listeningin june 27, 2008 bearing up · weeden & co.lp lance lonergan national sales manager...

Who knew when I interviewed Louise Yamada, ofLouiseYamada Technical Research Advisors onTuesday morning, that market action over thenext several days would be downright dreadful?Actually, Louise pretty much knew. Which is notto say she was — or is — happy with prospect.But forewarned is forearmed, and whole rafts oftechnical indicators were telling Louise to makecapital preservation priority No. 1. Not onlywas she discerning no improvement among themultitudes of stocks still mired in seculardeclines from peaks they notched back in the bullthat expired in 2000, Louise was detecting indi-cations aplenty that the materials, utili-ties and transports that led thebroad averages to fresh peakslast year are slip sliding intocyclical corrections, or “bearmarkets.” An unfortunatelinkage of secular and cycli-cal trends, if ever there wereone. But one undeniably inmotion by Thursday, at thesame time that Louise’s“inflation in all the wrongplaces” notion was playingout with a vengeance in theenergy market. Unsettlingand dangerous times, to besure, for investors, but Louisehas a clear view of what toexpect. When I checked back in with herThursday evening, Louise wasreeling a bit from another dayspent watching markets“breaking down not onlyhere, but internationally.”

Markets in the developed world, she remarked,are tracing out patterns very reminiscent of thebroad double top in the S&P 500 between 2000and 2007, and giving off a whiff of the samesort of secular decline afflicting groups likehousing and financials. Meanwhile, the emerg-ing markets, she observed, are behaving uncom-fortably like the industrial leadership stocks thatpaced this market’s cyclical bull run from the2003 bottom: In a word, toppy. And due for acyclical decline. With this week’s selling on thedomestic front, she reported, “We’re on the vergeof losing stocks that have been the leaders ever

since the rally began off of the 2003 bot-tom – stocks like Emerson,

Caterpillar, Deere, broke downbadly. These are not good breaks

for our leaders. And look atGoogle, it is coming off; Lookat a weekly chart of Apple; if

that doesn’t look like a dou-ble top, I don’t know whatdoes. I don’t have good feel-ings about this at all. Theway the industrial leader-

ship is pulling back is defi-nitely not telling us thatsomething out there is

good. And closing on thelows of the day tends to indicate

there’s more selling to come.”Just how much damage she expectsto be wrought, and where, Louise

graciously spelled out during alengthy chat on Tuesday,

which is presented below.KMW

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Bearing UpLouise Yamada Sees Convergence of Secular, Cyclical Downturns

Reprinted from

What’s your read on equities, Louise?The stock market is breaking down.

You don’t see a bounce coming, consideringall of the dreadful news lately, from consumersentiment to banking woes to Detroit?I’m not convinced that the technicals will sup-port it. You’ve been getting a lot of littlebounces, but there’s never any real buyingbehind them. That’sthe problem. There’sso many individualissues here, in whichwe basically started tosee deterioration inmid-2007 in terms ofthe underlying indica-tors, and the rallieshaven’t been particu-larly strong. You brokelate last year the initialsupport, which was,what, Dow 13,000,from a little, tiny multi-month head and shoul-ders and quicklyachieved the downsidetarget, which took youdown to 12,000 basi-cally.

Below, actually.You hit 11,740. Then you had the rally thisspring, and this selloff back to the lows. So nowit looks as though you have a complex head andshoulders, in which the old little head andshoulders pattern from June to October nowbecomes a complex head. Then the rally backin December of ’06 into early ’07 becomes theleft shoulder, and the three-month rally thatwe’ve just experienced and that has disap-

peared, becomes the right shoulder. And theneckline on this new, bigger head and shoul-ders is at 12,000. When you take the measuredmove from the top of this new head down to theneckline at 12,000, which is a 2,000 pointmove, you can get a target of 10,000. TheS&P’s chart is a little bit more crooked, but theDow is showing just a perfect count. Basically,we’re slipping under.

Isn’t the old sawthat even a drowningman pops to the sur-face a few times? Sure, and we’ll get ral-lies along the way —

But you’re convincedthis is a secular, orlong-term, bear mar-ket that we’re expe-riencing? I actually think we’re ina hybrid market.Depending on whichstocks you’re in, it’seither a secular bearmarket, or the begin-ning, probably, of acyclical correction—orbear market. I’ll get to

that in a minute. But for the majority of stocks,which are still in bear markets from their highsin the 2000 period, it’s structural. You don’tget over a structural bear market in three years;not even in five years. They usually last 10, 12,15 years.

That long? That’s several lifetimes—It is a long time. When we started to anticipatethe bear market of 2000, we went back and did


“Our expectation was thatthe structural bear marketbeginning in 2000 would be

less like the immediatelyprior one and more likethe alternate, where we

would have falling rates anddeflationary pressures —

and it has turned out exactly like that.”

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Victor JuhaszPage 1 Illustrations

Note the DJIA, from a smaller “head andshoulders” (see small arcs, top) of April 2007to January 2008, achieved the downsidecount at the March 2008 low ( “b”): A movefrom the “head” to the “neckline” (“a”),measured equally from the neckline “a” downto “b.” Now a more complex “head-and-shoulders” pattern has taken shape, in whichthe “head” is comprised of the entire previ-ous “head-and-shoulders” pattern (see largerupper arc), and the “right shoulder” is repre-sented by the March to June 2008 rally andretreat, balancing what becomes a “leftshoulder” from October 2006 to March 2007;with the neckline defined at 12,000-11,740.The measured downside count, from the headto the larger “neckline” (at “b”), then pro-jected down from that neckline “c,” carriesto 10,000.— Louise Yamada, 6/25/08

Sources: Updata Technical Analyst, Bloomberg and LY Advisors

a study to try and prepare people for what toexpect of a long-term bear market. When welooked at the history that’s available in anydetail, we could only find about three of them:There was 1966 to ’82 (16 years), which was ahorizontal bear market around a pivot low in aperiod of rising inflation and rising interestrates; there was the 1929 to ’42 (13 years)experience, which began with the Crash andfeatured deflation and falling rates; and thenthere was the bear market of 1905 to ’21 (16years), which was a horizontal around a pivotlow, like the one that began in ‘66, and thatwas also accompanied by rising rates and ris-ing inflation. So taking Elliott Wave’s alterna-tion of cycles into consideration, our expecta-tion was that the structural bear marketbeginning in 2000 would be less like theimmediately prior one and more like thealternate, where we would have falling ratesand deflationary pressures — and it has turnedout exactly like that.

Exactly?Close enough. I mean, the symmetry is justincredible; we had a three-year crash in bothinstances. Then we started to see that therally from 2002 into 2004 that looked identi-cal to the corresponding 1932 to ’34 struc-ture. Then the more or less sideways correc-tion in 2005. That’s when we put forth whatwe call our “Alternate Hypothesis,” of alter-nating cycles [right] suggesting that, shouldthe pattern continue, the market from 2002to 2007 might be like 1932 to ’37, which was afive year rally. And we’ve seen it!

So history did rhyme, to say the least.But are you suggesting that’s continu-ing? Because what came next wasn’t toopleasant, if I remember my history.Well, the market’s structure in ’37 became alittle bit more complex; you got a double topand a 47% decline. The eerie thing is thatwe’ve been tracking that to perfection here in’08. I mean, it’s just extraordinary when yousee the alignment of the charts of those twoperiods, whether you look at the New YorkStock Exchange Index or the Dow. What’seven more amazing, to us, is that if you lookat the S&P financials over the recent past,they have already accomplished much of that47% decline. Now the question is, does therest of the market have to follow?

You’re making this too easy for me —The fact is, a lot of stocks already are. I mean,


“It’s just extraordinary when you see the alignment of the charts of those two periods, whether you look at the New York Stock

Exchange Index or the Dow. What’s even more amazing, to us, isthat if you look at the S&P financials over the recent past, theyhave already accomplished much of that 47% decline. Now the

question is, does the rest of the market have to follow?”

look at the structural bear market profiles ofpharmaceuticals. Pfizer (PFE) has never recov-ered from the 2000 decline and is now ateenager. Eli Lilly (LLY) has never recoveredfrom the 2000 decline. And then you’ve lostother healthcare stocks, the UnitedHealthGroups (UNH) of the world. Plus, you’ve seenthe financials with their tremendous six-yearrelative strength top and the potential thatwhat is happening now is simply delineating asecondary top to the 2000 period, which wouldmean you’ve got like an 8-to-10-year toppingprocess in the S&P financial sector.

Is there a glimmer of a silver lining, atleast, if the financials have already taken adrubbing, as you said, that’s analogous tothe hit the market took back in 1938?Couldn’t that imply an end to the suffering?Well, they’re not quite there yet, but the track-ing has been rather extraordinary. And thereare many similarities between the periodsbecause both were marked by financial crises.I think this financial crisis is much worse thanwhat we saw in ’98 or even in 1990, eventhough you’ve seen a lot of comparisons madein the press trying to show this is “just anothercrisis like we had in ’98.”

Why?The technicals tell you that it’s something farlarger, far more structural, and far more seri-ous than what happened in ’98 or in ’90 - ’91,because of the tremendous distribution that’sbeen taking place.

What do you mean by structural here?Our concept is that we’re in the midst of a 20-year shift of capitalization weightings in themarket, a process which we haven’t seen sincethe 1981 - ’82 period. And at the same time,we’ve been seeing all these other 20-year struc-tural reversals: Gold moving into a new bullmarket, breaking its 22-year bear market thatbegan in 1980; the CRB breaking out, and oilbreaking out in 2004. These are all structuralmoves, and many of the young people in thebusiness have never experienced a structuralshift. But if you think about the capitalizationshift that’s taking place, the financials in 1980were 6% of the S&P 500. Last year they were22%, and now they’re, you know, 16%, proba-bly on their way back to 6%, single digits. Bycomparison, you’ve got the energy sector,which was 27% of the weight in the S&P in1980 and fell to about 6% in 2003. It has nowgrown to 14% and is probably going to grow

back into the 20s, and maybe to 30% eventual-ly. That’s a structural shift. Certainly, all ofthose structural shifts are going to encounterinterim setbacks. But they’ve all got quite away to run.

Though they’re not all going in a souther-ly direction —That’s why I mentioned earlier that I thinkwhat we’re really in is a hybrid market, whichwe started to identify last year when the Dowand the New York Stock Exchange indicesbroke out to new highs. The thing was that,characteristically, structural bear markets donot go out to a new high during a repair rallyphase. You’ve typically got a declining phaseinto a pivot low for every structural bear mar-ket, and then you have a repair phase, in whichyou get a series of cyclical bears and cyclicalbulls. But the bulls never go out to new highsand the bears never exceed the pivot low for Xnumber of years, whether it was from ’74 to’66, or from ’29 to ’42. So if 2002 is our pivotlow, theoretically, the indices should stay aboveit, No. 1, and No. 2, should not have gone outto new highs.

So your hybrid market idea is a way ofdealing with the fact that those indicesdid go to new highs, without declaring anew bull market?Actually, what I am implying with the termhybrid market is that 2002 probably did markthe initiation of a global structural bull market,and the U.S. stocks that have been participat-ing in that, in fact, remain in up trends to thisday. Even though you have secular downtrendsin motion for consumer discretionary stocksand for financials and for healthcare, and for ahost of other issues, some of the correctionsthat have taken place and are taking place inthe market’s leadership sectors — in industri-als, energy, materials and utilities — are reallypullbacks in ongoing uptrends. Include rail-roads, too, in that list of leaders, of course.And, yes, they can pull back, as we’ve seen, by20 - 30 - 40 points, and it’s not fun for theinvestor. But those sectors have retained theiruptrend progressions, and that is what’s sort offascinating. So if those global leadershipstocks are now suffering a bear market, wewould consider it a cyclical bear market.

You’re saying the relatively strong groupsare the ones tied most closely to theglobal economy?Yes. We did a comparison of the global devel-


opment that has been taking place from 2002forward to our domestic build-out in the U.S.,from 1942 to ’66, which initiated that great bullmarket. What we found was that the first cor-rective trend, or cyclical bear market pullback,occurred in 1946 — four years into the secularmove. So I would say that the stocks that havebeen our leaders this time around now are prob-ably looking at a cyclical bear market environ-ment — at the same time that the stocks that con-tinue to be mired in their structural bear phasesthat began in 2000 are undergoing their finaldeclines and ultimate repair periods. What’sinteresting is that if you look at the analogoushistorical periods for both of these cycles (thesecular downturn from 1938 to ’42 or the cyclicaldecline from 1946 to ’49), you find that each wasa difficult three-year period.

So with both the cyclical and seculardeclines happening at the same time,you’re implying —We’re looking at probably three difficult years.You’ll get your rallies and you’ll get retreats, butyou’re not going to get a sustained move ineither direction, or at least not for a while. Imean 1942 ended at a new low for the structuralbear market. And a structural bear market is thelook we’re seeing in the charts of a lot of stocks.

For instance? Take a look even at General Electric (GE), whichlooks like it still might be in a structural bearmarket. Goodyear (GT), General Motors (GM) areat new lows; Ford (F) is at new lows. You’ve gotso many stocks that are at new lows. InternationalPaper (IP) is at new lows, having broken supportthat goes back to 1996. What I am saying is thatthese stocks have broken down through 10-yearsupports, so they’re probably the ones that arenot going to be the survivors in the new global,less “Americentric” environment.

In contrast do the energy and industrialand utility and materials companies thathave been leading the market have achance of being global survivors, even ifthey suffer a cyclical setback here?Right.

Yet we are seeing the price of energy anda bunch of other commodities go throughthe roof — how do you reconcile that withthe “deflationary environment” you men-tioned?Clearly, we have pockets of inflation and pock-ets of deflation, but that takes us back to anoth-

er of our concepts. Do you remember how westarted talking, back in 1996 or so about “look-ing for inflation in all the wrong places”? Well,the CRB broke out through a 22-year downtrend in 2002 - 2003. And the observation thatwe had made even way back was that the CRB is40% agricultural, and with agriculture you haveto consider water, because agriculture utilizes87% of the fresh water in the world. So as muchas a decade ago we were suggesting that waterwould be the new oil of the 21st Century. TheCRB is also 40% energy and 20% metals. Nowthe energy aspect of it is no longer a capitalgoods commodity in this country, in the sensethat we use 50% less oil to produce goods thanwe did in the 1970s. But our energy consump-tion keeps going up because consumers areusing it, whether by moving to the South and airconditioning everything in sight, or whether byplugging in the way we all are. I often wonderedover the past 10 years when the airports weregoing to catch on to the fact that their electricbills were going up, probably sky high, becauseeverybody was plugging in while sitting there.Now they have kiosks where you can pay to plugin when there are no “free” plugs available.That’s another thing, the “hidden” cost of thiselectronic age: 40% of the cost of data storage iselectricity. Obviously, data storage is an impor-tant factor, but I would call whatever energyinput goes into it a consumer commodity or aconsumer essential. So what were suggesting insaying that we might be looking for inflation inall the wrong places, was that in the last centu-ry, the inflationary forces really showed up inthe capital goods arena, which has now movedoffshore. So you’ve got lower wages and lowerprices (although there’s a small amount ofequalization coming into play). But now, com-ing into the 21st Century, the inflationaryforces would show up in the consumer essen-


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tials: food, water and energy.Now, of course, the agricultural complex hasjust broken out through a 34-year consolida-tion, which is extraordinary. It’s not that com-modities are going to stop being volatile. Butthey’re being volatile at a much higher level ofdemand now, for whatever reason — and I’m notgoing to get into attempting to parse the rea-sons. But if you think of these consumer essen-tials in terms of the population — when I wasborn there were fewer than three billion peopleon the globe; last year, there were six billion;now there are seven billion, I understand, onthe way to nine billion in the not–too-distantfuture. Meanwhile, we have finite land, finitewater, finite energy. It’s a no-brainer where thepricing power is going to be. It’s going to be inthe consumer essentials.

Most of those folks also have finite money.Yes, but their purchasing power is growing.That gets back to what we’ve said about thisbeing a less Americentric world. We’ve got twobillion Asian consumers coming to the fore toreplace the U.S. consumer as the engine of theworld, or at least partly. China only exportsabout 25% of is output to us, and Europeexports more to China than she does to us, sothe world is becoming less U.S.-dependent.Today we have 58% of the world’s market capi-talization, 79% of its GDP; 86% of its listedcompanies and 95% of the population outsidethe Unites States. So things are different thistime. It’s not that market psychology is going tobe any different, but the underlying environ-ment is different because there are so manymore options and variables to consider and soinflation is showing up in all the wrong places.You probably saw the chart in Barron’s lastweekend, where they juxtaposed oil to the NAS-DAQ bubble and called the rise in energy pricesa bubble.

Sure, and other more elaborate efforts todo the same sort of thing. It does look likea pretty good “fit.” Well, the only thing I could think of, and what Iwrote on that page, was “NASDAQ, no earn-ings; Energy, earnings.” It’s not a bubble. I’mnot sure at all that oil belongs on that sort ofchart. Could it pull back? Yes, it could break,but it’ll still be in a very normal uptrend above120. If it comes under 120; maybe it pulls backto 110 or 100, but I can’t see it going back tosubstantially lower prices. I mean, sure, we’regetting a global slowdown, so it’s bound tocome off a little.

But your charts place energy prices veryfirmly in a long-term uptrend? Yes, let me just find my chart on oil. When itbroke out in 2004, we went back to see whathistory could be telling us about this new lift inoil prices and found that in the 1940s there wasa multi-year step-up in the price of oil, and itnever came back down to the old lows, and —

Oil’s price has always risen in a series ofstep functions, hasn’t it? Yes, exactly. The rise in the 1940s was followedby a 24-year plateau, albeit slightly up-trending.You didn’t get the next big step-up in oil untilthe ’70s. But again, it was a multi-year step up,that never saw prices come back down to the oldlows. So in 2004, when we broke out above 40,we had essentially broken out of another 24-year resistance. You know, we don’t make upthese cycles: 24 years. What this perspectivehas done is allowed us to suggest that we were inthe next multi-year step up for the price of oiland that is not likely to ever come back down tothe old lows. I think there’s a good possibilitythat oil is in one of those multi-year step-ups.You had quite a correction, from 80 to about50, a year and a half ago. If we have anotherpullback; it’s no big deal. Your long-term up-trend is still in place well into the 70 - 80 range,so you could see it come back. We don’t see itcoming back that far, but it could come back to110 - 100 in a perfectly normal consolidation.

So there’s a lot of scope for a correction inenergy prices before you’d have to recon-sider your secular bull story on it?Exactly, and we know that sometimes bull marketsetbacks can be sharp and steep. When we had a70% - 75% run in gold and then a 25% decline in2006 that was pretty steep and quick. It’s a pos-sibility. But longer term, I think we’re still look-ing at a secular bull market in oil, notwithstand-ing all the new technologies that will inevitablybe coming into place, they’re not going to beeffective for quite some time.

Well, the higher oil goes —andstays—the moreattractive it is to search for alternatives —Yes, exactly. And don’t forget that oil is priced— mostly — in dollars. I think the weak dollar isbehind a lot of the strength in oil.

It’s the flip side of the coin?Yes, the dollar just looks awful. I know theywere trying to jawbone it up recently —


And it does seem tohave found some foot-ing.Yes, a little bit, above71 (Dollar Index, DX-Y). But it just hasn’tgone anywhere. One ofthe prime problemshere is that whengrowth is driven byhigh levels of businessinvestment, it leads tocurrency strength, butgrowth driven bystrong consumptionand governmentspending leads to cur-rency weakness — andthat’s exactly whatwe’ve been doing foryears with individualconsumption and gov-ernment spending. Youcan’t just keep doingthat and maintain any-thing but a weak currency. Plus, you’ve got for-eigners who are getting tired of losing out ontheir dollar holdings. There’s less demand forthe Treasury auctions, and eventually, sincemost of our debt is held outside of this country,we won’t really have control of the long end atall. If people stop buying the long Treasuries,you’re probably going to see interest rates atthe long end lead up; that is our hunch,because the short end is still struggling withthe deflationary crises in the financials.

When you look at the buck on yourcharts, what do you see?Well, it broke a 34-year support when it wentunder 80. That was a pretty critical level.We’ve had long-term targets out there at 67and 60 for the dollar. Whether it gets there ornot is going to depend on how fast people elim-inate their holdings abroad. But if you look atthe broad trade-weighted dollar, which I like tolook at, because it includes all the countriesthat have surpluses against us, you have had anincredible 25-year trend break from a six-to-seven year top. It’s a very different picture fromthe spot dollar or the trade-weighted dollar. Thebroad trade-weighted dollar is much more dra-matic, in the sense that it’s reversing another 25-year structural trend. So it’s another of the manysequential 20-plus-year structural trends thathave been reversed over the past four or fiveyears and that, along with the capitalization shift

we talked about, don’t paint a pretty picture. Ifyou think about history a little bit, 19thCentury Britain was the economic world leaderand the pound was the currency of choice, yetsomewhere post-the Second World War thatbaton got handed over to the U.S., and we’vebeen the economic leader, and the dollar hasbeen the currency of choice. But I suspect thatsomewhere in this century, we’re going to handthat baton over to China or somebody else, andthey’ll become the economic leader, and somaybe the yuan will be the currency of choice.If they are smart, they’ll back it, at least par-tially, with gold. The dollar has become a fiatcurrency, along with all the other developednations’ currencies; they’re printing as fast aswe are.

That’s one thing that does tend to sup-port the dollar: Considering the alterna-tives.Yes, well exactly. But the way the dollar’sgoing and the way people are diversifying outof dollars — certain countries are asking foreuros in exchange for oil, and actually we’veseen anecdotal evidence that there are stores inNew York that are asking for euros—that’s allearly evidence that the dollar may be losing itsreserve currency status. I’m not quite surewhat’s going to replace it at the moment, but it’llevolve.

Reprinted with permission ofJUNE 27, 2008 PAGE 7


Other than being the current fave of hiphop artists and such, as a store of value,the euro looks even worse than the buck. I agree with you; it’s just perceived as better atthe moment. But, ultimately the winners aregoing to be whoever has a surplus. Those arethe currencies that are strengthening, and if theones that are linked to the dollar get to thepoint where they de-link, the dollar is going tohave a really hard time.

Let’s segue back to the stock market.Even the Lowry’s data, which has beensuper in navigating this downturn, ispointing to at least a short-term oversoldcondition developing. Doesn’t that argueat least for a bounce?Mm-hmm. But in a bear market a lot of shortterm indicators periodically get to oversold lev-els. So you might get a little bounce, but a per-sistence of oversold levels is the empirical evi-dence of selling pressure. That’s what “over-sold” means. While traders are anxious to useit as a signal for a pop, you can get into longperiods — the way we did in the 2001, 2002,2003 decline— where some of the indicators

remain oversold for enormously long times.Part of the way, in fact, that we were able toidentify that we are in a very different environ-ment was that the TRIN indicator becamedeeply oversold. You never saw it so consistent-ly oversold. Traders would say, “For two days ina row, the TRIN has been over 2; it’s time tobuy.” But clearly it wasn’t.

And it stayed oversold?That’s right. That’s an indicator that — in a sta-ble, advancing market — may only get deeplyoversold once every year or 18 months, and itwas becoming more oversold more frequently.

What else is making it challenging to“read” this market?There are a few things that we have to consider thatmay very well be changing some of the characteris-tics of the market’s volume and of the declinesthemselves — and the main one is the uptick rule. Ifyou look at the volume data from the point last yearwhen the uptick rule was eliminated, you have hadsome enormous volume spikes in the decliningphases over this span. I mean significantly largerthan in declining phases in any other portion ofthe data we have that combines NYSE and off-floor volume.

Even in other bear markets?Well, we only have that combined data back to2001; but we didn’t see any spikes like these inprevious declines in that stretch. That brings tothe fore questions about what does this exces-sive down volume do in terms of registering90% down days? What does it do in terms ofsmoothed total volume, not just New York StockExchange, but total composite trading volume,on and off board? Does it skew it to the downside? Will it skew it to the down side? Thereare a lot of unanswered questions that are goingto have to be evaluated as we go forward withthis, and clearly we don’t have any modern his-tory to compare today’s volume to. We’d beenliving with the uptick rule for 70 or 80 years.So it’s going to be a question of the evolution ofbehavior without the uptick rule; we just haveto watch to see how the volume characteristicscome in. But so far what you basically can say isthat you have not had volume support on therallies, and that’s important.

What’s another change in the market’sunderpinnings that you’re watching?Margin debt. I wrote about it last week.

Your chart [nearby] was eye-opening.

Yes, the de-leveraging that’s going on here inmargin debt looks like it’s just the beginning —and very similar to the pattern of the 2000 -2002 period. Which would suggest that you’vegot a considerable way to go before the unwind-ing is over.

So that’s not a ladder to heaven you drewin there?Scarcely. The data is only released monthly, soyou don’t see it right off the bat. But when wesaw the last update at the end of the month, itwas pretty much of a shocker, the way thedecline is paralleling what happened at thebeginning of the 1999-2002 stretch. That kindof decline in margin debt can have a drasticeffect on the market. Another interesting thingto look at is the action in the S&P 500. Thisindex never did make it out, sustainably,through its 2000 peak. So there’s your oneindex that is characteristic of a structural bearmarket, and the S&P has essentially double-topped, in 2000 and then last October, and ofcourse that’s the index with such a large portionof its capitalization in the deteriorating sectors:the pharmaceuticals, the financials, the con-sumer discretionary. You add it all up, and ver-sus the New York Stock Exchange index, whichwas 87% small and midcap stocks when the rallybegan, the contrast is sharp. The small and mid-caps were the new leaders and the S&P 500 hasbeen the laggard, the — what should we say? —poster boy for the structural bear market pat-tern.

If you wanted to reach for a positive spinon all this, could you at least say that thegroups in structural bear markets, like thefinancials, drugs, at least have probablysustained most of the damage they’re like-ly to suffer? I’m afraid not. Remember, this looks like itcould go on for another three years or so. Imean we had a very dear, old friend who, youknow, was buying Pfizer a couple of years ago,when we were just starting LY Advisors as anindependent research firm. It had a great yield,5%. But I said, “Please, don’t buy Pfizer. It’s ina long-term structural bear market.” Then itbroke 24, and then it broke 22, and now it hasbroken 20. I called him recently and said, “Ihope you sold your Pfizer,” and he said, “Well,at least it’s yielding 6% now.” Well, that’s theold story about “value” stocks that only becomemore valuable. I mean, two years ago, wouldyou have expected the stock to be at 17? Mostpeople wouldn’t have. Yet it’s been in a consis-

tent decline and the bear market for a lot of thepharmaceuticals actually started in 1999. Pfizertopped in 2000, and if you look at a weekly ormonthly chart, in every rally since then it hassettled at a lower peak, which is a classic multi-year distribution in a structural bear market.

You can’t project a bottom?You don’t know. That’s the thing. You have gotto wonder how many of these are going to sur-vive, and how many are going to be handing thebaton over to someone else, perhaps foreigndrugmakers or biotech, or whatever. So couldPfizer go to 15? Sure. Could it go to 10? Yes.So could Citicorp (C).

Too big to fail, but not to shrink?Right. Look at an AIG [American InternationalGroup] as another example. I mean that has hadphenomenal decline.

What’s that chart telling you?You’re going lower. You’re going much lower. Imean, this is just incredible. When you look atAIG’s chart, it has broken every single support.It topped at over 100 but then broke originallythrough 80 at the end of 2000. Couldn’t makeit back through 80 in any of these subsequentbull moves. Failed at lower levels around 70,and then 60 became the next support to break.And then 50 was broken early this year, whichtook you back to a level last seen in 2003. Andnow you’ve broken a support that goes all theway back to 1998, under 40. This tells you thatthis stock could become a teenager before it’sover. So you have to be cautious in interpretingoversold conditions, because what they reallyrepresent is the empirical evidence of selling.At some point these stocks will wash out, but Ithink you’ve had so many people buying themon hope, that I suspect it may take a while towash them out.

Does anything look better?Not much. Even a stock like DuPont (DD) thatwe thought was starting to look better, isn’t act-ing well. If that stock breaks 40, all bets are off.And General Electric (GE), certainly isn’t actinglike a leader. The stock rallied back through 40,which was the major resistance level from its2000 decline, but then couldn’t sustain thatlevel and fell back. Now it’s breaking 30, whichshould actually take you through 2003 support.So could GE become a $20 stock? Yes, it could.When you think about it, it’s got a big broadcastcomponent; it’s got a big financial component,and those are two of the areas that are in struc-


tural decline.

So the likes of GE and AIG aren’t the onlyfinancials with dreadful-looking charts?No. Many of them look that way. This wholething is becoming a tremendous top. These alsoare some old tech sectors that are going toremain old tech. Watching General Motors (GM)break through 20 was just mind-boggling. Itcould go back to 11, if not 5.

Okay, but as you said, it has been a bifur-cated market, and some stocks enjoyed anew bull market since 2003. Surely thosecharts aren’t so dismal. Sure, but one of the things that we’ve seen hap-pen recently is some splintering in the leader-ship areas. Aerospace was one of the firstindustrial groups to go by the wayside, Boeing(BA) being the primary name here. It has inplace a rather large head and shoulders top tak-ing you all the way back to 2006. The criticalsupport here is around 71 roughly, and thestock is moving right around that. So that lookslike a structural top, although it’s well abovethe 2000 peak. This it is an example of a stockthat was clearly in a bull market, but now it’slooking like it is running into structural head-winds. The point is that we are starting to loseour leaders so the leadership is getting thinner.And you’re going to get profit-taking in thegroups that have been outperforming. Youknow, there’s always something that outper-forms into a top. So the question becomespreservation of capital, because even thegroups that have been outperforming start topull in and possibly break short-term support —even if, in many cases, they stay within longerterm up-trends.

Are there indicators you are paying partic-

ular attention to, today?One of the indicators that have kept us on theright side of things is the percentage of stocksabove their 200-day moving averages. It’s beenwell under 50% for quite some time; call 50%the oversold threshold, if you want, so there isan example of an indicator that’s been oversoldthroughout this entire rally. It has stayed over-sold ever since we started seeing deteriorationin other indicators, which was in mid-2007. Ithasn’t come back over 50%; it was similarlyoversold from 2002 into 2003, until the marketlifted. We’re watching it, because once it getsover the 50% threshold, you have a betterchance of having some kind of a rally.

What about the tech sector? People havebeen detecting signs of life there.We actually wrote up technology last summer —to our subsequent chagrin — when its relativestrength line broke out through a downtrend.But it immediately went on sabbatical andretreated. And even at the time we said youhave to be very selective, which is a theme — oldtech/new tech — that we’ve been reiteratingsince the mid-’90s. You have to look for newtechs because technology is so quickly com-moditized or copied by China; sometimes what-ever competitive edge a tech has is incrediblyshort-lived now. Meanwhile, a lot of the oldertech companies have not been able to recover.Even some of the ones that we selectivelypicked out a summer ago have not done all thatwell. You’ve got a few that have done nicely;BMC Software (BMC) comes to mind as one thathas inched its way along over the past couple ofyears. It broke out of a multi-year base in 2006and consolidated for a year above 30. Now itlooks poised to challenge resistance at 40. Butsomething like MEMC Electronic Materials(WFR), which did extremely well, now looks

like it has traced out a hugeyear-long top; a break under60 would be devastating tothe stock. So it’s very selec-tive, you’ve had to be quitenimble to play the rally andkeep your stop losses in place.Now, IBM has done very wellsince the 2003 bottom andHewlett Packard has done verywell. But I think they’re bothlooking at corrective actionnow. Then there is Apple(AAPL), of course. But at thispoint you have to wonder,looking at its chart, if it does-


LY Advisors' Parameters For The Major Indices

IndexRecentClosing

High

RecentClosing

Low

Decline% FromHigh To

Low

Resistance Levels Downside Targets 20% Off

High30% Off

High

Dow Industrials 14,164.53 11,740.15 -17.12% 13,000; 13,500 11,000 - 10,000 11,331.62 9915.17

Dow Transports 5,492.95 4,140.29 ----- 5,500 4,800 4,394.36 3845.07

Dow Utilities 552.74 473.43 -14.35% 540 - 550 460; 420 442.19 386.92

NYSE Composite 10,311.61 8,489.38 -17.67% 9,200; 9,600 8,000; 7,700 6,249.29 7218.13

NASDAQ Composite 2,859.12 2,169.34 -24.13% 2,550; 2,600 2,200; 2,000 2,287.30 2001.38

S&P 500 1,565.15 1,273.37 -18.64% 1,375; 1,450 1,250; 1,175 1,252.12 1095.61

S&P 400 926.23 744.89 -19.58% 900 800; 700; (650) 740.98 648.36

S&P 600 445.19 344.69 -22.57% 400; 420 360; 340; (320) 356.15 311.63

Russell 2000 855.77 643.97 -24.75% 750; 800 700; 650; (600) 684.62 599.04

n’t have more of a correction ahead.

That doesn’t bode terribly well, does it, forthe Nasdaq 100, which has been one of thebetter performing indexes, and is heavilyweighted to a handful of glam techs, Appleincluded?It’s the same old story. Of the “four horsemen”in that index, only Microsoft (MSFT) has been adisappointment, and even it was a relativelygood performer in the cyclical bull; it didn’t godown. Meanwhile, Apple, Research In Motion(RIMM) and Google (GOOG) did very well. Butnow they all look like they could all use, at least,a rest.

Google, too?It looks like it’s poised to break again. I’ve beenwrong before, but it rallied right up into resis-tance just over 600, which was the level thatacted like support in its runs to its tops over700 in late ’07. I’m just looking at the chart,the breakdown in the original distributioncame at around 614, then you went all the waydown to 400-something and you came rightback up to 600. But now you’re failing at thatresistance level, which is interesting. The stockhas seen a lot of trading, so there’s been a lot ofupside and downside, but if you step back a lit-tle from the daily noise, you can see that itstopped right at the critical resistance level. SoI’d be careful with it — and with everythinghere. It’s a question of preservation of capital.

Sure, but lots of folks don’t have much choicebut to be in equities. What’s a safe haven?It’s hard to because we don’t see anything com-ing up from the ashes. We don’t see majorbases in the charts the way we were seeing in2003. Well, one: Wal-Mart (WMT), which reallyhas turned around its profile. That stock hadbeen in a seven-year downtrend and then westarted to see evidence of accumulation justbefore its breakout and it seems to be in a newbull market.

Can you put some numbers into thatdescription?From the peak at 70 at the beginning of 2000,every single rally in WMT failed at a lower level.But then all of a sudden you started seeing thisbasing coming into the stock chart in 2005 -2006. Essentially, there was a failure to golower rather than distribution, creating thissort of nice sort of heavy weight in the chartabove 42, and you finally broke out of that chan-nel, climbing to 52, consolidating briefly and

then continuing to move up. The stock looksgood. The next level of resistance here is 60; ifwe can get through that you take it through the’02 peak, which was just shy of 65. So, yes, thatone does look quite interesting. But it’s virtual-ly the only stock you can spot that’s coming outof a good base. In a similar vein, Costco (COST)doesn’t look bad; of course, it’s in the samegroup, and also fills the bill when people needto be frugal. And you do have the stocks thathave been leaders in the rally from ’02 -’03,stocks like Caterpillar (CAT), which we think aregoing to continue to participate in globalgrowth. But pulling up the chart here, thisstock could continue these wide swings, from60 to 80 to 60 to 80 to 60 to 80 — and now it’scoming down again. It could certainly continueto do that for quite some time and still stay wellwithin its uptrend. And in doing so, it wouldestablish a platform from which to rise at a laterdate — which may not be for another year.

I’m getting the sense you’re reaching.You’re right. Now, we still like the railroads,which are pulling back. Hopefully they’ll giveus another opportunity to come in and partici-pate. We don’t talk much about electric utili-ties, but selectively we like them. We did a pieceback in 2000 and again in 2005 or ’06, suggest-ing that the electric utilities may well be “basicmaterials” in the new high tech world when youconsider that electricity is 40% of the cost ofdata storage. In fact, I will make a bet that theyare going to be one of the groups that grows incapitalization over this 10- 20-year cyclebecause we’re not going to be able to live with-out them. How are you going to plug in a carwhen you can’t even keep the lights on in a heatwave?

Been wondering that myself.But we’re in a situation right now where theelectric utilities are going to be caught up inthis cyclical decline. For people who have tostay 100% invested, to me, that means it’s timeto hedge, however they can, because there’s stilla very furious unwinding taking place. This is atime to err on the side of caution. RememberAlan [Shaw]’s old saying?

Which one?“I’d rather be out of the market wishing I werein than in the market wishing I were out.”

The perfect closer. Thanks, Louise.

Reprinted with permission ofJUNE 27, 2008 PAGE 11

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This material is based on data fromsources we consider to be accurateand reliable, but it is not guaranteedas to accuracy and does not purportto be complete. Opinions and projec-tions found in this report reflecteither our opinion (or that of thenamed analyst interviewed) as of thereport date and are subject to changewithout notice. When an unaffiliatedinterviewee’s opinions and projec-tions are reported, Weeden & Co. isrelying on the accuracy and com-pleteness of that individual/firm’sown research disclosures andassumes no liability for same, beyondreprinting them in an adjacent box.This report is neither intended norshould it be construed as an offer tosell or solicitation or basis for anycontract, for the purchase of anysecurity or financial product. Nor hasany determination been made thatany particular security is suitable forany client. Nothing contained hereinis intended to be, nor should it beconsidered, investment advice. Thisreport does not provide sufficientinformation upon which to base aninvestment decision. You are advisedto consult with your broker or otherfinancial advisors or professionals asappropriate to verify pricing andother information. Weeden & Co. LP ,its affiliates, directors, officers andassociates do not assume any liabili-ty for losses that may result from thereliance by any person upon any suchinformation or opinions. Past perfor-mance of securities or any financialinstruments is not indicative of futureperformance. From time to time, thisfirm, its affiliates, and/or its individ-ual officers and/or members of theirfamilies may have a position in thesubject securities which may be con-sistent with or contrary to the rec-ommendations contained herein; andmay make purchases and/or sales ofthose securities in the open marketor otherwise. Weeden & Co. LP makesa market in Apple (AAPL) and Costco(COST) (the featured securities.)Weeden & Co. LP is a member ofFINRA, Nasdaq, and SIPC.

W@W Interviewee Research Disclosure:: Louise Yamada is the founder and managing director of Louise Yamada Technical Research Advisors, LLC. This interview was initiated byWelling@Weeden and contains the current opinions of the interviewee but not necessarily those of LY Advisors. Such opinions are subject to change without notice. This interview is for infor-mational purposes only. The research company is engaged solely in the conduct and publication of independent technical analysis research and, as such, is completely unconflicted. Althoughemployees of the Company may from time to time hold positions in securities mentioned in research reports, the Company’s policy proscribes any employee activity that would conflict withclient interests. A copy of the policy is available on request. The Company’s technical analysis research is prepared from data believed to be accurate and reliable but the Company cannotguarantee its accuracy or completeness and no representation is made to that effect. The Company’s technical research is based on analysis of the current price performance of a security ascompared to its historical price performance, taking into account also the technical position of the industry group and the overall position of the securities markets. Past performance is notnecessarily a guide to future performance, however, and technical analysis alone should not be relied upon in making investment decisions. All publicly available information regarding thesecurity in question should be reviewed including the fundamentals of the security and other information provided in any filings with the Securities and Exchange Commission (SEC). The infor-mation in this report was specifically prepared for institutional investors and is not for the use of individual investors. No part of this interview may be reproduced in any form, or referred toin any other publication, without express written permission of Welling@Weeden. For further information, contact: LOUISE YAMADA TECHNICAL RESEARCH ADVISORS, LLC 530 Fifth Avenue -Suite 200 New York, NY 10036 (212) 944-6200

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