- Brace for Bullish Backlash

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Brace for Bullish Backlash

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Brace for Bullish Backlash

Thursday, 17 July 2008

By Lynn Carpenter
Can every sector be bearish? Not for long, and that makes this market very interesting right now.
One of the services I have used for many years is Dorsey Wright Associates, (www.dorseywright.com) which publishes point and figure chart information.
The company keeps track of which sectors are most bullish in terms of those point and figure signals. Today I’d like to show you how the sectors line up on DWA’s bell curve:

Source: Dorsey Wright

Dorsey Wright uses pink to indicate unfavored sectors. Yellow is neutral, and green is favored. Those in caps are currently on buy signals.

But none of this is what I really want you to see here. This “bell curve” is a mess. A normal distribution would take this shape:

Only a sector or two should be at the extreme ends of the curve. Most of the boxes should have been stacked up between the area shown as -2 and +2 on the sample curve. Those numbers stand for two “standard deviations” from the median. In the Dorsey Wright chart, a normal distribution is loaded heavily between 34 and 68. Those numbers stand for the percent of stocks in the sector that are bullish on a point and figure chart.

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Today’s DWA bell curve chart is extremely unbalanced, and that is not a stable condition. We should start to see some sectors break out soon. But look carefully…

You may not catch a roaring bull market in its early stage by looking at index numbers. Index values are too heavily influenced by the weak financial stocks that make up a large part of their value. But we should begin to see some sectors other than defensive ideas like gold or electric utilities pick up the action.

And just a reminder: I am looking for business services to tell us when things are really getting bullish again. That group’s still bearish, but I am watching.

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