Wall Street is a funny place.
leapt a record 7.94% on Tuesday, and the typically bullish analysts who work for the big firms worried that the rally could be a bear-market head fake. Yet, when the market was at higher levels only a few weeks ago, quite a few of these same six- and seven-figure analysts were out there telling clients and the public that the "correction" was over.
They were wrong then, and they may also be wrong now. That, at any rate, is the latest thinking of technical analyst Tom Beale of
, who had been bearish since late March and has turned cautiously bullish.
Beale is a contemporary witchdoctor who sells his research to professional investors including some extremely successful hedge fund managers. One customer says that Beale has "been more right on the market's short-term moves than any technician I know of. Period." Beale, a modest fellow, says only that most of his clients are "long-term." He has been providing independent research since 1982.
Beale, who holds a doctorate in anthropology from Harvard, relies on two kinds of proprietary market indicators. The first looks for notable historical patterns in today's market. Second are trend-following measures that track market momentum, shifts in stocks' supply and demand and lastly, investor sentiment.
His two models that are giving buy signals at the moment are the
S&P Short-Term Model
S&P Volatility Model
. They try to identify near-term moves of between 5% and 10%, or more. They began to hint of better times in mid-May; on May 12, the Short-Term Model hit its most bullish reading since March and the Volatility Model was getting very close to giving Beale a green light to buy. "These are my two most sensitive models, the ones that are usually the first to kick in when there is a turn in the market," says Beale.
In his view, the shakeout since mid-March supports the readings given by his indicators.
"The sideways volatility we saw in April followed by the sharp break to new lows in May meet the minimum requirement for an end to the Nasdaq bear market," he says. "The minimum amount of time required to end a bear market is 8 to 10 weeks -- as we had in 1987. The fact that after the April 14 break we went to new lows means that this correction has lasted long enough to meet my minimum time requirement.
"It is very hard to read when sentiment has been washed out enough," he says. "I cannot say precisely how much is enough. This is not a science. But, I think we have done the minimum washing out of daytraders and margin players."
Beale takes some comfort from his study of the history of market rallies.
"Going back to 1933, you have never had a market top on the
or the S&P in fewer than 22 months after a bear market bottom," he says. Beale dates the most recent market bottom from August 1998, or almost 22 months ago. "It is almost as if after a bear market washes out everyone it takes a long time to rebuild the bullishness. Now, history does not always repeat itself, but I have in my mind that the market should be OK at least into the summer."
He forecasts new all-time highs on the Dow and the S&P by summer and a rally in the Comp to 4000 during the same period. He does hedge a bit, though, saying he wants to see confirmation from his intermediate indicators.
But, basically, Beale is a bull right now. Not even the recent slow volume figures put him off. "It bothers me a bit, but volume is not critical to my view," he says. "Volume is not a hard and fast predictor of rallies. Sometimes rallies start on low volume that builds."
And after the summer?
"Then we are in no man's land," he says. He does not look for a bear market later in the year. "It rarely happens in presidential election years," he says, "But in the first year of a presidency when the new president makes some hard decisions and the
gets more aggressive, the market can run into trouble. I wonder more about what the Fed will do after the election than I do about what it will do in June."