Market Summary and Forecast 3/1/5
Expectations for 2005 remain overly optimistic in our opinion. This is reflected in both the longer term sentiment indicators and from what we continue to read in the financial press. For example, our sentiment combo, an indicator that combines AAII, Investors Intelligence, Market Vane and Consensus Inc has been above zero for 22 consecutive months. This is by far the longest stretch in the nearly 18 years of data. Readings above +60 are bearish and below -60 bullish. There have been some periods when it was below the bearish level such as last August when it moved to near +20, However, nearly two years of readings above zero suggests a huge degree of complacency on a longer-term basis. In addition, we have seen several readings that have exceeded the previous peaks seen in 1997 and 1998 and exceeded them by a significant level. The current reading, which is well off its peak is nonetheless only a few points below where it stood in January 2000. Investors Intelligence has seen more bulls than bears for 124 consecutive weeks massively out clipping the period leading up to the 2000 peak, and the 1987 peak. The last time we saw a streak of this magnitude was from September 1970 to March 1973 as the 23 month 1973-1974 decline was just getting underway That streak ran for 133 weeks, a record we think will be a cinch to be broken but a very negative record to be broken.
We have over the years painstakingly pointed out that sentiment is not a timing tool but a measure of investors and traders future expectations. Extreme can become more extreme when it comes to sentiment, as we saw leading into the March 2000 top but the message we see from our longer-term measures coupled with what we hear and read on a nearly daily basis is strong evidence that we are getting into the final phase of the cyclical bull market and quite possibly moving towards extra innings. In other words we do not see the party as over but do see it as being on borrowed time and the longer it takes to pay back that time the more serious the pay back will be. Our forecast for 2002 for Timer Digest (http://www.timerdigest.com) was for a transition year from secular bear to cyclical bull (if only we had paid attention to our forecast in 2003). At the end of last year our answer to that same question for 2005 was a transition year from cyclical bull back to secular bear. Nothing we have seen this year has caused us to alter that view but instead has reinforced it. However, how long this phase lasts is not easily addressed. Tops can hang on for what may seem an eternity before the final tick is in. It could end next week ( we doubt it) or it could hang on for several months but in either case we do not see the market making it out of 2005 in the black.
The mid month decline into last weeks early low did not do much to help the long-term sentiment measures but it did help some of the short-term indicators such as the Rydex ratio and the CBOE put to call ratio. The 10-day moving average of the CBOE put to call ratio is a tick or so from the the low end of bullish. The Rydex Nova/Ursa ratio is OK but at the very high end of neutral. This could support a short-term rally but are not all that far from moving back above 1.00 and to a bearish reading. We have also seen seen improvement in the AAII survey with the 10 week moving average of bulls divided by bulls plus bears moving to high neutral. This is the only one of the four components of the sentiment combo that is not bearish. However, the key point here is that not one of these indicators, even the positive ones, are close to where they stood at the August or October low and are not anywhere close to levels that can support more than a short-term rally before moving back to fully bearish levels or for he indicators that are bearish to more extreme levels.
While last weeks decline did help to relieve some of the short-term excesses, the late rally helped to move both the short-term volume oscillator and the 3-day oscillator to strong overbought levels, levels that in most cases lead to higher prices short-term. In fact both moved above their early February peak and their strongest reading since early November. Unlike early November, and even early February, not one of our four primary momentum indicators are showing that kind of strength. However, it is way too early to say that this is a failure from such indicators as the McClellan oscillator but it does put us on alert In the meantime both the 10-day and open 10 Arms have moved to the high end of overbought, something we have not seen since early to mid December. The weekly breadth momentum indicators are showing big divergences and the technical barometer and sentiment model are bearish. This adds further to our long term view that the market is approaching the two minute warning and about to enter overtime. However, while over time is called sudden death it can also last a full quarter and sometimes we even get a second overtime but that does not change the fact that the game is in the late stages but only delays the end.
Short-term the odds favor more of a rally and a rally that should lead to move above the January 3 high. We do not see the rally running away to the upside and certainly do not see a rally of the same magnitude as we saw from October to January. We moved to neutral from bearish Friday on both the short and medium-term when the S&P moved above our 1209 stop. We will remain neutral. Long-term we are 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.
For a detailed explanation of the services we provide you are invited to go to our web site at www.marketsummaryandforecast.com, where you can also receive a free two-week trial to all of our services.
You can E-mail us at lk1618@comcast.net or write to:
Market Summary and Forecast
3835R E. Thousand Oaks Blvd PMB 297
Westlake Village, Ca. 91362
or call the office at (818) 889-0485
