Technically Speaking

(November 15, 2002)We often get posed the question, “Have we seen the market bottom?” This has been a very difficult question to answer as we have seen a number of short-term rallies that have only been precursors to future market lows.

One way to ascertain whether a bottom has been reached is through “technical analysis.” Technical analysis examines market data, looking for conditions consistent with past bottoms. We subscribe to a service from Ned Davis Research (NDR) to assist us in performing this type of analysis. They provide us with charts and tables of information so comparisons can be made with historical trends.

When determining whether a market bottom has been confirmed, NDR looks at 10 charts. These charts focus on a variety of technical factors including the number of advancing stocks versus declining issues, the volume of advancing versus declining issues, surges in market momentum, % of stocks above their 10-week moving average, the volatility of the market and crowd sentiment. Each indicator has a level that meets a condition needed to indicate a market bottom.

We began looking at these indicators closely this summer and noticed that a number of them were getting close to meeting the levels mentioned above. An example of this is the indicator that examines the ratio of Nasdaq 10-day advancing versus declining issues. When the ratio of advancing issues to declining issues is greater than 1.3, then the condition is met for this indicator confirming a market bottom. In June, we noticed that this indicator had advanced from 0.7 in the spring to nearly 1.2. Then, when the market fell in July, the indicator dipped back to 0.7 before steadily climbing to 1.4 in October. Historically, the Nasdaq Composite Index has returned an average of 10.2% in the four months following the trigger of this indicator.

This type of analysis was conducted on each of the ten technical indicators. As of 11/14/02, seven of the ten indicators have reached the level confirming a market bottom. This in no way guarantees that the market cannot go down from here, but it certainly increases our confidence in the near-term direction of the market. Technically speaking, that is.

Source: Ned Davis Research