CHAPEL HILL, N.C. (MarketWatch) — My contrarian sensibilities have been triggered in recent days by how self-congratulatory the stock market bulls have become.
Yes, equities’ quick recovery from the October swoon was impressive. But stocks today still face many of the same stiff headwinds that were present at the September market top. So the last thing we should do is become too cocky.
Especially since, according to Hayes Martin, historical precedents suggest that the recent rally is most likely unsustainable.
You may recall that I last wrote about Martin’s research in late September, at which time he was predicting a severe correction. Just four weeks later, the SP 500
on an intra-day basis, was 9.5% below its September high. Secondary stocks fell even further and made it into “official” correction territory.
In mid-October, however, rather than forecast a continuation of that already sharp decline, Martin told his clients that “a decent trading bounce” was imminent. And here we are today at new bull-market highs.
What is Martin telling his clients now?
When I checked in with him earlier this week, he was making a big deal of “subsurface” weakness in the market’s rally from the mid-October lows.
A most telling weakness, according to Martin, is that the market never exhibited the kind of explosive upside action that is typically seen “early in a strong market advance off important lows.” For example, there has not been even one session in which trading volume for issues rising in price was at least nine times greater than the volume for declining issues — a so-called “9-to-1 up day,” as this phenomenon was dubbed by the late Marty Zweig.
This is noteworthy because, as Zweig wrote in his 1986 investment classic “Winning on Wall Street,” “every bull market in history, and many good intermediate advances, have been launched with a buying stampede that included one or more 9-to-1 up days.”
But not the rally that began at the October lows. Making this even more significant: 9-to-1 days have become more frequent in recent years than they were when Zweig did the research for his book. So their absence since the October lows is particularly surprising, suggesting a serious deficiency in the market’s rally.
This is one of the reasons that Martin has concluded that “strong buying conviction is lacking here, despite the appearance of a potent rally.”
Another reason that Martin doesn’t believe the recent rally is particularly sustainable is how quickly the bears have jumped back onto the bullish bandwagon. He points, in particular, to the Investors Intelligence survey of investment advisers: Over the past two weeks, there has been the sharpest jump from bears to bulls in 40 years.
Martin’s best guess? We’re not at the beginning of an intermediate-term advance that takes the broad market averages to significantly higher levels. Instead, the recent rally is merely “an interim bottom within a longer-developing top.”
About Martin: He is president of Market Extremes, an investment-consulting firm in New York whose research focus is major market turning points. I first heard of Martin’s work from David Aronson, a former finance professor at Baruch College in New York who now runs a website, Trading Systems Synthesis and Boosting, that makes complex statistical tests available to investors. Aronson told me he doesn’t “know anyone who has studied market extremes to the depth that he [Martin] has.”
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