Richard Dickson, the Senior Vice President at Lowry Research outlined his bullish bias in a recent interview with Pimm Fox of Bloomberg Radio. While his firm continues to be bullish, it is important to make the distinction that Lowry Research is most interested in the accurately determining the primary trend of the market. I want to stress this especially because of the recent lopsided sentiment picture we’re seeing lately.
So Lowry is not really interested in calling every short term twist and turn. Their goal is keeping their mostly institutional client base on the right side of the major stock market trend. To do this, they use their proprietary measure for demand – called Buying Power – and supply – called Selling Pressure. They faltered for a few months, incorrectly believing that the first few months of the young bull was actually a short bear market rally. But in August 2009 they issued an intermediate buy signal and have been doing a great job so far.
The last time we checked in with this venerable Wall Street firm was in September when they were telling us a similar narrative: accumulation continues unabated.
Recently Lowry’s Buying Power index moved above the Selling Pressure index. Richard Dickson of Lowry Research believes that this cross is a positive development for the market because it is indicative of a confirmation for the cyclical bull market that started in March 2009. Dickson says that every bull market going back to 1933 has shown a similar cross.
Another cross was the “Golden Cross” that happened a few months ago. While completely being a completely different indicator, this has also been a positive development for the market based on previous trading history. Having said that, we can’t ignore the fact that the market has been in rally mode for several months now and is showing some very giddy sentiment from retail investors.
According to Lowry, historically when the Buying Power has crossed above the Selling Pressure after similar rallies the market tends to enter into a short term consolidation and pullback. This prediction fits in with the current market because we’ve had a very good first half for December and sentiment is way ahead of the market.
Lowry expects a correction similar to the one we saw in November which lasted about a week to two weeks and pulled the S&P 500 index down about 4%. Usually a correction after this kind of cross (BP over SP) is moderate. But again, that is in the short term.
Another major research firm that continues to have a bullish bias is Ned Davis Research. They base their optimism on breadth and seasonality (the election year cycle). And they corrected called the short term correction in November.
As well, we are continuing to see confirmation from major breadth indicators that the bull market is healthy. No major bull market has ever ended when the majority of issues were near or at their highs:
And today we are continuing to see a very high level of new highs relative to new lows in the stock market. Of course, anything could happen but if this is a major top, it would be the first of its kind. All the important indicators that have provided us with reliable guidance in the past are telling us that while the short term is precarious, the long term trend is still up.
Finally, Dickson comments on the peculiar outperformance of small capitalization stocks relative to large cap stocks. Many well respected investors (like Bill Miller of Legg Mason, Jeremy Grantham of GMO, et al.) expect large caps to take point in 2011. However, Lowry believes that small caps will continue to outpace “high quality” large cap stocks in the new year.
This year’s outperformance doesn’t fit in with the ‘normal’ pattern of small cap performance. What we usually see is a usually 6-7 year cycle where large caps and small caps take turns leading each other. But the latest cycle ended in 2006 so we should be seeing small caps outperforming in 2012-2013. Instead, they have gained 28% this year and mid caps have gained 27% while the S&P 500 has only climbed 15%.
Interview with Richard Dickson of Lowry Research:
To listen to the interview, press play and let it buffer for a few seconds:
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