I’ve been meaning to post this for some time now . . . this week’s sell off makes now as a good a time as ever:
I was trained in Technical Analysis by 2 people: Guy Ortmann, who was trained by Alan Shaw, and Ralph Acampora, who is a peer of Alan Shaw. So when a story appeared on Bloomberg about Shaw, you can be sure it got my attention:
“Shaw, 65 years old and a 45-year veteran of Wall Street, said the latest rally in stocks probably will end during the second half of this year. ‘Unless the history books are wrong, we’re only supposed to have one major bull market in one’s lifetime,’ said Alan Shaw, who received the No. 1 ranking for technical analysis on Wall Street along with colleague Louise Yamada in a survey by Institutional Investor magazine last year.
The rally happened from 1982 to 1999 and any gains now are taking place in the context of a longer-term bear market, Shaw said at a conference of the Market Technicians Association last week. Technical analysts rely on identifying patterns in price charts to make buying and selling decisions. “We are now in the midst of the first cyclical bull market” that occurs after reaching a milestone such as 10,000, said Shaw, who has worked for Smith Barney and predecessor firms since 1958. Smith Barney is a division of Citigroup Inc. Analysts define a cyclical bull market as a rally that eventually fails and occurs within a longer period when stocks are little changed or declining.”
I agree with Shaw’s long term perspective. Its hard to argue with when you see it on a chart. Its even harder to advocate caution when momentum takes the market up a few 1000 points. Its a fine line to walk.
“The Dow flirted with 100 from 1905 to 1924, and had four rallies along the way. The average gain equaled 77 percent and lasted 24 months, Shaw’s data show. In February 1966, the benchmark came within five points of 1000. It failed to surpass the level for good until 1982. There were also four bull-market rallies during that time, and they averaged 53 percent and 29 months in length, the data show.
The first close above 10,000 during the market’s current rally took place on Dec. 11 and marked the 19th time that the Dow industrials crossed that threshold. “My conclusion from this is we do have further to go in the cyclical sense,” said Shaw. The Dow and benchmarks such as the Standard & Poor’s 500 Index could even reach their previous highs “and still be in a cyclical bull market,” he said.
Understanding the difference between cyclical and secular may very well be the key to making money in the market over the decade.
“Another reason why a longer-lasting bull market probably isn’t in store is that interest rates aren’t likely to go much lower, Shaw said. The 4 1/4 percent U.S. Treasury note maturing in November 2013 yields 4 percent; last year, the benchmark 10- year note yielded 3.07 percent, the lowest since 1958. “There’s very little leeway” to support a more sustained advance in share prices, he said. The Dow returned 14 percent a year from 1980 through 1999, a period when the 10-year note’s yield fell to 6.45 percent from a peak of almost 16 percent.
As for the Dow, Shaw assessed how far it might fall by applying the patterns of the benchmark around 100 and 1000 to what he called a “computer-generated simulation.” The results showed the average would ultimately hit bottom in 2008 at around 6000, or 43 percent below current prices, he theorized. Even so, he and the other panelists at the conference said the current rally had further to go and investors could still generate positive returns over the next five years with the right investments.
Smith Barney’s Shaw Sees U.S. Stock Rally Ending in Second Half
Bloomberg.net, January 15, 2004 00:00 EST