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Is the Juice Worth the Squeeze?



There are few things an analyst can say with complete certainty about the market, although Toddo's characterization "Minx" comes pretty close.

That's why a huge red flag was raised in my mind when I saw the cover story of the Money section in USA Today yesterday. The headline was bad enough: "10 Signs This Rally May Be for Real." But it was the sub-head that really got me: "Many analysts say latest rise is different." The only thing that can be said with certainty about the market is that it's never, never different. In fact, go back to virtually any key turning point in the market, both bear market bottoms and bull market tops, and you'll find the phrase "this time it's different" being used as a battle cry. The book "Devil Take the Hindmost: A History of Financial Speculation," by Edward Chancellor is an excellent source for those who want to brush up on their bubble history.

Below is the current chart of the NYSE Bullish Percent. As you can see it has now moved into the high-risk 70% area. Currently, it's at 71.7% through Thursday's action. A move into the high-risk red zone on this chart is not in and of itself a bad thing, but if you are considering putting money to work here you may want to ask yourself "is the juice worth the squeeze?"

How long can the NYSE Bullish Percent (BPNYSE)remain above 70% in Xs? Consider some other time periods:

• In 1975, the BPNYSE hit 62% in February and continued to move higher into July, topping out at 82%.

• The BPNYSE hit 66% in October 1982 (having reversed up in August 1982 at 38%) and stayed above 70% until August 1983.

• In December 1986 the BPNYSE hit 64% and did not reverse down until May 1987.

• In 1989 the BPNYSE started out the year at 56% and stayed in Xs until October 1989.

When the current structural bear market began in 2000 (yes, despite the current rally we believe we're still in a structural bear market) we went back to look at how the NYSE Bullish Percent acted during the last structural bear market, which we identify as the period between 1965 to 1982.

Here are some of the things we found:

What is interesting about this is that although the market returns were dramatically different during these time periods, the NYSE Bullish Percent risk indicator moved between offense and defense in nearly identical fashion. At first this might appear to be a weakness in the indicator, but if you look at how the market moved during both market periods what you find is that no matter which type of structural environment you are operating in, there are times to play offense and times to play defense.

Certainly, those with a long bias were rewarded during the structural bull market, but there were numerous instances between 1983 and 2000 where individuals were wiped out by high-risk market conditions that precipitated devastating losses in capital. Likewise, those with a short bias were rewarded over those with a long bias during the last structural bear market, but sudden and sever bear market rallies between 1965 and 1982 were enough to cause potentially catastrophic pain to shorts who were similarly caught off guard by high-risk market conditions.

Even during the structural bear markets there are good gains to be made on the upside. For instance, there were three 50%-plus return periods and eight periods that saw 20% or greater returns in the Dow Jones Industrial Average.

The value of the NYSE Bullish Percent risk indicator is that it tells us which way the stream is flowing, so to speak. When it reversed up on April 2, this indicator was telling us the risk for shorts was high. In essence, shorting stocks while this indicator is in Xs, or going long when this indicator is in Os, is a lot like trying to row a boat against the stream.

Right now, virtually all of our bullish percent-based indicators, short, intermediate, and long-term, are in Xs and above 70%. I can't recall a time when buying stocks with the indicators at these levels rewarded the buyer. Will this time be different? It's never been different before.

No positions in stocks mentioned.

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