Reminder About All Prior Posts

Just a heads up that as of the time of this writing, all posts on this site are from Sept – Nov 2012 and should not be confused with current, relevant market data and opinions. I’m resurrecting the blog and am [for a time] leaving the original posts intact to give some background color of my thought process & approach to new readers.

Look for a new post here tomorrow expanding on some of the price data/charting that informs my work allocating capital through the different environments of the market cycle.

J

Sunday Night Indicator Round Up

Through Friday Nov. 23 we’re seeing continued improvement in several indicators as the market steadies itself after the post election sell off.  On Friday, of all Optionable Stocks there were 19 net new buy signals & 178 net positive chart reversals which adds to a trend that began the previous week.  We also saw the overbought/oversold condition of the optionable universe improve 9.73 percentage points from it’s post election low of 40% oversold, to a current level 10.25% oversold.  This compares to the May 2012 low of 52% oversold & Aug 2011 low of 96% oversold.  Another indicator experiencing a large move up is the Percentage of Optionable Stocks With Positive Weekly Momentum, which increased 13.95 percentage points to 44.13%, (meaning just over 40% of optionable stocks have positive weekly momentum based upon a 1 week vs 5 week moving average).

An interesting change and one that should have positive implications for large technology stocks is the reversal up of the Nasdaq 100 Bullish Percent, which tracks the percentage of NDX components currently on chart buy signals.

A reminder re bullish percent charts.  At first you may be tempted to think “Apple & Google had sharp rallies for the week so of course an indicator tracking the Nasdaq 100 would be up”.  But bullish percent charts only give one vote per stock regardless of how heavily weighted a particular stock, like Apple, may represent of the underlying index.  Apple’s new buy signal, which occurred on Nov 19 at $556, counts as a 1% improvement for the BP calculation, (due to the underlying index having 100 constituent holdings), and a 6% increase in buy signals is required for the BPNDX to reverse up).

On the sector level, the largest positive Advance/Decline moves happened for Chemicals, Healthcare and Food & Beverages.  All sectors but Electric Utilities, Gaming and Savings & Loans saw positive A/D changes.

Indications Of Interest

Tracking all optionable U.S. stocks, on Friday Nov. 16 we had 14 net new sell signals and 6 net negative chart reversals.  While this continues the string of days with net negative chart movement, the total buy and sell signals as well as reversals up and down are beginning to come closer to balancing out which means the current market weakness may be a bit extended.  Other indicators following the optionable stock universe saw slight improvement through Friday such as the “Percent of Stocks Above Ten Week MA” up 1.8% to 22.23, “Percent of Stocks Above 30 Week MA” up 2.8% to 41.15 and “Percent of Stocks With Positive Weekly Momentum” up .7% to 23.22.  While these aren’t large upticks it’s nice to see them stabilize for the moment.

One negative development is the “Percent of Optionable Stocks in a Positive Trend” dropped enough Friday to reverse down at a reading of 49.80, which means that slightly less than 50% of all optionable stocks are currently in positive trends.

On the Sector front we see more evidence of recent weakness for equities by noting that Overbought/Oversold readings continue to move lower.  One month ago the average reading for all sectors was 6.96% overbought, last week it was 21.28% oversold and as of Friday the average sector is 33.69% oversold, or 1 standard deviation below the average sector five week moving average.  (For more info on overbought/oversold readings see here).  For perspective, at the S&P500 low on June 4 2012 the average sector was 48.70% oversold.

Lastly, tracking sector Advance/Decline stats, while most were solidly lower at week end, two sector’s A/D numbers actually rose; Finance and Gaming.  This could be early indication of these sectors being a bit washed out and an interesting area to scout for potential watchlist long candidates.

I’m So Over You

I saw an interaction on social media today that prompted me to write about the terms “Overbought” and “Oversold”, words that while used very frequently by financial bloggers and traders in discussions of the bullish or bearish qualities of the equity market and individual stocks, can have very different meanings and uses from one investor to the next.  I’m going to focus on the term Oversold so please keep in mind that the meanings for the term Overbought are the same, just opposite.

In a general way, when someone says that XYZ stock is oversold they either mean A:  the price of the stock is well below the true value of the company based on fundamental valuation metrics such as price/earnings, price/growth, etc or B: a drop in the price has pushed some technical indicator to an extreme and unsustainable level.  For all intents and purposes, particularly outside a value investing setting, it will be definition B that you’ll be hearing.  But that still leaves a lot of room for interpretation and application so let’s look at a couple of examples, including how I define and use it as an indicator in my own portfolio management process.

Firstly, and very important to remember when hearing traders or investors mention a stock being “oversold” is that many of them are not referring to a specific and trackable statistical condition but are relying visually on an oscillator like the Relative Strength Index or a Moving Average Convergence Divergence reading that appears “stretched” and now must snap back.  I consider these to add fine anecdotal evidence on the surface, and could actually be tracked effectively in tabular form but the fact is that’s not how most traders use them.  Here’s an example using Google.  I’ve circled the extreme position of both RSI and MACD.

Another method, and the one that I employ, is to use past volatility to calculate a statistical bell curve for the asset in question, plotting where in the curve the stock is currently priced and express it as a percentage of the mid-point of the curve ie: 10% overbought, 35% oversold etc on a curve like this.

The concept behind this approach is that 3 standard deviations from the mean, (normal) is considered 100% overbought or oversold. This does NOT mean the stock will magically snap back to normal or that it’s somehow fundamentally cheap.  In fact stocks can and do go much further than 100% overbought or sold, in reality the tails on a bell curve go to infinity so that’s a reason I would only use this as a secondary indicator after trend and pattern to help guide buy/sell decisions.  Also, a stock can go from oversold to normal without even changing price, but through time as the back data refreshes to create a new normal.

Going back to our Google example, here’s data in tabular form showing overbought, normal and oversold levels by week and as a percentage of normal based on that weeks closing price.

By using this information I believe you can add another strong data point to the weight of evidence guiding your investment decision making. Remember, when someone says that a stock is overbought or oversold, be aware of how they’re using the term and what that can mean for a buy sell or hold decision you may be considering.

Yes Virginia, We’re Still In A Bear Market

I see many highly experienced and yet unselfish people on social media willing to share their trading expertise with others, and sometimes it gives me the idea for a contribution of my own.  This occurred today as the result of a post by Sheldon McIntyre of Heritage Capital, (@hertcapital).  I had the idea of putting together a very long term chart of the S&P 500 based on a post by him of the S&P 500 Index priced quarterly. His post is here.

This chart is the $SPX from 1927 to the present and it includes the last three Secular Bear Markets which occurred in the 30s, the 70s, and the current market beginning in Spring 2000.  I apologize for the slighty blurry graphics, it’s apparently hard to squeeze 85 years of trading into a blog post but if you click on the chart you can then magnify and see it clearly.

Lastly, keep in mind the last two secular bears markets have lasted 25 and 17 years respectively.  We are currently in year 13 and close to the high point of the current one, so we would appear to be at a crossroads.  Either the market begins to account for a new up swing in global growth strong enough to deserve higher asset prices, or our investing tactics and emotional fortitude may be strongly tested yet again.

Weekly Momentum – An Update

My last post concerned Weekly Momentum calculations and an indicator I use to gauge strength or weakness across the broad market, the “Percent of Stocks With Positive Weekly Momentum”.  In addition to giving us a feel for the underlying strength or weakness in the market this indicator can also signal turning points in the breadth of the strength or weakness, particularly when we see it reverse from above 70% and below 30%.

After topping recently at 88% in July we saw a reversal and the indicator fell as low as 20%. With yesterdays action this indicator has reversed up to 26% meaning that 26% of all optionable U.S. stocks now have positive weekly momentum.  I’ll be watching for a rise above 30% to confirm the continuation of the building strength for equities.

Weekly Momentum…How Weak

A quick note about weekly momentum, which is calculated using a 1 week vs 5 week smoothed moving average and is used as a secondary indicator to measure near term strength or weakness in a given security.  By tracking the percent of stocks with positive weekly momentum one can gain insight of current “internal” strength or weakness of the market.

Using the universe of optionable stocks, widely held and traded securities, we can look across both the NYSE as well has NASDAQ.  The percent of optionable stocks with positive weekly momentum recently topped at 88% in July of this year and after reversing down in late July, have now moved all the way to only 24%.  Fully 3/4s of the optionable stock universe currently has negative weekly momentum!  While this calculation can typically bottom as low as 5 – 10%, below 30% we can begin to watch for signs of a reversal up and the onset of buying pressure.

I will post an update to this when it occurs.