It's been a while but recently the 1995/2005 comparisons have begun to become popular again. To us the only thing that 2005 and 1995 have in common is that both are the fifth year of a decade. To that end, this theme has been played to death the past several months. It is now common knowledge that year five is up. It is so common, so widely talked about that it seems to us that investors and traders are viewing it as their right to have an up year in 2005. As a very good friend of ours says, "its like they are viewing it as "a congressional edict" that the market will be up in 2005. As we have discussed in previous issues, we have not found one indicator that has a 100% accuracy. The year five phenomena has been right for the past 12 occurrences or 120 years. In those previous 12 occurrences January has been positive. In 2005 January was down. Although the January barometer has had a fairly good record over the past 50 or so years, we do not put a lot of reliability in forecasting a year ahead based on one months activity.
With that behind us, we go back to the 1995/2005 comparison. The first difference is that as mentioned above January in 2005 was lower while in 1995 it was up. More importantly to us is that the technical backdrop is 180% or so opposite. A lot of this is based on sentiment or market psychology. In 1994, the S&P traded in a 10% trading range ending the year with a loss of about 7 points. The DJIA on the other hand closed the year with a gain of 80 points. Nineteen ninety four went out with the percent of bears from Investors Intelligence over 50% for 15 of 16 weeks. Our longer-term measure of this indicator, the 10-week moving average of bulls divided by bulls + bears was at its lowest level since late 1982. The insider buy/sell ratio was the best in years and at one point there were actually more buyers than sellers. This is a very rare and bullish development. The four-week moving average of Market Vane was at the low 40% high 30% level for months while the Consensus Inc numbers were even better and at times below 30%. Last but not least, the sentiment combo, which combines the three above mentioned surveys along with the AAII survey into one measure was at its lowest and most bullish level since the late 1990 low.
At the end of last year we had sixteen consecutive weeks of Investors Intelligence percent bulls over 50. The four week moving average of both Consensus Inc and Market Vane were at or near five year peaks. The insider buy/sell ratio has been at bearish levels not for weeks or months but for nearly two years and at one point the 8-week moving average hit its most bearish level in its 33 year history. The sentiment combo in late December hit its second worst level (bearish) in its sixteen plus years and has been above the +60 bearish threshold for fifteen consecutive weeks. It has been above +60 for 81 of the past 93 weeks and has not been below zero since early April of 2003. Compare that to 1994 when it spent nearly the entire year below zero.
At the end of 1994 the major momentum indicators were oversold and diverging. At the end of 2004 they were overbought and diverging. Early January 1995 also saw a very sharp and persistent overbought condition signaling an initiation signal. January 2005 saw a deep oversold condition from these same indicators. Last but not least is the four year cycle. The four year cycle had bottomed in late 1994 with1995 the beginning of a new up phase. The four year cycle last bottomed in October 2002 or March 2003. It is currently in its final phases not its beginning phase. From a technical perspective we can find little if any positive comparisons between the current market and ten years ago.
In early February the primary momentum indicators reached modestly strong overbought readings, the kind that historically have not been commensurate with a price peak. As we have discussed in the daily reports, there have been failures such as April 2004, failures from those levels when there were also no divergences are rare. However, the fact that we have had failures is to us added confirmation that nothing in the market, at least that we are aware of is 100%. They came close but did not reach the levels seen in early November when we had a confirmed medium-term initiation or thrust signal. This was confirmed not only by the level of momentum but also by the markets initial reaction to the overbought level. In November, while the indicators corrected their initial overbought level the S&P continued to move higher as is consistent with an initiation signal. Although the decline last week was relatively shallow and recouped quickly it was and is not consistent with a true thrust or initiation signal. However, the quick recovery also confirmed that we were not facing an immediate failure such as April 2004.
The rally late last week saw both the S&P and DJIA move above their early February high as the indicators, and the new highs suggested was the most likely course following the strong or moderate momentum surge. While the DJIA and S&P did satisfy the initial signal by moving to new highs, not one of the indicators have confirmed. Some are closer but some such as the McClellan oscillator are a little north of half their early February peaks. We also have divergences from the number of new highs both daily and weekly as well as a small divergence on the 13-day RSI. Speaking of RSI, here too we saw a modest reading in early February but nothing to the degree that we saw in early November. There are two things to keep in mind about the divergences. The first and most important is that they have not been confirmed and as such are only potential divergences and until they are confirmed they will remain as potential divergences. Secondly, until they are confirmed as real there is always the possibility that they can move higher and eliminate the divergences. As we see it now they are warning signs that need to be respected but not yet acted upon.
Over the past week or so we have given 50/'50 odds as to whether the post January 24 rally would lead to a move above the January 3 print high. We still see it at about those odds but with slightly favoring the higher highs. We also see this coming week as critical to whether this occurs or not as a failure early on could very well lock in the above mentioned potential divergences as real. While we lean slightly in favor of new highs we do not see this as being an all clear signal that a whole new leg up is underway. The position of most of the sentiment measures argues strongly against that. Instead, we see a move to new highs as the completion of a larger post August 2004 (October for the DJIA) rally. A move down from current levels back below the January 24 low on the other hand could set the stage for a more exploitable rally. For now we are going to remain neutral on both the short and medium-term. Long-term we remain bearish.
Larry Katz
email me at: lk1618@comcast.net
website link: www.marketsummaryandforecast.com
Larry Katz serves as both editor and research director of Market Summary and Forecast. Mr. Katz is a full member in the Market Technicians Association and is both one of the founders and the president of their Southern California Chapter. He also serves on the management committee chairing the membership committee. Mr. Katz is a regular contributor to Top advisors corner on America On Line. He is a regular guest on the Business Channel in Los Angeles with Richard Saxton. He has been a quest speaker of the Market Analysts of Southern California (MASC), the Omega users group of Thousand Oaks, Ca. and Orange County, the Market Technicians Association Atlanta Chapter as well as the Foundation for the Study of Cycles. He also ran a workshop at the Market Technicians Association 1999 Annual Seminar. He has been a regular commentator on the Reuters Financial network, both in the US as well as in Japan, as well as being published in the Market Watch section of Barrons Magazine on a number of occasions. He is currently ranked in the top five for intermediate term gold timing by Timer Digest.
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