for a few days, but then have one more sharp decline that drops under the level on that date that the signal was given. But in all cases, even including the ones that dropped lower, the immediate few weeks after the signal proved to be outstanding buying junctures when you look at the longer term outcome.
So, what should you do here? Personally, I believe this second 1.50 penetration gives even further confirmation, and reinforces even stronger the underlying infrastructure for the new bull market. Of course, the Fed’s meeting tomorrow could provide fodder for either a blast-off, or that last plunge that has occasionally occurred in the immediate aftermath of these signals. I have no idea what they are going to do, but no matter what, it will not change our posture in the least. Our posture is that you should be fully invested now in stocks and bonds, with a greater emphasis (weighting) being given to stocks in a proportion based upon your risk/reward characteristics. We give our own assessment of what that weighting should be on the asset allocation section of our website.
Our age-old discipline is based upon the three variables that describe today’s psychological, monetary and valuation components. Our charts are updated, as they virtually always are on each Monday to describe those three different variables. If all goes well, I will also be able to update the comments for each of those charts this afternoon. But whether or not I get to that, you can tell the very positive nature of both the psychology and monetary components. And now, with the latest drop in the stock market, and the decline in both short and long-term interest rates, the IBES S&P Valuation model has just dropped back to being fairly valued. It is not really that meaningful on an historical basis, but if you look at the Valuation model chart on our website, you will see that each time this valuation model has dropped back into fairly valued territory in the last three years, and was able to start a rally, it produced a very sharp meaningful rally. With the support of the Arms index signal, I fully expect this rally to be not only sharp, but very meaningful.
In this morning’s commentary, I showed the chart of the Smart Money Index that we compile each day. I have described this index many times to you, and also expressed my thanks to one of my subscribers, Wally Hertler, who reminded me about four years ago of this indicator that was developed back in the ‘80’s by Lynn Elgert. In February 1988, I had read of its great 1987 sell signal that had correctly forewarned about the imminent 1987 crash. Wally, as a very astute individual investor and statistician, had laboriously kept this indicator for all those years, and was kind enough to furnish me the past data. Since it was confirming my market stance in late 1997, he thought I might be interested in pursuing it. After three years of watching every wiggle in its progress, I finally considered it accurate enough to be added to my basket of the most dependable psychological indicators.
Wally has started his own website, that is essentially composed of his analysis of this one indicator. You can get the info that you need to subscribe if you are interested by hooking up with this link: hertlermarketsignal.com. I thought one of his recent charts was extremely interesting. Instead of just using the smart money index, which is a cumulative index that subtracts the Dow Industrials progress in the first 30 minutes, and then adds the Dow’s performance during the last one hour, he has just dissected the two components, and labeled the cumulative index of only the first 30 minutes from each day. With his permission, I am including his chart that relates the “dumb money” index and the action of the S&P 500. They look like a carbon copy. In other words, it is the dumb money that is driven the lackluster action of the S&P 500. The signal just being given by the Arms index is telling us that the dumb money is running out of ammunition.
It NEVER fails. In every instance in my life, when I hang get out on a bullish limb after the market has taken a big plunge, and some extremely effective historical indicator flashes one of its very rare buy signals, the reasons come flying out to dispute the accuracy of the indicator “this time.” It is always some new thing that is disputing the accuracy, or the effectiveness of the indicator. This time is no different, even though the excuses are always the same.
In my earlier life, I have worked closely with some statistical stock market geniuses. I am very sincere in my admiration for their extreme intellect. But despite their ability to develop and maintain the very effective evidence, when the very highly emotional periods came about, they often would find excuses to dispute their own work in that particular time. Quite often, their lack of faith turned out to be totally wrong, and the signals had indeed worked. I choose the other route. I go to extremes to believe the few indicators in my stable that have always worked for me. And time and time again, I have been rewarded. Sometimes it takes a little more patience than I (or my followers) would like in order to keep the faith. These patience-trying periods bring about a lot of advice from the “flip-floppers” to abandon these “benchmark” indicators. But the temporary deceptions that encourages these bits of advice from the skeptics has almost always been the eventual undoing of those who believe that this time the indicator is being distorted.
I have been inundated by those who are pointing out a couple of articles just published that are disputing both the strength of the advance decline lines, as well as the Arms index. Here’s their logic. They say that the NYSE advance/decline line is being distorted because that recent statistics reveal that a large part of the NYSE stocks are now either stock or bond funds, international stocks, preferred stocks, etc., so the new positive trend in this advance decline line is not meaningful—more of a interest rate call than a stock market trend. This is not the first time this has been used as an excuse to distrust the advance decline line. These non-industrial listings on the NYSE have been around for a long time. I personally have never used the advance decline line as an indicator, only as pperipheral evidence. But in its defense, when you look at the net new highs, and break it down to new highs and new lows, you will see that the number of stocks on the NYSE making new lows was 58 on Friday. That number was 104 on July 11, 2001, 258 on March 22, 2001, 231 on November 11, 2000, and 295 on October 18, 2000. Use your logic to see if this makes sense. Even if there were 50% of all the stocks on the NYSE that were being influenced directly by bond prices, which there are not, but the rest of that index was composed of purely industrial stocks that were in severe bear markets as those pundits imply, wouldn’t you think the ferocious bear could do more damage than that? And wouldn’t you think the new low list would be expanding. Of course, it would. And if you are managing real money, and not just playing games at talking market, you know that the majority of your diversified portfolios are not suffering. They are not screaming bullish either, admittedly, but they are not acting that badly. Last week, our managed accounts were up, even including those horrendous panic attacks.
The next argument comes that the new decimalization of the stock trading prices is influencing trading by making it easier to manipulate prices by these lower differential in prices. They believe that this makes any indicator that uses advances or declining numbers, or their upside/downside volume no longer reliable. In my opinion, this one is really reaching for a reason not to believe. I recognize that there are fewer stocks that enter the unchanged category now than before, but I believe the few stocks that are up by just a few pennies are cancelled out by the few ones that are randomly down a few pennies.
In every high dramatic market environment that I have ever lived through, I hear of all kinds of conspiracies that are out there affecting market trading. Maybe so, but I personally have found it is much better to disbelieve all the conspiracy theories. I have to admit, it would be a lot easier when the market is not going exactly the way I have been predicting, to come up with some conspiracy to explain the obvious dysfunction that is behind my failures. But over the years, the conspiracies NEVER turn out to be the real cause of my ignorance. I do believe markets can be temporarily distorted, but they are not caused in my opinion by some consortium that is doing it in a coordinated scheme. Every one of those consortium conspiracies that have been uncovered in the past—when the F.B.I. catches up with them--have proven to be of such an insignificant nature that they have had little effect on the overall market.
So here I am looking very gullible to some of you I suppose. But I choose to continue to trust the indicators, and to distrust those reasons why this time they are not going to be effective.
Okay, take a big breath. You’ve made it to the end. I’m through until Wednesday morning, and I promise you no more two a days for a very long time. |
