Many years ago, Martin Zweig, a prominent financial advisor during the 1970s and 1980s, coined a catchy investment axiom: “Do not fight the Fed and do not fight the Tape.” Applied to the present market, when the Fed is aggressively reducing interest rates and doing its best to resuscitate the financial markets, the odds should favor the long side. However, in contrast, the market tape remains unfavorable, with price, breadth and volume indices making new lower bear market lows.
How this dilemma will eventually be resolved is anybody’s guess. In the short term my own bet is still on the tape indicators, also called technical indicators. The charts provide a clear picture of what this market downtrend looks like. Since October 2007, the broadest index of NYSE common stocks, the NYSE Composite, has been making new lower lows on a daily closing price basis.
The same trend has been followed by the daily NYSE Advance/Decline and the Upside/Downside Volume Lines. The only difference is that they both had already topped out in June 2007. Their failure to confirm the new October 2007 highs for the NYSE Composite, and other NYSE price indices provided an early bearish warning of things to come. The same pattern of trading has also been is evident in many global bourses.
Two weeks ago, most North American and Asian indices made new bear market lows, breaking below the previous lows of January 22/2008. Among the few indices that are still holding above the January 22/2008 lows are Canada’s TSX Composite and the Dow Jones Transports. Supported by the stocks of commodity producers, the decline in TSX Composite, from its October 2007 top, has been limited to 17%, at the lowest point.
Looking beyond the short-term implication in the bearish consensus of technical indicators, the Fed’s frantic rescue actions to mitigate the meltdown in the credit market should in time revive the equities and the badly sinking economy. Regrettably, the experience of the 2000-2002 bear market shows that it may take as long as two years from the time of the initial rate cut to the start of the next of new bull market.
Putting aside the contradiction between bearish short-term technical indicators and bullish long-term monetary indicators, for the intermediate outlook, I find the bullish standing of the sentiment indicators very encouraging. Over the last five to six weeks, the consensus of sentiment indicators in our keep has reached the most bullish level since the 2002 market bottom.
As a result of the bullish standing of monetary and sentiment indicators, my proprietary leading market indicator, which we call our “Marketmeter,” now stands at a bullish +34%. Since I developed Marketmeter some 26 years ago, all readings in Marketmeter higher than +20%, were followed by market gains of no less than 20% within the subsequent six months.