Dow Sends Buy Signal That’s Worked Since 1921

The Dow Jones Industrial Average is sending a buy signal that has foreshadowed gains of 18 percent during the past nine decades.

 

The 30-stock gauge climbed to more than 10 percent above its mean level from the previous 200 days, rebounding from 34 percent below the so-called 200-day moving average in November, according to data compiled by Bloomberg. Eighteen of the last 21 times the Dow rallied from at least 10 percent below the 200-day level to 10 percent above, it posted gains during the next 12 months, Bloomberg data since 1921 show.

The CHART OF THE DAY tracks the difference between the Dow’s last price and its 200-day average since 1989. The lower panel displays the measure’s price, along with the buy signals it sent near the start of rallies in 1991, 1999 and 2003.

“This rally, while it will have its fits and starts, is the beginning of a new trend, not just a bounce,” said Michael Williams, managing director of New York-based Genesis Asset Management, which oversees about $2 billion. “It is a significant opportunity.”

The Dow posted an average advance of 18 percent during the 12-month period following buy signals since 1921, Bloomberg data show. In the six-month period, there were 17 advances for an average gain of 8.2 percent. In three months, it climbed 18 times, averaging an increase of 5.7 percent.

Returns by the Dow Jones Industrial Average 12, 6 and 3 months after the buy signal.

Buy Signal            12 Months         6 Months      3 Months
June 11, 2003          13.36%             8.98%         3.01%
Jan 8, 1999            19.49%            15.38%         5.75%
March 5, 1991           9.05%             1.21%         1.11%
Jan  27, 1989          10.18%            13.46%         4.14%
Sept. 3, 1982          31.38%            23.02%        11.67%
July 18, 1980           3.78%             5.34%         3.48%
Aug. 9, 1978           -3.74%            -7.76%        -9.83%
March 7, 1975          26.43%             8.63%         9.11%
Dec. 7, 1970            4.73%            12.75%         9.69%
May 8, 1967             1.02%            -6.60%         1.41%
Jan. 25, 1963          15.20%             1.18%         5.68%
July 24, 1958          33.51%            19.91%         8.53%
Dec. 13, 1949          16.26%            15.04%         3.15%
Nov. 6, 1942           16.66%            18.21%         8.29%
Sept. 11, 1939        -16.61%            -4.49%        -5.20%
July 6, 1938           -3.05%            10.95%         7.49%
Feb. 18, 1935          43.10%            19.09%         8.06%
Apr. 19, 1933          54.47%            23.53%        51.63%
Aug. 29, 1932          37.72%           -31.68%       -21.87%
Aug. 18, 1924          35.82%            14.36%         5.46%
Dec. 12, 1921          21.89%            12.53%         8.12%

Average                17.65%             8.24%         5.66%

Surging Profit Estimates Signal 26% Rally for S&P 500

Surging Profit Estimates Signal 26% Rally for S&P 500

Analysts are raising U.S. profit estimates for the first time since credit markets froze two years ago, reducing valuations even after the steepest rally since the Great Depression.

Wall Street firms raised forecasts on Standard & Poor’s 500 Index companies 896 times in June and lowered 886, according to data compiled by JPMorgan Chase & Co. The last time analysts were bullish on a net basis was in April 2007, before more than $1.5 trillion of bank losses tied to subprime loans spurred the first global recession since World War II, the data show.

The failure to anticipate Goldman Sachs Group Inc.’s record second-quarter profits or Freeport-McMoRan Copper & Gold Inc.’s tripling of bullion sales forced analysts to boost 2010 projections. Wall Street firms estimate the S&P 500 will earn $74.55 a share next year, up from $72.54 in May. Stocks now trade at 13.13 times estimated profit, indicating a 26 percent increase in the S&P 500 should the index return to its five- decade average of 16.54 times annual income.

“There’s a sea change of opinion and it all goes back to the improving economic data,” said Fritz Meyer, the Denver- based senior market strategist for Invesco Aim, which oversees $348 billion. “Expectations got pushed too low in the depths of the recessionary mentality. That translates into upward revisions in earnings estimates and drives stock prices.”

Earnings Revisions

Analysts lowered profit forecasts at a record pace after the failure of Lehman Brothers Holdings Inc. in September caused overnight borrowing costs for banks to hit an all-time high of 6.88 percent, tipped the U.S. economy into the worst recession in half a century and sent the S&P 500 to a 38 percent decline, the biggest annual retreat since 1937.

Four out of five of the 4,716 earnings revisions in October were decreases, the most ever, JPMorgan data show. Analysts have raised estimates amid growing signs that the global economy has bottomed.

The turnaround in June from October was the biggest since the JPMorgan data started in 2000. The second-largest swing was in October 2002, the beginning of a five-year bull market that doubled the value of U.S. equities.

Futures on the S&P 500 rose 0.2 percent as of 2:18 a.m. New York time. The gauge rose 4.1 percent to 979.26 last week and has rallied 45 percent since falling to a 12-year low on March 9, pushing its price-earnings ratio to 13.13 based on 2010 estimates. The measure would have to rise to 1,233.06 for the multiple to equal its historic average since 1959, according to data compiled by Bloomberg.

‘Quick Snapshot’

The estimates indicate S&P 500 corporate earnings will rise 25 percent from this year’s projected $59.80 a share, which would be the biggest increase since 1995, the data show.

Revisions are a “really quick snapshot of whether people are becoming more or less optimistic,” said Jack Caffrey, an equity strategist at JPMorgan Private Bank, which oversees $380 billion in New York. “We expect the world to get better, so we wouldn’t be surprised to see stocks move higher.”

Second-quarter earnings announcements indicate analysts may need to change even faster. Of the 204 companies in the S&P 500 that have reported results, 75 percent have beaten consensus estimates, data compiled by Bloomberg show. No more than 72.3 percent have ever beaten analysts’ estimates for a full quarter since at least 1993, the data show.

Equity analysts remained too bullish last year as the economy shrank 6.3 percent in the fourth quarter and 5.5 percent in the first three months of 2009, the biggest six-month contraction since 1958.

Cost Cuts

Forecasters predicted fourth-quarter profit would fall 19.7 percent on Jan. 9, according to consensus estimates compiled three days before the earnings season began. Instead, earnings plummeted 61 percent, the biggest decline since at least 1998, according to data compiled by Bloomberg.

Analysts are being deceived by second-quarter results that were boosted by cost reductions, according to Christopher Sheldon, the Boston-based director of investment strategy at BNY Mellon Wealth Management, which oversees $142 billion globally. Only half of the S&P 500 companies that reported exceeded forecasts for sales, data compiled by Bloomberg show.

“When you look at bottom-up estimates, we would say that’s going to be dependent on a lot of things continuing to go right,” Sheldon said. “As we’ve moved away from the worst-case scenario, people have embraced this idea of a V-shaped recovery, and to us that’s a challenge.”

Invesco Aim’s Meyer says it is “perfectly reasonable” for stocks to rise as much as 25 percent through next year because the economic recovery will boost profits.

‘Grow Into Sequoias’

Economists doubled projections for third-quarter economic growth to 1 percent in July from 0.5 percent in June, according to a Bloomberg survey of 57 analysts this month.

Housing starts unexpectedly rose in June as construction of single-family dwellings jumped the most since 2004, while industrial production shrank less than forecast, reports from the Commerce Department and Federal Reserve in Washington showed. Smaller job losses also helped lift the Conference Board’s index of leading economic indicators to a third monthly advance, the longest streak in five years.

“We’ll rally on signs those little green shoots are starting to grow into sequoias,” said Randy Bateman, the Columbus, Ohio-based chief investment officer at the asset management unit of Huntington Bancshares, which oversees $12 billion. “The revisions in analyst estimates are a manifestation of those green shoots.”

Bateman said he expects the S&P 500 to gain at least 10 percent this year and is “overweight” energy, mining and technology stocks.

Freeport, Goldman

Analysts boosted their 2010 estimates for Freeport by 11 percent to $4.11 a share after the operator of the world’s largest gold mine surpassed second-quarter earnings projections by 90 percent last week, on faster bullion sales and copper production costs that fell 35 percent.

The per-share estimate has increased 138 percent since falling to a low of $1.73 in January. Freeport, which has risen 145 percent this year, trades at 14.55 times next year’s profit forecast based on last week’s closing share price of $59.82. That’s 40 percent less than its 2009 valuation of 24.31 times, data compiled by Bloomberg show.

Estimates for Goldman Sachs’s 2010 profit have risen to $16.19 a share, almost triple the low of $5.90 in March. The New York-based bank trades at 10.17 times next year’s projection. That’s a 63 percent discount to its multiple of 27.73 using earnings from the past 12 months, even after the stock rose 95 percent this year.

Asian Demand

Intel Corp., the world’s largest maker of semiconductors, reported a second-quarter profit on July 14 that was double what analysts projected as personal computer demand improves in Asia. The Santa Clara, California-based company also made a third- quarter sales forecast that topped consensus estimates.

That caused analysts to raise their 2010 earnings estimates for Intel to $1.08 a share, a 21 percent increase. Its shares reached a 10-month high last week and have surged 32 percent this year. Intel trades at 17.93 times next year’s profit, 36 percent less than the decade average of 28.13.

“There are a lot of situations where folks have just dialed expectations to the floor, and that’s just wrong,” said Brian Barish, president of Denver-based Cambiar Investors, which manages $4.5 billion and boosted its stake in Intel earlier this year. “The fundamentals, on balance, are moving in your favor, and there are still a lot of people out there that don’t believe that. There’s still some money to be made.”

Defense Is the Best Offense: Pause to Be Expected, Najarian Say

After three straight weeks of declines, the stock market was down again midday Monday, bringing some bears out of hibernation.
But Jon Najarian, co-founder of OptionMonster.com, isn’t too worried about the recent action, saying the market is merely experiencing a natural pause after its huge rally from the March lows. “I don’t see anything out there that’s going to cause us to do that in the short term,” he says.

That said, Najarian believes the market is likely to remain range-bound for the bulk of the summer and advises traders to take a more defensive stance, recommending health-care stocks like Cardinal Health and consumer staples like Wal-Mart. (Najarian was long both at the time the accompanying video was taped.)

For options traders, he recommends a “collar trade” of selling calls at or just above the market and buying S&P 500 puts – creating an “insurance policy” to protects you against a big drop, he says. “At a minimum what you want to do is lock in some of the gains you’ve got.”

 

Seasonal trade:
Health care and Consumer staples have provided twice the returns of Financials in the 2nd half of the year for 49 years !!!

 

’9-to-1 up’ days market indicator

INDICATOR TO RESEARCH:
A rare technical formation occurred in the stock market in June that, far more often than not in the past, has heralded higher stock prices over the subsequent six months.

The particular formation is referred to as a “Nine To One Up Day.” It refers to the volume of all NYSE-listed stocks that go up on a given day, expressed as a percentage of the total volume of all stocks that rose or fell on that day. On a day when rising stocks’ volume is the same as declining stocks’ volume, for example, this ratio would be exactly 50%.

A “Nine To One Up Day” occurs when this ratio is 90% or higher. According to Martin Zweig, who helped to develop this indicator several decades ago, such a huge imbalance of up volume over down volume “is a significant sign of positive momentum. In other words, when daily up volume leads down volume by a ratio of 9-to-1 or more, that tends to be an important signal for stocks.” The quotation comes from Zweig’s 1986 book, “Winning on Wall Street.”

Zweig used to edit two investment newsletters, the Zweig Forecast and the Zweig Performance Ratings Report, both of which were discontinued in the mid-1990s. Both were ahead of the stock market at the point they were discontinued. Zweig continued to manage a group of open-end and closed-end mutual funds and individual accounts with collectively more than $10 billion in assets; he announced his retirement in 2005.

How bullish are 9-to-1 up days? Zweig in his book argues that, “Every bull market in history, and many good intermediate advances, have been launched with a buying stamped that included one or more 9-to-1 up days.”

The relevance of all this to today’s market is that there two 9-to-1 up days in June, one on June 15 and the second one June 29.

This second 9-to-1 up day adds greatly to the bullish significance of the first. That’s because a single 9-to-1 up day, by itself, has not always been a bullish event. Perhaps its biggest false signal came on March 16, 2000, at more or less the exact top of the market before the Internet bubble burst.

Such a spectacular failure might incline you to dismiss altogether any focus on the ratio of upside to downside volume, but that might be too hasty. In his 1986 book, Zweig acknowledged that a single 9-to-1 up day can issue false signals and that, therefore, it would be better to focus on occasions in which two such days occur relatively close to each other (Zweig used a three-month window,) and when also there is no day between these two days of big up volume in which in which there is a 9-to-1 down day (a day in which down volume is 90% of the combined volume of rising and falling issues).

Zweig called these “double 9-to-1 signals.”

He reported that they are relatively rare, occurring once every two to three years, on average, since 1960, and particularly bullish. According to Zweig; over the six months and 12 months following each double 9-to-1 day between 1960 and 1985, the stock market was higher, sometimes significantly so.

Ned Davis Research has calculated the returns for this indicator over a longer period, from 1950-2004. On average over the quarter following a double 9-to-1 up day, the S&P 500 /quotes/comstock/10u!spx.x (SPX 927.23, +8.33, +0.91%) is 7% higher, and over the six months following such days, the S&P 500 rises 12.6% on average.

Are there any flies in the ointment?

One might be that there have been several days recently in which there was huge downside volume. Volume on these down days was not quite enough to satisfy the definition of a 9-to-1 down day, but pretty negative nonetheless. And, according to Zweig, a 9-to-1 down day in the proximity of two 9-to-1 up days implies “not as much [upward] thrust” as do two 9-to-1 up days that are unaccompanied by a 9-to-1 down day.

For example, if we lower the bar just a little, to 80% from 90%, then the last five weeks have experienced many days of huge volume imbalances, some on the downside and some on the upside.

During May and June, in fact, there were no fewer than seven days in which down volume was 80% of total up-and-down volume, and there were also seven other days in which up volume was 80% of total volume. Richard Russell, editor of Dow Theory Letter, quotes Lowry’s Reports to the effect that, “This is the greatest volatility seen in the market in the last 55 years.”

The bottom line? According to an email from Zweig Monday night, it’s bullish. That’s because big down volume days are not as bearish as big up volume days are bullish. So the last two month’s big down days do not erase the bullish significance of the two 9-to-1 up days seen in June.

Russell is not so sure: “My experience with high-volatility markets is that they end up about where they started.”

However, he allows that “maybe this one will be different.”