We last mentioned Walter Deemer’s views on the cyclical bull, secular bear market back in 2004. He was profiled again last week in Barron’s.
Here’s an excerpt:
You’ve been pointing to the Nasdaq as the most vulnerable area of the market for a long time. Are you surprised it has held up?
I’m surprised because in a normal four-year cycle — and I keep going back to the four-year cycle, because it has worked since the end of World War II, and when something works as long as that, you have got to believe in it — the market goes up for a little more than two years and then goes sideways as it forms a top.
But the point of demarcation in the average comes usually somewhere late in the second or early in the third year, which would have been somewhere in late 2004 or early 2005. Yet the market has just hung in there and hung in there and hung in there. That doesn’t mean you can’t have a full-fledged four-year cycle decline, because some of them only take three or four months to complete, and that doesn’t mean the Nasdaq is still not vulnerable.
What’s activity in the Rydex funds pointing to?
At the peak a couple of weeks ago, 37% of Rydex’s sector-fund money was in their energy funds, which is a huge, huge number, especially since they only have two energy funds. I’m convinced the Rydex Fund players are doing the same sort of thing that hedge funds are doing. I think a lot of the smaller hedge funds are using the Rydex funds to move in and out of the market, in and out of sectors, and in and out of bearish funds. I’m seeing general complacency.
I should cite another study, too, which is the ISI Group’s hedge-fund survey. A couple of weeks ago, their gross exposure hit an all-time high, which means hedge funds were more exposed to the market than they have ever been before — which possibly can be explained by the lower volatility: It takes more dollars to achieve the same result. But, at the same time, the net exposure was just about at an all-time high. It is a contrary indicator.
The hedge funds are the driving force in the market these days, and they are still most bullish at tops and most bearish at bottoms. The Rydex numbers confirm there is a lot of bullishness, or to put it another way, there is not much active bearishness. People maybe talking bearish, but they don’t seem to be acting bearish." (emphasis added).
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Source:
Loaded for Bear
Interview With Walter Deemer, Publisher and Principal of Technical Analysis, DTR
SANDRA WARD
Barron’s, Monday, February 20, 2006
http://online.barrons.com/article/SB114021824432777477.html
Hey Barry,
When you get back, might be nice to hear if you found any great restaurants or evening hot spots. I think we are moving to SF within the next year. That is, if I can find gainful employment.
What does Walter Deemer know? He’s some crotchety old man. lol. The kind who has pegged nearly every major move since men lived in caves. I love these old guys and gals who have lived through more than the roaring 90s.
This time it seems different than recent cycles. I’m assuming this is more along the lines of what people felt like in the 70s. The chart patterns, interest rate cycles, housing cycles and globalization seem to parallel the 70s quite well. I woudn’t exactly call this a blow off US equities top. That said, one could argue it has been for many overseas markets, oil, certain industrials, broker/dealers, energy, commodities etc. For oil to be up 25 points in four months into September of last year is astonishing. Yet no one has talked of that being a blow off. It appears we are awash in oil right now and the only thing holding it up may be this risk premium. If global demand slows…….charts looking like a double top as well……..we could see the bulls getting butchered. That second oil top was formed after supply started to build significantly. It was a purely emotional spike driven by Iran. Many smart people appear to be calling for a 38% fib retracement to $48ish. A still bullish pattern would call for a retracement to $33ish. Just enough to slaughter the inexperienced and convince them the oil boom is over as they run like lemmings from their energy investments. Pile in at the top and sell at the bottom as we’d prepare to rise again. Just a possible scenario.
I also can’t believe the relentless assault by the broker/dealers. I keep looking for a short entry and it doesn’t come. I can’t remember where, may have been Barron’s, but they have spent 90% of their time below this valuation in the last ten years or so. Considering the market PE has contracted quite a bit in that time, that really smells of being terribly overvalued. I’ve given up on the B/D and moved on to technology, which looks to be rolling over. No one mentioned that semi number reported last week in the durables. Down 7+%? Everyone loves semis. Propped up by consumer demand and not the business cycle as they have been historically. Consumer spending starting to wane? Uhh, so three areas are really holding the markets up: Financials, tech and energy/commodities. All are very extended in fundamentals and technicals IMO. And regional banks are beyond their peak valuation as a percent of total market valuation as well. Everyone says banks are so cheap…………..I guess they haven’t looked at the charts in the 70s. Citigroup lost more than 50% its value and Bank of America didn’t make a new high for twenty years.
YO B real
looks like fun out in SF… How phat is that exilim? 7.2 mega?
Interesting read was this interview on Deemer’s site by an MIT grad student…
Peace out
http://www.walterdeemer.com/home.htm
I read the Deemer piece in Barron’s last week. Deemer seems to be the type to have confidence in his own analysis and be willing to live with the consequences of being wrong, if he is wrong.
The question arises: Why is it that the bubbly optimists haven’t been spanked yet?… Why hasn’t reality set in for them? Who do they think they are?
In that sense all of our opinions (I’m questioning my own) are much like the cheers, cajoling and rooting that breaks out after a golf putt is struck… or after a stone is released in curling. They are just so much useless pontification after the event. The golf ball and the stone already have their destiny ordained by then.
It’s still however almost like the ones who root for an outcome must conceive of the notion that they can on the strength of their opinion and determination will a result that follows their wishes.
Consider a bridge: Assume a crowd is assembled on the approach ramp to the bridge. In the crowd there is a diversity of opinion of the status of the bridge. Some say it will surely fall… others scoff at that and point to those crossing it at the time.
There’s a party on the other side, but you have to cross the bridge to get there.
“Come over!” they’re shouting from the other side, ” and join the party.” But, some wait and point to the teeter-tottering status of the bridge. Bold ones cross it and laugh back, “Ha ha, you fools!… you’re afraid of your own shadow… just cross the bridge… we’ll all join the party.”
Slowly, but steadily, the opinion of those remaining begins to break in favor of crossing. Yes, there are still hold-outs, but they’re having to watch successive crossings, and each one raises the level of the taunt. “You fools, you’ll miss the only chance you’ll ever have to get to the party.”
Meantime, let’s think of the bridge. What is its opinion or what does it know?… Well, it only knows it’s a bridge in one condition or the other, and it knows what its destiny will be, either way. But, it neither knows nor cares what our opinions are. It doesn’t care if we get safely across or not, whether we make it to the party or not or whether we are peacefully content with our circumstances without crossing it, and it isn’t biased against those who have boldly challenged its unknown destiny and won.
But this much is for sure. Should the bridge collapse and we find ourselves on it at the time, and thus in free fall toward the water, at that very moment in time we would be no worse off nor better off than we’d been at the instant we committed ourselves to crossing it. And if it falls, it’ll take the bold, the timid, the cautious and the confident, all together without the slightest prejudice.