Recent Articles in Special Research Articles

This month’s research piece looks at our Investors Intelligence % Bears indicator. As long time subscribers know, we break the market down into three basic market principles: (1) Internal Momentum, (2) External Momentum, and (3) Sentiment. Of these three principles, Sentiment Indicators have always been condition indicators for us, and not timing tools.

This month’s research piece is a paper on Relative Price (also known as Relative Strength) analysis that won the Charles Dow award (given by the Market Technicians Association and Barron’s) in 2007. The author, Charlie Kirkpatrick, has been a good friend of mine for years. The merits of Relative Price analysis have been debated since the 1960’s, and numerous studies have shown it to be one of the most effective methods of stock selection, especially on an intermediate to long-term basis. This is our second piece on Relative Strength (the first one was by Bob Robbins written in April of 2010). Bob’s piece was more trading oriented, and this piece has a more academic cant to it. For new subscribers, we recommend reading them both.

This month’s research piece is a bit different in nature from those we usually do. Louise Yamada, a good friend from my  Robinson – Humphrey/Smith Barney days, has generously contributed a report from her company, Louise Yamada Technical Research Advisors, LLC. This report suggests a bear market in bonds is coming, and details how to react in the event this occurs.

One thing about commodities that is essential to remember is that, unlike stocks, commodities have fundamental values that are very real. I say this, not to be funny, but rather to emphasize that commodities have real uses in the world while stocks are more nebulous.

When Technical Market Analysts get together, the talk often turns to the markets! In these discussions, one question that provokes vituperative discussion is whether the United States and other markets around the world entered a secular bear market in 2000. We have some observations about this, but before we look at some charts, let’s define our terms.

Throughout our career, we have been warned about the “Ides of September/October”, i.e. the chance for a significant decline in those months. Yet, in many cases, the market has rallied in those months, or gone sideways. We have often wondered if there was an indicator that forecast the price movement in October, but have not been able to find a common denominator, in spite of the examination of various indicators. Our latest attempt has some merit, and we present results to you in the following article. 

We will discuss only the main three types of gaps (breakaway, continuation, and exhaustion) and not discuss opening gaps and other types of gaps, as these are beyond the interest of most of our readers. Remember, as you read, that all gaps can be either upside or downside gaps.

We continue to have questions about sentiment indicators, especially the low levels of bearish sentiment on Investor’s Intelligence that we have seen this year.  The fact that the economy is emerging from recession may not be the only reason for such strings of numbers. We will take another look at the data and “see what we can see”.

Relative Price Trend, or the price of a stock divided by the price of the S&P 500, is one of my basic technical strategies.  It has helped my net returns of my firm exceed the S&P 500 10 percentage points average annually over the past 5 years – without using any leverage (i.e., margin) and with large-cap orientation and diversification.

One common question this time of year is regarding the January Effect. The January Effect was first noted by Arthur Merrill in his publications, and suggests that small cap stocks that experience heavy tax loss selling in December often rebound in January, creating the opportunity for larger than average gains in a short amount of time. 

This month’s research piece is on sentiment in general, and the Investor’s Intelligence numbers in particular. Sentiment numbers are derived from two types of sources. One is empirical market activity, such as options activity or mutual fund cash levels analysis. The other source is various sentiment polls conducted by organizations. Sentiment indicators rely on the philosophy of contrary opinion, which suggests that markets will move against the majority position much of the time.