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THE TODD MARKET FORECAST

Prepared by Stephen Todd

A New Indicator

(September, 2010) We're always looking for new methodologies. Most investigations end up in the trash bin, perhaps 98%, but once in a while, we discover a heretofore undiscovered tool that shows a lot of promise.

We have found that when the S&P 500 closes in the bottom 20% of its range for the week, the index has a strong tendency to rally over the next two weeks. It is basically an oversold indicator. We have found that it only works for buy signals.

We can see this in the chart below. In our August letter, we discussed the monthly version and unfortunately labeled it weekly by mistake. This one really is the weekly version so bear that in mind.

Chart1

For the time period shown, from May of 2009 through this past Friday, the buy and hold gained 181 S&P points. If you had bought at the close of the week in which the signal was given and sold at the close two weeks later, you would have gained 324 S&P points. Twelve of the signals made money while six lost. This works out to be 66%. The average loss was 21 points. The average gain was 38 points.

We checked to see how it performed in the mega bear from October 9, 2007 to March 9, 2009. During this time the S&P lost 888 points while this methodology gave up 226 points.

From December 30, 2004, the S&P 500 lost 148 points while the weekly supply demand signals gained 293 points.

In this business, we deal in probabilities, not certainties. All we can do is play the odds and if we do that consistently, we should come out on top over time. The last signal was given on August 13 and we would have lost 15 S&P points.

We believe that this can be a valuable tool both weekly and monthly. You should review the newsletter for August to see the monthly version described. Remember, we mislabeled the chart. It should have read "S&P 500 monthly."

We'll keep track of this gauge and keep you informed on the nightly hotline. Remember, we can only get a signal at the end of the week or the end of the month.

Considerable Pessimism

Take a look at the chart below. The percentage of bulls from the American Association of Individual Investors has now dipped below 25%.

Chart 2

In the past, when this has happened, the market has had a tendency to rally for a few weeks, even when it was in the grip of a major bear market. We can see this with the arrows.

All of this is complicated by several things. First, we are coming up on September, a poorly performing month comparatively speaking.

There is a general consensus that the economic conditions are worsening and frequently the market will discount this perception.

In addition, austerity measures that caused rioting in Greece will begin to hit home in September and we are apt to see more rioting. This spectacle coincided with some sharp sell offs in our own market a couple of months back.

We might also keep in mind that the Japanese stock market is off 19% over the past 5 months and the Shanghai index is down 21% since last December.

In the past, Far Eastern markets have not correlated well with U.S. and European markets, but that could be changing now that Asia has become so much more important thanks to our slavish devotion to so called free trade.

On the other hand, profits have been good and we're starting to see more merger activity and stock buy backs. That's an indication that stocks are cheap.

Just keep in mind that they can get a lot cheaper if the market psychology is not healthy. This Friday we get the non farm payrolls and investors are already fretting about it. The expectation is for a loss of 80,000 jobs.

A Secular Bear?

From March 2000 to September 2002, we experienced a once in a generation mega bear market, dropping 51%. This was the biggest drop since the 1929 crash, bigger than the 1973-1975 collapse.

Then in October of 2007, we began a second once in a generation crash that was even bigger. In S&P 500 terms we gave up a whopping 58% by the low in March of 2009. Again, the biggest pratfall since 1929 and undercutting the 2002 lows.

The fact that we were making new lows from the peak in March of 2000 to March of 2009 is clear evidence that we have been in a secular bear market. After all nine years is a lot of time to decline.

This begs the question. Is it over? The 1929 experience only lasted 2 years. We are in uncharted territory. Stay tuned.

Bonds And Sentiment

The CONSENSUS BULLISH SENTIMENT INDEX (Presented with permission from Consensus, Inc. Current data available at www.consensus-inc.com, 800-383-1441) for stocks is still at a point that could and should support a rally from current levels. This hasn't changed in a month or two.

The CONSENSUS BULLISH SENTIMENT INDEX for bonds remains overbought. This could be a preamble to a bond retreat, but a lot still depends on the geopolitical events now influencing the markets.

Chart 3

The COMPOSITE GAUGE 5 DAY M.A in the next column is at a level that could easily support a rally of a few weeks.

Chart 4

Other Markets

Here are the signals for the other commodities over the past couple of months. B means buy, S means sell and N means neutral.

Bonds S--03/24, B 05/04, S 07/09, B 08/06, S 08/27

Gold S--03/24, B 04/07, S 07/01, B 07/09, S 07/16

Crude Oil B--04/30, S 05/14, B 05/26, S 08/10

U.S. Dollar S--03/16, B 03/24, S 06/15, B 08/11

EURO B--03/16, S 03/24, B 06/15, S 08/11

Silver B--04/01, S 07/01, B 07/09, S 08/11, B 08/25

Copper B-02/11, S 04/27, B 7/09, S 7/16, B 07/23

CBOE Put Call Ratio

The put call ratio is basically neutral at the present time.

Chart 5

News And The Market

(1) On April 14 the Dow gained 104 points as, Intel surprised the "Street" with blockbuster earnings. (2) On April 16 the Dow dropped 126 points as the SEC named Goldman Sachs in a civil suit. The stock dropped 14% on that day. (3) On April 27 the Dow dropped 213 points when it was disclosed intraday that S&P had lowered the debt rating of Portugal and raising concerns that the Greek problem was spreading. (4) On May 6, the Dow lost 348 points. It was down almost 1,000 points intra day and most thought there was some sort of error or computer malfunction. (5) On May 12, the Dow gained 149 points. IBM gave sharply higher guidance and there was eager anticipation of great earnings from Cisco Systems which didn't disappoint. (6) On May 24, the Dow dropped 127 on concerns about the financial regulation bill working its way through Congress and continued worry about the sovereign debt issue. Over the weekend Spain nationalized a regional bank. (7) On June 4, the Dow lost 323 points on news that Hungary could be a new source of trouble. Also the French bank Societe General was reported to have derivatives trouble. (8) On June 15, the Dow gained 214 points on news of a successful bond offering by Spain. This caused the euro to rally which translated to our markets. (9) On June 29, the Dow dropped 268 points. Chinese growth was being questioned and the Shanghai market dropped 4% which spread to Europe. (10) On July 13, the Dow rose 147 points partly because the night before, Alcoa and CSX reported solid earnings. Also helping was strength in the euro. (11) On July 16, the Dow dropped 261 points. Several firms reported better than expected bottom line earnings, but the top line was lackluster. Also consumer confidence dropped sharply. (12 On July 26, the Dow was up 101 points on solid earnings from UPS and FedEx. (13) On August 6 a much weaker than expected non farm payroll caused the Dow to drop as much as 160 points before it came roaring back and closed up 21. (14) On August 11 the Dow dropped 265 points. The prior day, it shrugged off the Fed's comments about economic weakness, but after thinking about it overnight investors decided to panic. (15) On August 27 the Dow rose 165 points. GDP was weak, but better than expected and Bernanke stated that the Fed stood ready for help the economy.

Chart 6

The London Market

The London market is somewhat outperforming the S&P 500. It is now much further above the late June lows than the Dow. This is probably a good thing.

Gold

Gold has had a nice run since the end of July, but it will require watching. It's overbought and not too far from the resistance of late June that turned back the last rally. Nevertheless, we remain bullish.

Chart 7

The daily chart for the S&P 500 is making a series of lows below lows, but it is giving signs that the pattern is going to reverse.

The five day m.a. of five day RSI is quite oversold and capable of supporting a rally from current levels.

The five day m.a. of the advance decline differential is just coming off a mild oversold reading. We would still rate this short term indicator as positive.

The VIX % change 5 day m.a. has been moving up and down sharply. Right now it's somewhat neutral.

Chart 8

The weekly chart of the S&P 500 looks to be in a somewhat confusing pattern. Hopefully, this will soon be straightened out.

The percentage of bears minus bulls from Investor's Intelligence is at the level that triggered the last multi week rally. Rate this gauge bullish.

The percentage of bulls as reported by the American Association of Individual Investors is oversold and suggesting an uptrend is in store.

The weekly advance decline line is in the vicinity of the old highs even though the S&P is not. This is a positive divergence.

Chart 9

Trading System 2

Trading System 2 is our primary vehicle for making money on short term market moves. For the month of August it lost 1 S&P futures point while the S&P 500 itself lost 46 points with a day and a fraction left in the month. The system lost .64 SSO points while the SSO itself lost 2.88 points.

Chart 10

At the last FOMC meeting on August 10, Mr. Bernanke, the Fed chairman opined that conditions were "unusually uncertain." As of this writing, before the close on Monday, August 30, the Dow is down 588 points from that date. In other words, the market doesn't like uncertainty.

September, 2010
Stephen Todd
The Todd Market Forecast
P.O. Box 4131, Crestline, California
909-338-8354
www.toddmarketforecast.com


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