But don't look for any kind of '90s-style rallyBy Michael L. Burke, Investors Intelligence
Last Update: 12:01 AM ET July 1, 2003
Editor's note: Michael L. Burke taught fundamental and technical analysis at the New School in New York and is author of The Three Box Reversal Method of Point and Figure Construction and Formations. He has edited the Investors Intelligence newsletter since 1982.
NEW YORK (CBS.MW) -- As of this writing, the Fed has just cuts rates for the 13th time since January 2001. Combining this with some other work makes the current period very similar to what was seen at the end of 1994.
At the end of 1994 we were in a period where the market had a negative bias all year. The Fed had begun raising rates in February of that year and would continue to do so until February 1995. Advisory services were very bearish all year and, in fact, there were only four weeks all year that we saw more bullish advisers than bearish ones.
At the end of the year we were in a streak that would eventually see 45 weeks in a row with more bears than bulls. In December, we would see two weeks in a row with more than 59 percent bears, the most bears in 12 1/2 years. Industry company insiders, on the other hand, were very bullish and had been buying pretty much through all of 1994. Our indicators were extremely oversold.
At present, in addition to the Fed rate cuts, our advisory service sentiment now shows the fewest bears, 16.1 percent, since April 3, 1987 -- 16 years ago.
For the past five years, advisers have been heavily biased to the buy side. At the lows last year in July and October, we saw a couple of weeks with more bears than bulls, but other than that it has pretty much all been to the buy side.
The current reading of bulls at 61 percent is the most since February 2001. Insiders currently have been selling like crazy, also the opposite of 1994, with currently more than four sales for each purchase that they make. Indicators are extremely overbought.
The quick end to the war, better-than-expected first-quarter earnings, low rates and the tax cuts all added fuel to the market rally and created a lot of momentum with lots of people jumping in as they became afraid of missing the boat. Both down markets and up markets can feed on themselves and this is what has been happening here.
Back at the end of 1994, with conditions as described above, pretty much exactly the opposite of what we are seeing now was happening. The Dow Jones Industrial Average ($INDU: news, chart, profile) was around 3,700 and was ready to begin an advance of 8,100 points over the next five years. This advance took the market from a modestly undervalued condition to one that was widely overvalued.
Although, we have come down a lot from the early 2000 highs, the valuation at present is still higher than it was at the highs in 1929 and 1987.
The dollar, in April 1995, ended a 10-year decline and was ready to move up to a high in October 2000. This was one of the reasons for the strength we saw in stocks from 1995-2000.
Now, the dollar is in the third year of a decline that we think may have much more to go. Foreigners own about a third of our bonds and about 10 percent of our stocks and when stocks, bonds and the dollar were rallying they benefited even more than people did in this country because of the rising dollar. A down market in stocks, bonds and the dollar would have the opposite effect.
Thus, our current position is one of caution.
We have been selling some of the stocks that we had bought near the July and October 2002 lows and the March 2003 low. We are not looking for a wipeout, but we do think we will see a much better buying opportunity sometime in July or August. We also have started to add a few short sales to take advantage of the expected decline.
We continue to be of the belief that we are in a market much like the one seen from 1966-1982 where the market would conk out every time it got in the vicinity of the 1,000 level in the Dow. Now, we feel that the 10,000 level could be a similar ceiling for several years to come.
The period from 1982-2000 was one where buy-and-hold was the strategy of choice.
Now, we are in a period -- like the 1966-1982 time -- where the money is made getting in on the market declines and selling into the market rallies.
To sum up, we would look to be taking profits here and looking to buy on the good-sized decline that we think will happen later this summer.