Famous Market Technician Gary Smith Uses T2108 Out of Context

I used to follow Gary Smith during the aftermath of the dot-com, tech bubble crash. I always thought of him as a master technician in the stock market. His pieces were only occasionally made available for free through the TheStreet.com and then, after a few years, he “vanished.” I believe he went off to do his own thing on a proprietary site.

So imagine my pleasant surprise to stumble upon “Breakout” from Yahoo!Finance featuring legendary Jeff Macke interviewing Gary Smith on March 14th (I found this thanks to a disparaging reference from Schaeffer’s Investment Research). Imagine my double surprise to hear Smith include T2108 as one of his reasons for expecting a market sell-off. He did not mention it by name but by definition: the percentage of stocks trading above their respective 40-day moving averages (DMAs). It is rare to hear or read references to T2108, even rarer to find people who have studied its behavior (Schaeffer’s Investment Research does its own analysis of Smith’s claims but for some reasons uses 85% as a threshold which trains their focus on the most bullish periods of trading since 2000). In this case, I would love to hear what Smith has to say about my own historical analysis that contradicts his use of T2108 here as a warning signal.

Smith mentions that any reading of T2108 above 65% represents a warning sign for a market sell-off. He does not provide data for using this threshold; I use 70% (for my definition of overbought see my 2009 analysis “Using the Percentage of Stocks Trading Above Their 40DMAs (T2108) to Identify Overbought Conditions on the S&P 500” – the page may take a minute or so to load). More importantly, Smith fails to describe the context for the current T2108 levels (which have dropped back to 63% by the way). T2108 stayed overbought (above 70%) for 43 straight trading days to start the year, ranking it #7 for all overbought periods since 1986. An analysis of the historical data suggests that such a run does NOT end in a significant sell-off. Instead, it is the prelude to at least one more strong rally (see “Trading the S&P 500 After An Overbought Period Ends – Using the Percentage of Stocks Trading Above Their 40DMAs (‘T2108’).” Moreover, the maximum sell-off after any overbought period running longer than 25 days or so has been 8%.

I would LOVE for Smith to look over my analysis and hand down his judgment. Note in the interview that Smith does acknowledge the bullish case, and his primary discomfort with the market is really more about the significant run Apple (AAPL) has had. It reminds him too much of the rally in tech stocks that preceded the crash in March, 2000.

Be careful out there!

Full disclosure: no positions