Louise Yamada: S&P has a 1175 price target

Last night after the market closed I listened to a Bloomberg on the Money podcast with guest Louise Yamada, a well-known technical analyst. A lot of people in the fundamentals crowd stay away from looking at technicals, but in a market like this one, they cam provide some extra information.

Below are a few snippets of the transcript of that conversation on the Bloomberg News site. Her overall take is that this decline is looking a lot more like the 1929-1942 bear market than the 1966-1982 bear market. The 1929-1932 bear market had a double top with a decline from 1929-1932 followed by another nasty economic downturn and market decline from 1937. That period was also characterized by deflation more than inflation.

In this market, homebuilders obviously topped first in 2005, financials are now under pressure, but energy is looking like it has seen a top as well. Utilities have done quite nicely relative to the market.

My own view is that we have been in a bear market since 2000. I see asset deflation as the primary trend unlike the inflationary 1970s. Therefore, I believe we will break below the 2002 low of 800 on an inflation-adjusted basis.


Here Yamada frames her view, saying she sees the market going lower with a price target of 1175.

TOM KEENE, HOST ‘ON THE ECONOMY’, BLOOMBERG NEWS: Miss Yamada, welcome to the program.

KEENE: Had to finally get you on, folks, Louise Yamada, studying for years with the august Alan Shaw at Citigroup Smith Barney, and now out with Louise Yamada Technical Research Advisors.

Louise, too much to talk about here. Have you ever seen technical charts in the financial group as we see with the indices, as we see with Freddie Mac, Fannie Mae, as we see with Wachovia? Are these a different kind of chart?

YAMADA: Yes, I think that we are seeing very major structural breakdowns taking place. In some cases, one could argue that the distribution that’s taken place – post this 2007 rally – has really been a double top versus the 2000 peak that was made in the financials. Many of them never really got above the 2000 level.

So there’s been almost a secondary distribution for a lot of these names. And I think then you’re defining six- to seven-year tops. And it’s certainly much larger and much greater negative implications to anything that happened in 1998 or even in the 1990 period

KEENE: You have, Louise Yamada, an extrapolation of a line, folks. And the way to do this on radio is first, everyone has to wear their seatbelt this hour. But you’ve got a trend before the Internet boom. And then up we go. And we come back down to the carnage of ’01 and ’02. And then up we go again, and that’s your double top. And we come back down.

You’re suggesting that we could see the S&P – not just the financials – but the S&P itself revisit the trend that was pre-Internet. Do I have that right?

YAMADA: Yes. Yes, that is a possibility. We don’t have that target out there at the moment. We’re looking more- we’ve seen the S&P already achieve our first downside target at 1250. We have another one out there at 1175. But what you’re looking at suggests that if the deterioration continues, that the ultimate downside – or maybe not even the final – but the first trend line comes into play around 1000.

Here, Yamada says that Uilities have actually eeked out a positive gain during a bear market. But, she has full respect for just preserving capital and exiting the market altogether.

KEENE: When you look at, on the other side, of the safe haven of utilities – and I think I quoted it on radio yesterday, folks, actually up a little bit here. Help us with this idea of relative to the major index, the relative strength of something like utilities. They’ve been pretty good, haven’t they?

YAMADA: Utilities have been very offensive throughout this period. And at the moment, they are providing some defensive haven. They are outperforming. Obviously if they don’t go down very much and the financials go down to a great degree, the relative strengths of the utilities holds up quite nicely, and gives you an indication of going down less, at the very least.

KEENE: And in going down less, well in your ETF study from Louise Yamada Technical Research, there are no buys. There’s a few holds. And of course there’s tons of sells. Why should I worry about going down a little bit less if I’m long only, and just get out of the market? Why shouldn’t I just go to cash?

YAMADA: We have no problem with cash whatsoever. And as a matter of fact, a lot of our methodology for money management is that you don’t go into stocks so that you can underperform the market. You go into stocks because you perceive rewards.

So we keep a weekly buy, hold, avoid, sell list, which is all relative-strength based. And one could draw a line right down the center. And you don’t want to own anything in the avoid and sell lists. You may want to own in the buy and hold list.

But in a declining market like this, we also respect the absolute price support breaks. And when those occur, we would also exit the areas that are outperforming by going down less. But if they’re breaking critical support levels, there’s no reason to continue to hold them.

Here Yamada mentions that energy has come under pressure and the sector is breaking down. I follow the sector and in particular note that the refiners have rolled over. Valero Energy (VLO), the leading independent refiner, has been cut in half from its peak last year.

KEENE: In just one minute here, Miss Yamada, tell us about the energy group. We’ve heard from any number of strategists, our Chris Nagi and his equity desk, we’ve heard the energies are not what they were six months ago. Is it time to exit the energy stocks?

YAMADA: Well, I think you’re getting pullbacks because really energy and materials have been the outperforming leaders. They have been the leaders over the past five years, along with some of the industrials and the railroads, of course. And the utilities have done quite well.

And little by little, stock by stock, some of those leaders have started to go by the wayside, move into consolidation. And for the most part, I would say energy looks as though at the very least it’s moving into another consolidation in terms of stocks.

Now as the support levels, critical support levels, begin to break, as they have on some of the weaker names, then you have to, stock by stock, start to protect your capital.

Here, Yamada talks about the life cycle of stocks as represented by the technicals. She indicates how to know when a break out is ocurring or a break down.

YAMADA: Yes, well price, it’s really the creed of the technician is in price there is knowledge, because the equity market is a discounting mechanism. It’s more like a barometer than a thermometer, because there are always other people out there brighter than you or I. And price shows us what they are doing with their money.

Stocks generally top out when the business couldn’t be better. And stocks bottom out when the business couldn’t be worse.

KEENE: When you look at a chart, and I’m going to bring up Freddie Mac here, folks, which of course has been sport $8 today. Is charting about not what to
do, but to tell you what not to do?

YAMADA: It does both, because if you think of any price cycle, it has a – there is a life price cycle for any commodity, for any stock, for any index, that begins at a low level, breaks out presumably over an extended rectangle of some sort consolidation, and initiates an up trend. And the up trend is defined by higher highs, followed by higher lows. And the higher lows are significant because they indicate that somebody’s out there willing to buy without letting the price drop as far as it had.

Eventually you get into a period, after an extended decline, where price stops going up and starts to move sideways, or maybe even doesn’t go to a new high. And that is an indication that somebody is starting to sell into those rallies, and preventing it from going higher.

And when you break below the level at which the prior low took place, that is an indication that you’re moving into aggressive supply. The up trend represents aggressive demand, and the breakdown and the down trend represents aggressive supply. People selling into rallies.

Finally, this is where Yamada compares 2000-2008 to the 1929-1937 period. I do think this is more apt than a 1970s period and that we will revisit lows further down than 1175 on the S&P.

KEENE: Well, when I look at some of these indicators, and I put to sleep today our Nick Baker and Michael Tsang, looking at the Directional Movement Indicator. It’s got lots of pretty lines, folks. And red and green, and it gives you an asymmetric sense of the market. The latest carnage we’ve seen, Louise, is it about a lack of buyers, or is it about a lot of sellers?

YAMADA: I think it’s a little bit of both because we do follow the Lowry data from Lowry Reports. And they have – their buying power is at a new low, which I think is the lowest low in history. It even goes beyond our alternate cycle, which is the 1930s, that we’ve been comparing 2000 forward to.

And the selling pressure is at a new high. And the spread is a record. So you clearly have a diminishment in buying overall and an increase in selling. And I think it has a lot to do with the financial crisis that’s out there. And people are caught in the position where they can’t sell what they want to sell, so they sell what they can.

And then you’re getting an enormous deleveraging taking place under this market decline.

KEENE: This event we’ve had since August, and with your years of experience with Alan Shaw and others, Louise Yamada, is this an original territory we’re in, or does this hearken back to other debacles we’ve had?

YAMADA: You mean the equity market itself? Well our –

KEENE: The equity market and also this credit crisis.

YAMADA: Well, I think it’s very interesting that Elliot Wave’s alternation of cycles suggests that any cycle in life should be less like the prior cycle and more like the alternate. And I rather think it’s because people don’t look back beyond one generation.

But we said in 2000, looking back, that our bear market experience should be less like the ’66-to-’82 one, which took place in a horizontal pattern, but also with inflation and rising rates, and should be more like the alternate, which was 1929 to ’42, which had deflationary pressures the way we’ve had, had a three year crash the way we’ve had, and had falling to low interest rates.

And our alternate hypothesis suggested that 2002 to 2007 could be very much like 1932 to ’37. And it has followed to a tee. Not only that, but we are now getting the 47% decline that took place in 1937 in the very first area of financials. Whether or not the rest of the market has to follow that will take time to evolve.

KEENE: Well, it’s a terrific historical perspective. Just in one minute here, Louise, when you look at all this, when you sum up the technical analysis right now, what do you look at first when you come in in the morning? When you come to your office in the morning in Manhattan, what do you look at first?

YAMADA: Well I look to see what futures are doing, in terms of what’s happened abroad. And –

KEENE: Does it matter if we look at the futures, the S&P futures, in the morning?

YAMADA: Well in the morning, just to see what the sentiment is, I think, is what you might suggest about that.

KEENE: Is there a tipping point, like plus seven or minus seven?

YAMADA: No, no. You just like to see the general trend. Then the next thing I look at are all the indicators for the prior day. We look at the advanced decline data, the volume data, the new highs, new lows, and we have a particular up- down volume momentum study that we look at to see the proportion of up to down volume. And all of those have been oversold for a very long time. And contrary to what the traders feel, oversold is an opportunity to buy.

When you get into a bear market environment, oversolds can remain in place for quite a long time.

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