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Uh-Oh--Now Chartist Says 'Sell' Again . . .

July 28, 1998|TOM PETRUNO

Dan Sullivan's subscribers may need a chiropractor.

Sullivan's stock-market-timing system, explained in my Sunday column, has flashed a sell signal--again.

That follows the buy signal that Sullivan, the Seal Beach-based editor of the Chartist newsletters, issued on July 1. Which, in turn, followed the sell signal of June 11.

Sullivan, a veteran market analyst who started writing his main newsletter in 1969, obviously would prefer not to whiplash his investor-followers. And for the most part, his timing system doesn't normally whiplash like this.

Since 1987, the shortest duration of a Sullivan buy signal had been 7 1/2 months--until this latest episode.

The July 1 buy signal lasted just 24 days.

What's the deal? "Mainly it's the market's breadth--it's really awful," says Sullivan, 64.

Sullivan's system relies on three indicators: the stock market's momentum, or breadth (the number of stocks rising versus the number falling, as explained elsewhere on this page); the market's trend as measured by the movement of key indexes; and monetary conditions in the economy (i.e., interest rates).

When two of the three indicators are negative, Sullivan's system says it's time to get out of the stock market rather than risk getting caught in a sharp decline.

As detailed Sunday, Sullivan's timing record and stock-picking record combined have earned him second place, in terms of performance, among 29 newsletters followed by Hulbert Financial Digest over the last 15 years.

The June 11 sell signal was triggered after the market's breadth and trend deteriorated, even though the monetary indicator was positive, Sullivan said.

By July 1 the trend indicator improved enough to flash a buy signal, as blue-chip stock indexes surged and monetary conditions remained favorable.

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But by late last week the trend indicator joined the momentum indicator in negative territory again, Sullivan said.

"Everybody wants the safety of the big-name stocks" in the Dow Jones industrial average and other blue-chip indexes, Sullivan said. But that's leaving the rest of the market increasingly orphaned.

What's interesting is that many other professional market timers still are holding to buy signals--despite what virtually everyone agrees is a miserable-looking trend in the market overall.

James Schmidt, editor of Greenwich, Conn.-based Timer Digest newsletter, which tracks dozens of timers who write investment newsletters like Sullivan's, says that most of the top-performing timers are still rating the U.S. market a buy.

Schmidt's list of the top 10 timers--those whose market-timing records have been the most accurate over the last 52 weeks--now has seven bulls. The other three timers in the top 10 say they are merely neutral on the market.

No bears at all--even though, Schmidt says, "I can't think of one of them who doesn't mention [in his newsletter] the market's negative breadth."

Some of these market timers don't follow disciplined systems, such as the one Sullivan uses. In other words, their market-timing calls may be based as much on gut instinct as on a specific market indicator or trend.

Admittedly, that's serving the bulls well this year--provided they've kept their subscribers in blue-chip stocks, which is just about the only market sector (perhaps along with Internet stocks) that has been generating gains for investors.

Because of the abrupt rebounds in the Dow and other blue-chip indicators after each sell-off over the last 15 months, "I think they [timers] are reluctant to step to the bearish side" for fear of missing out if the market should pull the same trick again, Schmidt says.

And with Monday's 90-point Dow rally--while the market overall headed south--the pattern looks like it may indeed repeat.

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Still, with the majority of stocks falling rather than rising, many investors probably are losing faith in the 7-year-old bull market. Which begs the question: Is the market being set up for a major decline, when the last of the strong blue chips suddenly roll over?

Jerry Appel, editor of Systems & Forecasts in Great Neck, N.Y., says the worsening market breadth "is a process that ends a bull market," or at least that's been true historically.

But that process, he says, "can go on for a long time" before a genuine bear market sets in.

Could the broad market simply turn around here, and breadth improve dramatically? That would be unusual at this stage of a long bull market, Appel says. (It would require some catalyst to make investors love all stocks again.)

But "it wouldn't be so unusual for a trading range to develop," he said. In other words, the market could settle down, leaving most stocks trading in a relatively narrow range for an extended period, rather than plummeting sharply lower.

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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.

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