The following is a copy of today’s Morning Market Comments by Don Hays.
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January 09, 2009
Stock Market Extremely Overbought—AND THAT IS VERY GOOD NEWS
History Shows Extreme Overbought Market Never Has 6/12 Month Loss
By Don R Hays
Admittedly, this old Dog didn’t understand the message, but the stock market was telling us in late 2005 and 2006 that the Secular Bull Market had changed its stripes, and that something special (different from the prior 24 years) was happening. I hate myself when I see something in hindsight, and find I got suckered in just like everyone else. Such is the feeling in these last few months as we worked through the process to develop our new “fail-safe” trend analyzer that we are invoking into our Asset Allocation Process. The many hundreds of hours studying the major trends of the past revealed to us certain historical trends that need to always be recognized as possibly putting into place a new and different set of market conditions than those of the recent secular (20-year) norm. Our psychology indicators as well, in hind sight were starting to show in 2005 that something was amiss—something very different from the prior 25 years. The stock market is still in that process of correcting the fraud, the excesses, and the massive leverage built up from the greed of those previous 26 years (1974-2000). In many ways I could argue that the prior secular bull market that kicked off in 1974 ended in 1998 instead of 2000, but the exact timing is not that important. I believe this “correction” phase has now been in process since 1998, and now we are receiving signals much like those of 1974, that a new major secular bull market is not too long from being born……if it hasn’t already.
As you know, we rarely get conditions such as we received on October 9th when our Psychology Composite moved to its most bullish P1 reading. The same extremes were shown in our oversold indicators, reaching levels only reached in a very few rare bottoming occasions. Then when the Value-Line Appreciation Potential moved to a level that had only been seen at the pivotal 1974 and 1982 bottoms, it was obvious that something special was being presented.
That was October, 2008, and we believe strongly that October 10th WAS THE INTERNAL BOTTOM of the 2008 bear market, with the external final bottom on November 21st. But now our Psychology Composite has moved to P2. On Friday, our overbought indicator moved to 90—and on first blush it produces an instinctive..UGH!! This is a level reached very rarely in the last 40 years.
As I said, on first blush, that is scary, but don’t fall into that trap. You will see in the table on the next page that this is a sign that this bull market—just barely out of the starting gates—has so much power that it was able to catapult the market into that rare stratosphere. In fact, there is not one time in the last 40 years that an overbought condition such as this has created a loss in the next six months OR 12 months. It is very rare that investors buying on the exact day of the overbought extreme would have lost money even in the next 13 weeks.
Here’s the complete table of each of those overbought conditions above 80
To show the most recent periods when we’ve had this extremely >80 overbought condition you can see in the following graph.
Here’s the slightly shorter-term one we update each morning on our website for you.
We don’t like to overemphasize the very short-term, even those trading cycles under 3 months, but if you observe that prior table again, you will see that even in the next 2 weeks, the rare loss was very minimal.
The temptation is to wait for a correction after the S&P 500 has rebounded by 24% off its panic bottom, but history tells us that is not playing the odds in your favor—more is to come.
I am tempted to really pour a long one on you this morning, but will save that for next week some-time as I get into the long-term secular trend, and the application of our Trend Analyzer. But as a teaser, let me show you a couple of secular trends of the past.
From an historical basis, prior to the latest one that started in 1974, the previous long secular bull market started in 1942, right in the midst of America entering the Second World War, and didn’t end until 1966. In the topping-out of that prior secular bull market, it was not generally recognized by very many pundits either, until the peak years in 1972, but 1974 certainly woke up the brain-cells. The correction process of that one started in 1966 and ended in the despair of 1974. It certainly was not recognized as such until 1982, but it was there in 1974 for those that understood the message of the market.
You can see that there were many cyclical bull and bear markets in that long 22-year secular bull market, but except for that Missile Cuban Crisis in 1962, the secular bull market rose unabated without violating our red Trend Analyzer line. It paid investors to remain basically bullish taking advantage of the cyclical declines. But that changed with the peak in 1966, and really changed in 1974’s devastation. Most people say the years 1966 to 1982 were a flat market, and in some ways that was the case, but in our case the infrastructure of the next mighty secular bull market started in August 1974’s internal bottom. Now remember, the Value-Line service Appreciation Potential only was originated in the mid-1960’s, but the last 40 years show you very decisively the kind of bargains that became available at that 1974 trough, when essentially the greed and corruption built up during that prior 22 year bull market had to be cleansed. The cleansing only started with the county fully in support based on the trauma and pain of 1974. We hope you see the similarity.
Now let me show you the most recent Secular bull market.
Our new Trend Analyzer, that we will be giving some basic details on in the next few months, is definitely only useful in extreme cases–when something extraordinary is happenin–vastly different than the most recent 10-20 year secular pattern. It is designed so that in strong secular bull markets, it will be used very infrequently if at all and should depend on the normal cyclical variations to avoid those pit-falls that seem to come around every 2-3 years. But then in others—when the market is in the midst of only preparing the ground-work for the next major secular bull market cycle (such as has been happening since 1998-2000—it might flash regular caution lights as cyclical markets play around a flat line as they did in that 1966-1979 era, and in many ways since 1998. This is definitely not a “wiggle” indicator, but only a safety net that will help to buffer (not eliminate, but generously buffer) the massive losses such as came last year.
Is this locking the gate after the horses are gone? We don’t think so, we are working very hard now at corralling a new set of horses, such as we were able to do way back in the late 70’s, and boy did those horses run when we put our Asset Allocation bridle on them—a controlled run. We’re excited about the herd of horses now lolling around in the pasture that are so cheap and eager to join our herd. So with that basic description, we’re excited about the potential this stock market has over these next 20 years as the next great secular bull market starts to show its head.
The first referenced bull market that started in 1942 was nothing more than the realization that the Industrial Revolution had been born, and that the U.S. Super-Power would lead the world into a new cultural era.
The 1974-1998 (maybe some into the 2000 bubble) secular bull market was similar, in that it was showing and measuring the positive impact of the Technology Revolution and the effect it had on productivity and communication. It was bringing a new flat world, and now (with the shackles removed from my old, blind eyes) we now believe the next secular bull market that will become obvious in these next 2-10 years will be a bull market that is based simply on measuring the growth of that new flat world with the billions of new consumers.
Yes, all three secular bull markets have a connection. So now as the U.S. auto industry (Industrial Revolution) is dying or dead, we see old Microsoft still very profitably updating Windows 7. But Oracle’s Larry Ellison (who may or may not be right) seems now to be pretty savvy, when he said a few years ago that the successful Technology companies had reached a state of maturity when those that were able to consolidate and merge with others would be the most successful. So maybe that premise—if it proves true, could be a sign of the state of the large Technology Companies to be much like G.M. in 1966. So we’ll continue to observe and expand this theme, hopefully for the next 22 years of exciting global expansion, as Democracy and Capitalism expands throughout the world.
Let me briefly show you something that really caught my attention yesterday. Our associate Mark Dodson is very active in the CFA program in Nashville, and he had cited a speaker of a few months ago who studies, writes and speaks on the important topic of Demographics. His name is Richard Hokenson of Hokenson & Company (www.hokenson.biz) and Richard was kind enough to give us permission to copy one of his graphs that in his words show “the age change demographics of the US population continue to be very supportive for housing demand. Further thawing of the credit crisis could well mean that the consumer downtrend is short-lived and that the ensuing recovery could be more robust than currently expected.”
As you know, stock markets typically bottom out well before a recession ends, and since it is our belief this last bear market bottomed out on November 21st, we are hungry for news that will pull the herd along when it becomes apparent. Richard included this very intriguing graph of age demographics with the exciting portion being that growth of the 20-29 year old segment of the U.S. population. Here—with his permission—is his graph and excerpts of his commentary.
He has more interesting observations, and I’m sure if you have an interest in receiving more of his work he would be happy to furnish you details. But I think Richard may very well have the kernel of un-recognized news that might set the stage for this next economic and housing resurgence.
That’s if for this week friends. I cannot apologize any more for the terrible technology glitch yesterday in our webcast to our managed accounts. We appreciate you so much, and will attempt to make sure you get all that hoped-for information from that call. But we thank you for your indulgence, and you can believe that this malfunctioning webcast company has lost a client.
Thanks for listening my friends, we’ll see you on Monday—God Willing.
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