Sunday November 22 7:36 AM ET
Is This The Stock Market Rally To Remember?
By Pierre Belec
NEW YORK (Reuters) - Don't try to corral this bull market, just yet.
Investors may be looking at
the ''Rally to Remember,'' if an old Wall Street maxim is correct.
Investment guru Norman Fosback developed a trading theory back in 1970
that says the stock market
has showed boundless upward energy whenever the Federal Reserve makes
two or more interest
rate cuts in a row.
''It's a very old and reliable bullish signal for the market that's
called 'Two tumbles and a jump'
rule,'' says Don Hays, chief investment strategist for Wheat First
Union in Richmond, Va.
Indeed, Wall Streeters rushed to their history books after the Fed
lowered interest rates for the third
time in as many months to insulate the economy from the contagion that
has wrecked economies in
Asia, Russia and Latin America.
Hays said Fosback's trading rule -- which was activated for the 20th
time this week -- has an
incredibly good track record in forecasting the market's direction.
''It states that a major buy signal is given any time the Federal
Reserve reduces one of its three
major policy tools -- either the discount rate, stock margin
requirements, or commercial bank
demand-deposit requirement -- two times without an intervening
increase,'' Hays said.
He said that since the Fed was created in 1914, the central bank has
made back to back cuts in
interest rates on 19 occasions. The easing of monetary policy, which
has traditionally been done to
reinvigorate the economy, has been good for stocks, producing median
average market gains of 20
percent in 12 months.
''These signals come very rarely, and in the past only about once
every four years,'' Hays said. ''This
time, it has been even longer, since February 1, 1991.''
One explanation for Wall Street's bullish response is that stocks have
a history of rising in an
environment of falling interest rates.
Hays said the trading theory has produced some eye-popping results
over the years.
''In the five days after these signals were activated, the average
percentage change for the Standard
& Poor's stocks has been a gain of 0.7 percent and the market has
risen on 11 out of 19 times.''
In a 10-day period, stocks have gone up 1.6 percent in 13 of 19 times
and over 15 days, gained 3.5
percent 16 out of 19 times.
Over six months, the market has increased 16.0 percent in 18 of 19
times that the Fed trimmed
interest rates twice or more and it has posted an average gain of 30.3
percent over 12 months 18 of 19
times. The 15-month gain has been 34.8 percent in 18 of 19 multi-rate
cuts and over 18 months, the
gain has been 35.3 percent in 18 out of 19 times.
''If you analyze all the signals post-crash, since 1932, you find
every signal created a major
successful long-term buy opportunity,'' Hays said. ''They don't all
start immediately, however, but
are certainly close enough that an investor with a time horizon of 12
to 18 months would have never
lost money.''
This comes as good news for investors who are now recovering from one
of the nastiest market
plunges ever.
After soaring 17 percent for the year in mid-July, the market went
into a nosedive that wiped out all of
the gain by late August.
The Dow Jones industrial average has since rebounded nicely and is now
up 15 percent for the year
after a hair-raising rebound of more than 1,500 points in October,
thanks to the Fed's rate cuts, which
rekindled investors' confidence.
The latest shot of adrenaline by the Fed convinced Wall Streeters that
the central bank has done the
right thing and has moved quickly enough to save the American economy
from the foreign economic
threat.
Investors are betting on a brief but mild economic slowdown next year.
But some experts don't buy into these trading theories.
''Investors are running out of new stories to justify the stock
market's high levels,'' said John
Geraghty of North American Equity Services, a consulting firm.
''Some times, the market itself needs a story and now that there's
basically been no change in the
economic news, people are starting to depend on cyclical data, charts,
technical analysis or anything
that they can cling to, to justify what they're doing in the market,''
he said.
The Dow index has been powering higher since hitting bottom on Aug. 31
at 7,500. It stands just a
couple of hundred points below its July 17 record high of 9,337.97.
The rally has been propelled by a shift by investors from the
ultra-safe money and bond funds to take
more risk in stocks.
Market watchers say that barring an unexpected shock, the tremendous
recovery in stocks could last
for some time.
One reason is that bull markets tend to run longer because they rise
gradually and need a continuous
infusion of fresh cash.
Also, bull markets are self-fulfilling prophecies -- the more profits
investors make in rising markets,
the more cash they put back in and the higher the markets go.
On the other hand, bear markets are short-lived and intense because
they are a function of mistakes
as investors rush to get out at any price.
Will this be the 'Rally to Remember,' or the 'Rally to Forget.'? Stay
tuned.
For the week, the Dow was up 239.96 points at 9,159.55, the Nasdaq
composite index rose 80.22 to
1,928.21 and the Standard & Poor's 500-stock index was up 37.83 at
1,163.55. |
