Indicators may be signaling that it's time for investors to turn cautious, says Peter Miller of Barron's, who explains what he's watching.
Nancy Zambell: My guest today is Peter Miller, the Director of Statistics at Barron's. We're talking about market direction. We've had a great January. February had some pullbacks, but we also came back and hit 14,000 again. What does the market look like, according to your statistics right now, Peter?
Peter Miller: Nancy, the main tool I like to use is the Dow Theory, and how it's placed out on the quarterly, weekly, and then a daily level.
As we've seen through most of January and February, and quite frankly from the end of December, is that transportation has dragged up the Dow. Clearly transportation has hit higher highs. Even in spite of the sometimes lingering Dow, it's pulled it up to near its level of highs.
While that is a good sign, what we have seen over the past two weeks on a daily basis is something I like to monitor-both the industrials and transportation. If you look at the Dow Theory, it's really about agreement-one dragging the other, or disagreement where one might revert back to another previous level, and the changes on a daily basis.
Nancy Zambell: When they disagree, does that indicate a change in the trend?
Peter Miller: It typically does. Usually, I track which one is going in a negative direction, as opposed to the one that's going into a positive direction on a daily basis.
Nancy Zambell: What has it looked like recently?
Peter Miller: Over the last ten trading days, we've had an anomaly that I like to refer to as tremors-six in the last ten trading days. In the six that we have seen, it's 50-50 where transportation has been positive or negative and the Dow has been positive or negative.
As you can see if you chart the numbers, the Dow is being very resistant to transportation going up. We had four for the week of February 11 to 15. I have never seen four tremors in one week.
Nancy Zambell: That sounds important.
Peter Miller: Yes, and it could mean that we're certainly seeing a disagreement and reversion to a different level-possibly down to the previous low of 13, or even down to the 12.6 that we had back in November.
Nancy Zambell: You're speaking of the lows. Do you also track the highs and lows as an indicator?
Peter Miller: Yes I do, not only to compare the direction of the market and the agreement, but I also like to look at the highs and lows on those exchanges. In this case, I would be speaking of the New York Stock Exchange mostly, because it reflects a thirst for all financial assets due to the closed-end funds and REITs, etc. that it contains.
January 25 was the peak of the highs, and since then, we have been reaching fewer highs-much fewer highs. On January 25, we had 794 new highs, and two weeks ago, February 8, we only had 580. I believe last week was even lower at 545. At the same time, lows are increasing, which in a market that's going up is a typical sign of a top-reaching fewer highs and more lows.
Nancy Zambell: Does it actually predict a top in terms of numbers or just the direction?
Peter Miller: It's actually indicative of a market top.
Nancy Zambell: That's interesting. Does it give you any indication of how long that might last?
Peter Miller: I track them on a full-week moving average and create a ratio those numbers. On the January 25 time frame, it was a 13:1 ratio of highs to lows-higher than I've ever seen. Certainly we hit an extreme peak back at that point. While the market is still trying to edge its way up, I say that's a clear sign of a market top.
Nancy, I also have one other indicator that I would like to throw in. It comes from my good friend, Larry McMillan. He runs the equity only put-call ratio. It's a great indicator that we run on our striking price page. It's nothing more than a daily sum of all puts traded on all stocks, divided by the sum of all the calls traded on all the stocks on that same day.
Nancy Zambell: Basically, what people are selling versus what they're buying?
Peter Miller: Exactly. We create a 21-day moving average. If we chart it for a full year, you can clearly see it's a sell-or a market top-and a market bottom buy indicator.
If you were to have the chart in front of you, October was a sell indicator-and May-June was a buy indicator. As of January, it has been floundering, with sell indications as well. It's been pretty accurate over the last four years.
Nancy Zambell: That's very interesting. I'd like to wrap up, Peter, with one more question.
Often we see as analysts and advisors that no matter what the market is doing in terms of statistics, if the markets have had a great rally, then retail investors will often get in at the tail end. Sometimes that's just the perfectly wrong time for them to enter the market. You also track investor sentiment, correct?
Peter Miller: Yes, ma'am.
Nancy Zambell: What is that showing us now?
Peter Miller: In many respects, it's showing that we're definitely risk-on. Very exuberant. AAII investor sentiment readings, for example, were at 58% last week. An average bull trend for them would be in the 40s, so they're over-over-exuberant.
Another that we use, Consensus Inc., is also very, very bullish-which is another sign that typically is not a good sign to be in the market. I typically sell when people are buying and buy when people are selling.
Nancy Zambell: Well, that's what most professionals do! I guess from here on, we should just tell people to be a little bit cautious.
Peter Miller: I think that would be a definite good piece of advice-to be a little bit more defensive in their positions.
Nancy Zambell: Wonderful, well thank you so much for joining me. It was a pleasure.
Peter Miller: Nancy, thank you for having me.