Stock Market Buying Power Hits New Rally High, as Demand Outpaces Supply
Checking in with the volume experts over at Lowry Research Corp., it appears that U.S. stock market buying power hit a new rally high last week, while selling pressure hit a new low.
That reflects the same pattern of expanding demand and contracting supply that has characterized the entire rally out of the March 2009 lows - a rally that's now one year old.
According to Lowry analysts, if you look back over the past eight decades, every major market top has been preceded by a sustained period of rising supply and falling demand as profit-taking becomes increasingly aggressive.
And that's not all. If you look at the six-month stretch that precedes a market top, advance/decline (A/D) lines have always deteriorated for at least six months before a major top. At the moment, by their measures, the U.S. market remains in the first phase of a long-term uptrend, which is the lowest-risk period for new buying after a bear market.
The 10 Keys to Short-Selling Profits
Short sellers took a lot of flak for their alleged role in the stock market meltdown of 2008-2009, getting blamed for artificially depressing stock prices, exaggerating the impact of the bad economic news rolling out of Washington and exacerbating the volatility that intensified the financial panic experienced by investors and the general public.
That last allegation was particularly troublesome to market regulators, especially after stock-market researcher Birinyi Associates traced a sudden sharp rise in stock volatility back to mid-July of 2007, a point coinciding with the repeal of the so-called "uptick rule." The uptick rule was a Depression-era regulation that allowed the short sale of a stock only when the prior trade had resulted in an upward move in its price.
That concern over volatility led to a lot of official posturing as the government struggled to come up with solutions to prevent future market mayhem, the result of which (at least for the time being) was the Securities and Exchange Commission (SEC) Feb. 24 adoption of a new "alternative uptick rule."
The Essential Eight: The Only Economic Indicators Investors Need to Know
Housing starts. PPI. Same-store sales. Weekly jobless claims. Philly Fed. Lagging indicators. Core CPI. Industrial production.
When it comes to economic indicators, the list is almost endless. One economic indicator follows another, filling an entire calendar - weekly, monthly, quarterly, annually. But on the specific day an indicator is announced, it seems to be the biggest deal going: Commentators comment, pundits pontificate, analysts and economics analyze, predict and forecast, and financial markets around the world react - often violently.
The next day brings a new batch of indicator reports. Yesterday is forgotten as the frenetic cycle plays itself out all over again.
Given this pattern, it's not surprising that the economic-indicator game seems confusing - and perhaps even pointless. In the eyes of many investors, the only thing these indicators seem to "indicate" about the economy is that it can be highly confusing and extremely difficult to predict.
One Indicator That's Unquestionably Bullish
Many economic indicators are sending mixed signals, but one stalwart is coming through crystal clear.
And it suggests that U.S. stocks are poised for a strong showing in 2010.
The indicator I'm referring to is the oft-overlooked "Super Bowl Indicator," which as has correctly predicted the direction of the Dow Jones Industrial Average in 34 of the past 43 years. That's an enviable 79% success rate. And between 1967 and 1997, the indicator was correct 28 out of 31 times - a stunning 90% success rate.
History Says Lost Decade For Stocks Should Lead to a New Bull Market … But Will It?
In its 1969 song "Spinning Wheel," the rock group Blood, Sweat & Tears immortalized the phrase "what goes up, must come down."
I cite this bit of music trivia in an investment story for two reasons: First, the name of the band fairly well describes the conditions attached to the stock market's historically sad performance over the just-completed decade. Specifically, a lot of blood, sweat and tears - thankfully followed by a tiny bit of healing in the final eight months of 2009.
Second, for those more attuned to mathematical theory than music, the market results for the 10 years from 2000 to 2009 provide the basis for a prediction for the coming decade - one essentially the inverse of the band's famous phrase. To be more precise, "what went down, must now come up."
That forecast is based on a fairly simple principle: Things that move in wave patterns - such as the stock market - have an overwhelming tendency to "revert to the mean." In other words, when stocks perform well above their long-term historical norm (known as the "arithmetic mean") for an extended stretch, they usually have to underperform for an extended period to get back in line with that long-term mean.
Conversely, when stock-market performance is well below the norm for a long stretch, it theoretically should enjoy an extended run well above the historical mean in order to bring the market's performance back in line with the long-term norm.
And the decade we've just completed was definitely far below that norm.
The prediction is also based on historical precedent, as demonstrated by past per-decade performances of the major stock market indexes.
Buy, Sell or Hold: McDonald's Corp. (NYSE: MCD) Is Undervalued and Offers Exceptional Upside
I first recommended McDonald's Corp. (NYSE: MCD) to Money Morning readers on Feb. 23, 2009. A few weeks later the stock bottomed out at $50.44. It then took the turn that we expected and went on to rally some 28%, achieving a 52-week high of $64.78 by the end of the year. The stock is now consolidating at these levels, and, from a technical standpoint it appears to be forming a cup-and-handle pattern.
This is important because this type of pattern often leads to explosive breakouts once the resistance level is breached. And while we wait for this to occur, we have the luxury of sitting on a 3.23% dividend yield, which is very safe given McDonald's very solid balance sheet.
I am confident that the only downside scenario to this investment would be to see the stock move within its well-established trading range for a little while longer. In times of economic and political uncertainty, this stock is a desirable one to hold as a core portfolio position.
U.S. Economy Forecast: What You Need to Know in 2010
2009 was a wild year for the economy. The stock market soared, but the U.S. economy was hampered by rising unemployment and tight credit markets. What will 2010 bring? Find out the four major trends to watch for in the next 12 months... and where to look for real gains.
How to Profit in Any Kind of Market
When it comes to the global financial crisis, many so-called "experts" think the worst is behind us. But I don't buy it.
And I'm not alone.
Just look at what some other big-name investors - each also known for their independent thinking - are saying or doing right now:
- Bond king Bill Gross is nervous and raising cash.
- Author, commentator and global-markets guru Jim Rogers has repeatedly said that he's not investing in stocks anywhere in the world right now.
- Hedge-fund heavyweight John Paulson is moving aggressively into gold.
- And investing icon Warren Buffett - never one known for tipping his hand - is candidly stating that the U.S. financial-crisis cleanup is far from complete. The fact that he's reportedly buying more shares of Korean steel dynamo Posco (NYSE ADR: PKX) would punctuate this point.
This kind of uncertainty can be paralyzing, making it tough to decide where - or even if - we should deploy our investments.
Fortunately, we've been here before. And what we learned will allow us to profit no matter what the financial future holds for the U.S. marketplace.
To learn the four secrets to investing success, please read on...
- Bond king Bill Gross is nervous and raising cash.