Sy Harding Sees 40% 'Bear Market Rally': Taking Stock
By Josh P. Hamilton
New York, Oct. 16 (Bloomberg) -- Four days of gains mark the start of a U.S. stock rally that may send benchmark indexes up at least 40 percent, says Sy Harding, who forecast shares' tumble in 2000 and the fleeting rebounds since then.
After reaching five-year lows last Wednesday, the Dow Jones Industrial Average and Standard & Poor's 500 Index each have surged more than 13 percent.
Harding, who says stocks have recorded most of their gains between October and April, said a gauge of momentum -- ``moving average convergence divergence,'' or MACD -- indicates now is the time to go back into stocks.
``I'm now bullish on the market for the rest of the year and well into next year,'' said Harding, 66, an engineer and publisher of the five-year-old Street Smart Report newsletter. He's a technical analyst, who studies trading patterns and charts and not the fundamentals of companies.
Harding, whose publication fetches $225 a year for an online subscription, has correctly called the turns in the current bear market, which has erased $7.8 trillion of investor wealth since March 2000. Most recently, Harding in June said the S&P 500 would slide to around 765, matching the 49 percent average peak-to- trough decline for the 10 worst bear markets on record. The benchmark reached 768 on Oct. 10 before rebounding.
Now, he said the Dow would rise to 10,300, a 41 percent gain from last week's low, and the S&P 500 would reach 1100, 42 percent more than the five-year low reached last week.
Trader's Almanac
According to Yale Hirsch, publisher of the Stock Trader's Almanac, timing the market by the calendar works.
An investor who placed $10,000 in the S&P 500 in 1950, shifted to fixed-income securities on April 30 each year and back into the S&P 500 each Nov. 1 would have reaped $363,353 over 50 years. Investing $10,000 in S&P 500 stocks from May through October during that time would have yielded $11,574.
When Hirsch re-ran his numbers on the S&P 500 using Harding's MACD refinement, $10,000 invested in 1950 grew to $901,761 through 1999.
MACD on Oct. 11 indicated the start of Harding's ``favorable season,'' as stocks rebounded from their lows and gathered momentum for further gains.
Harding's system starts with the historical observation that most stock gains occur between November and April, driven in part by pension-fund contributions and year-end bonuses flowing into the market.
Harding then overlays MACD to time two annual shifts: Into stocks on the first buy signal after Oct. 1, and back out on the first sell signal after April 1.
The system called for buying equities last Oct. 1 and then selling them April 9. An investor following that advice with an S&P 500 index fund would have banked a gain of about 8 percent during that period, then shifted into cash through last week.
Buying and holding for the entire period yielded a 19 percent loss.
Turning Point
Beyond ``normal seasonality,'' Harding said the S&P 500 is trading 40 percent below its 200-day average, suggesting sellers may have overreacted.
Other technical analysts said that more gains lie ahead.
``This is the beginning of a three- or four-month rally,'' said Philip Roth, chief technical analyst at Miller Tabak & Co. ``There's no long-term trend, so you've got to be willing to play these kind of swings.''
Just 19 percent of New York Stock Exchange stocks traded above their 200-day moving average last week, indicating stocks were ``way oversold,'' Roth said.
``I have a rule to buy when the number falls below 20 percent, like it did at the July bottom,'' Roth said. That bottom was followed by a four-week, 21 percent rally for the S&P 500.
Another indicator, the NYSE Short-Term Trading Index, last week gave its most positive signals since the 1987 crash, Roth said. The index, which measures average volume for rising stocks relative to average volume for falling stocks, fell below 0.50 for two consecutive days Thursday and Friday. It was only the second time in 40 years that advancers had twice the average volume as decliners for two straight days, Roth said.
Overvalued
The bad news is that investors looking for an end to the bear market may have to wait until late next year, said Harding, who built and sold two manufacturing businesses before founding Asset Management Research Corp. in Meredith, New Hampshire, 15 years ago.
Stocks aren't cheap by historical standards, he said. The S&P 500 sells for 31 times the past 12 months' earnings, compared with a historical price-earnings ratio of 17, according to Standard & Poor's. Harding also expects the economy to relapse into recession.
Still, some investors expect a sustainable rally.
``I'm more bullish,'' said Joseph Zock, president and chief investment officer at Capital Management Associates, which oversees about $1.5 billion. There's plenty of money in the financial system, ``low inventories, and relatively healthy employment,'' Zock said. ``That's a pretty good foundation for the economy regardless of the psychology of the stock market.'' |
