Market Internals Flashing Caution Signals

I regularly monitor the breadth of the stock market, or so-called market “internals”, for guidance regarding the most likely direction for equities. This is worthwhile research as I have often seen breadth leading price.

Few breadth studies are as insightful as those provided by Lowry Research, as reported below by Richard Russell of Dow Theory Letters fame.

Following are a few facts that I found fascinating. On May 8, Lowry’s Buying Power hit a high of 172. Since then, it has been falling. On July 2, Buying Power dropped to 95. This was one point below the level of Buying Power on March 9, which was 96.

In the 78-year history of Lowry’s, Buying Power has never dropped below its level at a supposed bear market bottom. In other words, Buying Power is now below where it was at the “supposed” March 9 bottom.

Buying Power has now fallen to its lowest level since September 1942.

The lowest level of Buying Power in the 78-year history of Lowry’s occurred in February 1933 during the depth of the Great Depression.

As of July 10, 2009, Lowry’s Buying Power was only 9 points above that level.

What makes the situation even more ominous is that Lowry’s Selling Pressure is at 885, and it has been climbing steadily since a low of 857 recorded on June 1.

The key to Lowry’s is not the absolute level of its Buying Power Index. It’s the relationship between Buying Power and Selling Pressure.

The span between declining Buying Power and rising Selling Pressure hit a 78-year record distance of 807 on July 8. The wider the span, the more bearish the situation.

It sounds as if a very cautious approach is in order.

Comments

[The Economi...:]

I can't help but wonder in absolute amazement how this market is being held up. Drop already. I'm lookin for buying opps!

Jul 15 08:35 AM

[Old Trader:]

Evidently, "anti-gravity" is now a reality!

Jul 15 08:52 AM

[whidbey:]

Odd is it not? The inflation numbers, .7%, suggest that deflation is being held off by a few commodities (oil). Yet, it is obvious that we have the technical signals in place for a brief rally, then some more down.

Lowery's data a coincident indicator or leading?

Jul 15 08:53 AM

[enigmaman:]

For every study there is to says to buy, there is another that says to sell and yet another that says hold, It seems that what a report says
can be a reflection of the what the author believes and or what the reader believes or what they want to believe. Id like to see a summary report that compares results of reports, theories, feelings what better to determine how to proceed, to me that would close the deal, otherwise its all just useless facts. Where are the ones, that most often call the bottom, call the top successfully, know when to go short when to go long, when to go into bonds or into cash. Are they hiding out, only available to a chosen few, the elite who make their money in the dark, beyond the reach of us mere mortals. Today I read a report by ECRI saying the recession is over this summer and we can look for 2.4% GDP growth, they use metrics that most others do not use and they have been quite successful in their predictions, but now there is the Lowry report that says the Boogie man is lurking just around the corner.

Im just dazed and confused and would like to believe someone knows what they are talking about, the problem is they all believe they do.

Jul 15 09:11 AM

[enigmaman:]

Just take a look at todays Alpha Email Market Outlook, topics, what is the common theme for the market, Agree to Disagree, Nirvana, End of Days, how can anybody discern anything from these, who is right who is wrong, that you will only learn when you decide what theme to follow, what you believe to be the truth has absolutely no bearing on what the truth really is and that is the conundrum

Jul 15 09:29 AM

[Brad Singer:]

I think you have bad "breadth"

Jul 15 10:04 AM

[Arnold Layne:]

So on Mar 9 buying power hit 96, and apparently was a good time to buy.
After rising to 172, it's back to the previous level, so it's time to buy, right?
Or should we have bought when it was at 172 [higher = better?].

heh.

Jul 15 10:58 AM

[Bruce Pile:]

The buying power appears to signal ignition points for powerful climbs when it gets to historical lows. It's the lowest right now it's been since September,1942. What happened in September, 1942? The market went right into about a 30% climb over the next 8 months. The lowest the buying power has ever been was February, 1933, just in front of the blast off to the 1937 high, one of the most powerful climbs ever. And now we are at the lowest since '42 and at the same level as March 9? Back up the truck, Clyde, and let's load up!

Jul 15 12:59 PM

[Steven Hansen:]

This is not 1942

Jul 15 11:46 PM

[untrusting ...:]

LOL, yep .... antigravity is called Goldman Sachs, JPM, the Fed, the Treasury and the rest of the PPT. When you have GS and the rest of the boys trading hugh percentage amounts of the total market, is it any wonder they can move it wherever they want?. Trends, past recession relationships, PE's, fundamentals, technical analysis, etc........ none of it makes any difference in this market .... because
when you have just a few of the good ole boys with tacit government approval and trillions of dollars to play with ..... it just doesn't make any difference what a few hedgies, pension funds, mutual funds, and retail investors think, they just don't have enough money to make any difference when playing agains the good ole boys. So take you best guess and just get in and get out quick if you get lucky. The answer is it should be going down .... but then again since "antigravity" is the prevailing cosmic force right now there just is no logic as to where it actually does go. Still think your safest bet is just to sell puts, collect the premiums, and then only be forced to buy if it does actually correct to more reasonable lower levels. Just IMHO.

On Jul 15 08:52 AM Old Trader wrote:

> Evidently, "anti-gravity" is now a reality!

Jul 16 12:27 AM

[adAstra:]

Prieur, what's your opinion on Lowry's being a contrarian indicator. When the Buying Power is low, it sounds like no one else is buying - sounds like a good time to buy to me!

Jul 16 01:40 AM

[Dave Dorgan:]

'Be very cautious', yes, because the 'wall of worry' loves bearish sentiment.

Jul 16 09:28 AM

[Maxe Paul:]

What it dose show is that this is a bear market rally, which i have been predicting all along, expect further rises as we are not at the targeted Fibonacci levels yet for a reversal i n the major indices.

Jul 18 08:53 AM