Wall Street Bear Turns More Bullish
Saturday April 5, 4:44 am ET
By Haitham Haddadin
biz.yahoo.com
NEW YORK (Reuters) - Wall Street, take note! One of your biggest market bears is donning bullish garb.
Paul Desmond, a widely read Florida-based market timer who forecast the 1987 market crash, told Reuters in an interview that stocks may rally over the next six months, or longer.
However, Desmond adds it's too early to call this the end of the three-year bear market, which has wiped out close to $8 trillion in investor wealth.
The reason? Stocks, though battered, are not cheap, given corporate America's sluggish profits, the expert says.
"We had a buy signal on March 17," Desmond -- who runs market timing service Lowry's Reports Inc. in North Palm Beach, Florida -- said in a telephone interview.
"This is not necessarily the start of a new bull market but still the strongest bottom we've had in the last three years."
He was referring to the decline by March 12 of the blue-chip Dow Jones industrial average (CBOT:^DJI - News) to a low of 7,416, the broad Standard & Poor's 500 (CBOE:^SPX - News) to 788 and the tech-laden Nasdaq Composite (NasdaqSC:^IXIC - News) to 1,253. On Friday, the Dow was at about 8,266, S&P at 877 and Nasdaq at 1,386.
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One reason for the newfound bullishness of Desmond and his team, which includes Richard Dickson, are proprietary indicators that track so-called market internals.
Since the U.S.-led attack on Iraq began, the market has clearly been responding to events in that theater, Dickson told clients in a note Thursday.
One theory making the rounds on Wall Street is that the market is currently being propped up by the successful prosecution of the war, Dickson said. Once over, however, the market could crumble when faced with the bleak economic prospects apparently conveyed by a recent spate of soft data.
"The only way we know of to examine the validity of this premise is through an analysis of market action," he said.
This analysis shows less and less sellers in the market and more and more buyers entering -- the ingredients of a bull run.
Lowry's "Buying Power" index, a measure combining rising stock prices and volume at the close, hit a new high on Wednesday, showing there is strong buying interest, Desmond said. The index is derived by aggregating these data for all 3,600 stocks listed on the New York Stock Exchange (News - Websites).
A similar gauge he uses is "Selling Pressure" -- based on declining prices and volume, also at the end of the day -- and this has dropped to a 9-1/2 month low.
"That shows the potential for a serious decline is very limited, as there are no serious sellers left," Desmond said.
Desmond is the recipient of the "Charles Dow Award" of 2002 for research on identifying bear market bottoms. While Wall Street was singing yet another "That's-the-low" song, he correctly refuted that and warned investors not to follow the "buy-and-hold" mantra.
The premise of his argument then was the market's final lows likely have not been hit, since two indicators he uses -- 90 percent upside and downside days -- did not confirm this. A few of these must occur in succession before stocks have turned the corner, he argued.
Now, Desmond and Dickson say there were 90 percent downside days on Jan. 27 and March 10, and a 90 percent upside day March 17. Not as many as he would like to see, yet promising.
The latter is a measure of a buying stampede: points gained equal 90 percent or more of points gained plus points lost, and upside volume equals 90 percent or more of the sum of upside plus downside volume. A 90 percent downside day indicates "panic selling," with investors hitting the sell buttons.
"Completion of the 90 percent pattern and deeply oversold indicators led us to conclude we have a significant bottom from which a substantial advance should occur," he said. "This is the kind of advance that can last six months or more."
A rally, he said, could carry through highs hit late last year: 9,043 for the Dow, 954 for the S&P and for 1,521 Nasdaq.
Asked why he believed an advance might not send the market grizzlies into their lairs for good, Desmond said stock values did not get as depressed as they have in other market bottoms.
The S&P price earnings ratio stands at 19 times backward-looking earnings, while it has hit 11 or lower at the start of a new bull market over the last 70 years, says Desmond.
He also watches the S&P dividend yield -- the dividend from a stock divided by its price, which is a measure of current return. That usually gets to about 3 percent at major bottoms and is currently at less than 2 percent, he said.
"Investors care because they see the yield tied to the bottom line," he said. "That's what they expect to earn in a worst-case situation."
Desmond said he likes a lot of names in the technology sector and blue-chips like financial giant Citigroup Inc. (NYSE:C - News) and heavy equipment maker Caterpillar Inc. (NYSE:CAT - News).
It is possible there may be more to this advance than six months, the pundit says, but adds "we have to wait and see." |
