By Lowry Research | 8 September 2010
As I briefly noted yesterday in my comment on back to back selling climax extremes, Lowry's "net" or "spread" between demand and supply is higher now than it has been since March 2009. Usually Lowry Research looks at the Selling Pressure and Buying Power indexes separately but they have been experimenting with calculating a simpler 'net' number between the two. Since there has been concern that we are in a 'new' bear market (from the April 2010 highs), Lowry Research went back to 1940 and checked to see if there was a similar instance in previous bear markets and found none.
That is to say, with every single bear market since 1940, the 'net' of demand and supply, as measured by Lowry's indicators, has been going down along with the market. This time, however, it is going up instead. This suggests that what we are seeing isn't a new or renewed bear market but a correction within a cyclical bull market.
On August 10th, Lowry Research correctly warned that the market was vulnerable in the short term (red arrow on above chart). But they continue to believe that in the intermediate and long-term range, the underpinnings of a bull market are in place. Furthermore, while volume is light, they point out that we are seeing pullbacks on lighter volume than advances. So all in all, there is an almost imperceptible accumulation taking place.
Like almost every single technically oriented trader, Lowry is watching the 1130 level for a breakout but they have no forecast on when that will occur. They suggest however that while the market is trading sideways, there is more accumulation taking place than distribution. Unlike the data we looked at from Investors Intelligence recently (see Post below), Lowry doesn't see a selling climax. Instead they are measuring a gradual and continuous decrease in selling pressure as the market trades sideways.
Interview with Richard Dickson of Lowry Research:
To listen to the interview, press play and let it buffer and listen to the complete interview:
Back To Back Weekly "Selling Climax" Extremes
By Lowry Research | 7 September 2010
A few days ago in the weekly sentiment overview we noted the capitulation of newsletter editors, as measured by the Investors Intelligence sentiment survey. Last week was the first time, since March 2009, that the number of bullish newsletter editors fell below 30%. Now, a separate market metric, also from Investors Intelligence, has given us yet one more reason to expect a market rally.
The metric is the number of weekly "Selling Climaxes". If you're unfamiliar with the term, it means the number of individual stocks that have traded below their 52-week lows, only to close higher before the week is over. As you'd expect, this is a measure of capitulation, just like last week's extreme sentiment.
The last time we noted this metric was in early June as the number of selling climaxes spiked for the first time in many months. Overall, that wasn't a great call as the market lurched up and down without really going anywhere. The next few months brought about a few weekly spikes, for example in mid-July. But we never saw back to back weekly extremes in selling climaxes as we are seeing now.
Not surprisingly, Investors Intelligence had been suggesting to their clients for the past two months to sit on their hands and wait for the market to finish drifting sideways. But in the final days of August and early days September, based on the back to back extremes in selling climaxes and other measures, they swiftly changed their posture. They went from 100% cash to 80% long stocks.
Lowry Research's proprietary indicators of demand and supply show a continuing improvement for the bulls. Selling Pressure has decreased by -33 points. Buying Power has gone up by +25 points resulting in the best "spread" between the two indicators since March 2009.
Personally, I'm still taking a wait and see approach as the S&P 500 index is clearly mired in a lengthy sideways chop. When, or if, the S&P 500 index is able to chew through the resistance at 1130, I'll take another look at where things stand. That level by the way is the 50% retracement for the bear market. But for now, back to back extremes of weekly selling climaxes is something to keep in mind.
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