HCT ... what do you think of what John Hussman has to say? ... he, Stephen Roach and ContraryInvestor.com (to whom he refers here) have been much on target since late 2000 ...
Thanks,
Ken Wilson
Monday May 27, 2002 : Hotline Update
The Market Climate remains on a Warning condition. This condition is defined by a combination of unfavorable valuation and unfavorable trend uniformity. I continue to view the advance off of the September low as a counter-trend rally in an ongoing bear market. My opinion is that the major indices will eventually fall below their September troughs.
While we did see a strong reversal off of the September low (allowing us to reduce our hedges by as much as 20%), the market never recruited trend uniformity. Basically, stocks launched off of the September low in unison, and then immediately began developing important divergences.
Interestingly, Lowry's ( www.lowrysreports.com) notes that the September low differed from more durable lows in that we never saw a swing in what they call "90% days."
Usually, bear market lows are preceded by a series of days in which down-volume represents at least 90% of up-volume and down-volume taken together, and the number of down-points among NYSE stocks represents at least 90% of up-points and down-points taken together. In general, a new bull market often follows the final 90% down-day with a 90% up-day just a few trading sessions later. The series of 90% down-days followed by a 90% up-day is taken by Lowry's as a signal of a completed washout, which often marks the start of a new bull market. The September low did not produce this, which makes Lowry's also believe that the bottom is not in place.
Among other indicators based on internal action, I noted that the 10-day average of the trading index (TRIN) had moved above 1.5 a couple of weeks ago. Part of my concern with this high reading is that it was not accompanied by any extreme of bearish sentiment (for example, a high proportion of bearish investment advisors or a spike in the CBOE volatility index). Normally, a 10-day TRIN above 1.5 is a measure of capitulation. The recent reading, emerging with high levels of bullishness among investment advisories and brokerage strategists, is more suggestive of distribution in large cap stocks, rather than capitulation. In short, the recent high TRIN strikes me as a danger signal, not a positive development.
On the economy, I continue to be in fairly thin company in my concern about the durability of economic strength. It's odd to see investors demanding aggressive cost cutting to improve profit margins, yet not realizing that if this is done economy-wide, those efforts will aggregate into greater job losses and weaker capital spending overall. Stephen Roach of Morgan Stanley is among the few analysts who seems to carry the same opinion. Also, there's an interesting commentary on contraryinvestor.com. It's one of the few places where I've seen comments about the continuing and almost surreal weakness in the Help Wanted Advertising Index.
Of course, we need no forecasts in order to carry a defensive position here. The current unfavorable status of valuations and trend uniformity is enough. We remain fully hedged.
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