Desmond Sees S&P 500 Gain Lasting

Desmond Sees S&P 500 Gain Lasting: [Technical Analysis]

By By Elizabeth Stanton, Bloomberg | 7 November 2009

Sept. 29 (Bloomberg)— U.S. stocks are probably in the early stages of an advance that will last three more years, according to Paul Desmond, president of Lowry Research Corp. Desmond says he sees no signs the rally will end after expressing doubt in June about the sustainability of gains that went on to lift the Standard & Poor's 500 Index 57 percent from its March 9 low. He was named 2009's best chart analyst by Technical Analyst magazine.

Stock indexes in the U.S. reached "major bottoms" roughly every four years between 1962 and 2002, meaning the current rise will [probably?] last another three years, said Desmond, whose firm recommended investors avoid stocks three months before the S&P 500's peak in 2007. His current view, based on Lowry's analysis of price and volume statistics, is at odds with 'research' by Bank of America Corp. and UBS AG that shows the market is vulnerable to a decline of 10 percent or more in October. [[Probably substantially more than that, given the right catalyst; however, that "risk" in no way detracts from Desmond's position— never assume even a very high probable risk must occur, barring the occurrence of its catalyst (or if its catalyst is compromised) : normxxx]]

"Most investors seem to say, 'If the stock market goes up very fast over a short period of time, that kind of 'prosperity' can't continue,'" Desmond said in a telephone interview. "They get nervous and want to take profits to avoid having it taken away from them. But the history of the stock market says that that's one of the things investors have to fight."

While Lowry, founded in 1938, didn't recommend clients enter the market until Aug.4 of this year, the firm warned them away from U.S. stocks in July 2007, avoiding a plunge of as much as 57 percent in the S&P 500 from October 2007 through March.

Trading Above Average

Some measures, including the percentage of shares trading above their 10-day average price, may suggest the U.S. stock market is presently "overbought," but such kinds of indicators and techniques don't work early in bull markets [[i.e., during spells of heavy, prolonged accumulation: normxxx]], Desmond said.

"The indicators have generally been useless in this period," Desmond said. "The only time in history you see that pattern is in the early stages of a new uptrend". The S&P 500's rebound from a 12-year low in March is its steepest advance since the Great Depression, though the benchmark is still 32 percent below its October 2007 record. Mary Ann Bartels, technical research analyst at Bank of America, called it a "mature rally" that's at risk of a 15 percent to 20 percent retreat in a Sept. 20 report. Technical analysts such as Bartels and Desmond base their predictions on patterns in price and volume charts.

New Highs

Desmond examines the number of stocks reaching new highs to determine whether a market is peaking. He found that during major tops since 1929, no more than 11 percent of stocks hit highs when the Dow Jones Industrial Average peaked. Usually, the number of stocks making new highs begins to deteriorate four to six months before indexes fall, he says.

The number of New York Stock Exchange-listed companies reaching 52-week highs has been 149 a day in September, the highest monthly average since July 2007, according to data compiled by Bloomberg. The level didn't exceed 14 during the fourth quarter of 2008, after Lehman Brothers Holdings Inc.'s collapse sparked the worst financial crisis since the 1930s. "The patterns we see here are very similar to those that preceded previous major market bottoms," Desmond said.