If you’ve been reading my columns here the past month, you know that I strongly believe the July 15th bottom will not hold.
You know all about my judgment that U.S. and European banks have a very rough road ahead of them. But I am relying on more than just my belief that in the potential for global synchronized recession that we have discussed in the past reports.
Another key point to consider is that demand for stocks is just not broadening and accelerating higher the way that it would if a new bull market had begun in mid-July. (See also: "Time to Bet Against the Market.")
Paul Desmond over at Lowry’s Reports in Florida, my favorite institutional guide to underlying stock demand and supply measures, observes that in terms of time and points, the latest mid-July to mid-August advance is developing much like the rally that began in mid-March and ended abruptly in mid-May. Yet there are distinct differences as well that bear noting.
For one thing, the mid-March rally actually had a lot more going for it than the current rally.
- Desmond observes that the previous rally was preceded by three separate days in which 90% of stocks traded down, and 90% of the up/down volume was down, otherwise known as "90% climaxes." And the last one occurred just one day before the market low in March, increasing odd that sellers had been temporarily exhausted. Then a 90% Upside Day was recorded a day after that low, which suggested that prices had been driven low enough to attract broad buying enthusiasm.
- In contrast, in the current case, two 90% Down Days were registered during June, but none during the last three weeks of the decline to the mid-July market low. This suggests to Desmond that the last three weeks of decline occurred on mild selling, and that the sellers had not been exhausted. And the subsequent rally has not been strong enough to generate a single 90% Up Day (despite two separate days in which the Dow Jones Industrials Average rose 300 points), suggesting that prices were still too high to attract broad investor Demand.
So the likelihood that sellers remain very active…
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…is one big yellow flag.
And here’s another: The proprietary Lowry measure of "selling pressure" fell 35 points during the first 23 days of the March-to-May rally attempt but has only fallen 6 points in the past 23 trading days of our current rally. This is further evidence that the desire to sell has not been exhausted.
More statistical evidence comes from advance/decline measures. In the March-to-May rally, the cumulative total of net advancing stocks rose by 9,050 issues in the first 23 days. In the current rally, there have been 6,540 net cumulative advancers. This shows that the latest rally is much more selective, and a century of data shows that selective rallies are usually short-lived.
Similarly, a measure of net points gained shows that the March-May rally figure was 9,009 points, whereas the current rally has only netted a gain of 5,462 points, even though net upside volume measures are fairly equivalent. This shows that the current rally has required a lot more volume to produce $1 of price increase.
So while the major indexes appear on the surface to be tracing out attractive uptrends from their mid-July lows, the lack of a sharp contraction of selling is worrisome. Desmond points out that in the 75-year history of his data, there are no instances of major market bottoms when selling pressure was near a high a month later. (See also: "Care for a Touch of Market Optimism?")
The bottom line from all this is that even if you peel away all the fundamentals and geopolitics—ranging from corporate earnings to oil prices, inflation and the Russian invasion of Georgia—you can see that the major institutional investors who control the market are not nearly as enthusiastic now as they were in the spring during a rally that looks on the surface to be similar.
This heightens my level of alertness to danger, and continues to lead me to recommend to my Trader’s Advantage subscribers that they maintain a defensive posture with relatively light exposure to stocks and ETFs in their long-term accounts and get short stocks and ETFs in their trading accounts. Check us out for some some specific trades.
Jon Markman is editor of Trader’s Advantage and a regular contributor to InvestorPlace.com. To get this type of actionable insight from Jon and other InvestorPlace Media experts visit www.InvestorPlace.com today!
