Stock market destined for intense selling
By Thom Calandra
CBS MarketWatch
08/05/2002 12:13
SAN FRANCISCO (CBS.MW) - A noted market researcher expects a series of massive red-ink days in the U.S. stock market -- sooner rather than later.
The selling is destined to follow what Paul F. Desmond calls an "upside blow-off" that lifted the battered Dow Jones Industrial Average more than 400 points a week ago. Desmond's research suggests strongly the stock market is far from a healing stage that will mark a return to better days.
Desmond and his firm, Lowry's Reports, rely on upside and downside volume and price levels for gauging supply and demand on the New York Stock Exchange.
"Although the July decline did not contain any 90 percent downside days, it did push stocks down to the most deeply oversold conditions seen since September '01 or beyond," Desmond said Monday morning. "As a result, we were prepared for a snap-back rally lasting at least several weeks. But then a 90 percent upside day was registered on July 29."
That rally, in which the Dow rose 447 points and the NYSE Composite Index (NYA) gained 5.1 percent, featured more than 90 percent of all NYSE trading activity as positive. The one-day rally also put more than 90 percent of all price activity in the plus column. Such positive days usually indicate tremendous demand for stocks by investors.
Not this time, Desmond says.
Desmond, president of Lowry's Reports, says bear-market bottoms almost always are accompanied first by frantic selling, the kind that puts 90 percent or more of all NYSE volume and points gained/lost in the red. Periods of frantic buying - the kind seen by bargain-craving investors -- must follow the devastation before stocks can truly be declared a winning proposition for new investors.
Coming days, weeks or months almost certainly will feature intense selling, the likes of which the U.S. stock market has not seen since April 2001, says Desmond, whose research on bear-market bottoms and bull-market tops won the Charles Dow Award this year. Lowry's Reports Inc. has been performing factual analysis on financial markets since 1938. "See our July 2 article: On the trail of the bear market bottom."
Desmond on Monday said the stock market ultimately will pay the price for investors' refusal to descend into bouts of furious selling.
"Our 70-year history shows that 90 percent up days that are not preceded by 90 percent down days usually turn out to be upside blow-offs that are quickly followed by new lows," Desmond said. His NYSE-based study earlier this year showed the bear-market washout - a classic capitulation by every investor and their mother-in-law - comes after a series of these 90-90 down days, followed inevitably by furious buying.
Desmond, using Lowry's Reports internal measures of supply and demand, says the one-day rally staged a week ago, "was accompanied by a significant increase in downside volume, showing that sellers were aggressively dumping stocks into the rally."
Pent-up sellers, perhaps hoping against hope they can somehow salvage 2 1/2 years of portfolio losses, almost always wind up throwing in the towel. Desmond says, "Until that desire to sell has been exhausted, usually through a series of 90 percent downside days, it will be very difficult for periods of rally to persist, without being swamped by another wave of selling."
Desmond's careful reading of the stock market bodes poorly for those who have yet to sell their losing stocks, stuck in taxable portfolios and untaxed retirement accounts. For those with cash and plenty of patience, his view presents an excellent buying opportunity - at some point far lower than current levels.
"We are still expecting an eventual series of 90 percent down days at significantly lower prices," Desmond told me Monday. Selling of that intensity has been entirely absent from the stock market this summer, and was not present even during the NYSE declines that followed the Sept. 11 attacks.
Desmond's view is direct enough for all investors to see. The U.S. stock market has erased, by some estimates, $8 trillion of wealth since the NYSE turned south in January 2000. I think those hoping for more snap-back rallies, but a magical ending of portfolio pain, are destined to learn a history lesson that will cost them dearly. |
