I have been talking a whole lot of investors since past couple of weeks and everyone is just talking about “What is market up to?”
Some say there is bull market somewhere? Follow up Question is Where??
Some say this is bear market? Follow up Question is “What to short?”
Some say this is sideways market? Again what is channeling and how should I trade.
Some of you guys know my view, that I am bearish since past couple of days. I have also lost money hand over fist trying to fight bull, bear and sideways market. So I have been doing lot of introspection on what is going on with my thought process and my mind.
I was positioned with SPY puts to take advantage of this decline (three times) but next day I took some profits and bailed out as I was psychologically weak and was afraid that market will turn back and tear me up.
I referred to my article back in last year “ End of the Trend “ to get some basic perspective on why I keep on becoming psychologically weak and give up my profits.
I reviewed 3 rules to that I usually look at and was not following them (admission is first step of resolving mistakes)
1) Higher High and Higher Low and Higher Closing Highs– Bull market. (check weekly chart and daily chart to get confirmation)
2) Lower Highs and Lower Close and Lower Closing Lows – Bear Market (Check weekly chart and daily chart to get confirmation
3) If it’s not 1 and 2 then it’s a congestion market.
Also I have been in discussions with “Isitpossible” (I think his name is Yogesh) at mysavingsplan.weebly.com on $BPNYA as a market indicator. He has done fantastic job developing a tool to find out which ETFs are worth trading based on market conditions. His market conditions tool is Bullish percent Index of NYSE ($BPNYA). His research shows that using the 30 EMA of $BPNYA, will keep you in trend with market and average losses are reduced to 4% over history of last 30-40 years.
Market Indices such as the Dow 30 or S&P500 indices are the most readily available barometers for market conditions. However the can go up one day, down one day and chop
around for days as we have been seeing in past couple of months and can fool you around.
As these indices have some weighting, there might be few components moving up heavily and giving a false sense of rising markets.
What is more beneficial is to have an understanding of the underlying strength/breadth of these market trends as they show exactly what is going on underneath these indices.
So what is $BPNYA
It is a market indicator developed by Abe W. Cohen in 1955 called the New York Stock Exchange Bullish Percent Index. It is relative level of market breadth. Abe was an early pioneer of Point & Figure (P&F) stock charts. The stock prices on P&F charts gives you a map of the relationship between demand (buyers) and supply (sellers). The advantage of P&F charts is that these supply/demand imbalances are clear and easy to identify: if demand outstrips supply, a P&F bull signal (X) is generated and if supply outstrips demand a F&;F bear signal (O) is generated.
Abe Cohen took the logical leap that by calculating the percentage of bull signals amongst the constituent stocks of the NYSE index, he would have an accurate picture of the supply/demand relationship for the market as a whole.
For example, if there were 2000 stocks in the NYSE index and 1000 of them were on bull signals, then the Bullish % would be reading 50%.
As it turned out, not only did the NYSE Bullish % identify periods when the bulls were in the driving seat i.e. the best time to buy stocks, but it also proved to be a one of the best contrary indicators for calling intermediate market tops and bottoms.
Abe Cohen’s original strategy for the bullish percentage was to be bullish on readings above 52% and bearish below 48%. However, as time went by, and the back history of breadth data built up, improved applications of this indicator were introduced. Earl Blumenthal’s book “Chart for Profit”, published in 1975, introduced a series of rules to be applied to the point & figure chart of the NYSE Bullish % or the “Bullish Bearish index” as he referred to it. The rules were further refined by Mike Burke in 1982.
I haven't studied these rules or read these books yet (hard to find them too) but to keep it simple I follow the 10 day SMA of this $BPNYA as pointed out by CKbergin last year.
How is $BPNYA calcualted
Bull signals and Bear Signals for this Bullish percent index are generated using following method
Stock Price | Price Movement | 3 x Price Movement |
0 to 5 | $0.25 | $0.75 |
5 to 20 | $0.5 | $1.5 |
20 to 100 | $1.00 | $3.00 |
100 to 200 | $2.00 | $6.00 |
200 + | $4.00 | $12.00 |
One can adjust for the volatility of the stock this 3x movement to 4x, 5x or anything one choose. Abe chose 3x.
Lets take an example of BIDU BIDU is trading at 123 and is trend is bearish..
Now for P&F chart to call this as Bull move, the stock will have to move $6 upwards.
Similarly lets take example of SIMG which is trading at 6.22 and is in bearish trend. Now for P& F chart to call this as Bull move, the stock will have to move $1.5 upward from its given price.
Similar for JVA , which is in the bull move, the stock has to reverse 1.5 downwards to be called in bearish trend.
Now since $BPNYA, measures the number of NYSE stocks which are in bullish trend. When 70 % of the stocks are having a bullish trend, historically this means that there is lot of froth building up in the market and every TOM, DICK, HARRY stock is flying higher without proper fundamentals behind it. Hence markets have seen heavy reversals once it reaches the 70+ zones.
Now during these 70+ zones, there might be lot of rotation going on, there might be some new stocks entering bullish mode and some leaving the bullish mode and getting bearish. Hence you might see some weeks to months before there is a heavy reversal resulting into market corrections.
Even during market corrections, there might be new guys becoming bullish and trading those bullish guys can make you profits (JVA, VRUS etc recent example). Even during market corrections, there might be some sectors may be still bullish on their Bullish percent indices. (OILS - 42% and Restaurants - 68% are the current ones more info at the end of the article on this). But for most of the investors, its better to go with the overall market mood and remain bearish till the signal reverses back to Bullish mode. Usually , when the $BPNYA signal reverses, the names that will lead the market will be from these already Bullish Percent Indices and eventually new names will join the procession upwards.
Dorsey Wright in the current generation is a big proponent of using P&F chart. His firm calculates lots of these data on everyday basis and provides very good information on various Bullish percent indices including Sector Bullish percent Indices. The names Oils and Restaurants I indicated above are from his service (I am a subscriber to this service).
Here are some of the names from OIL sector
Here are some of the names from Restaurant sector
These are some of the names but as the sector starts catching up some stream, there might be some new stocks in the same sector turning bullish but trading those names when they start turning bullish is very profitable.
ETFs of interest this week.
SGG, PCY, IEF, PALL, EMB, SHY, IEI, BND, BSV, TLT, FXF, UNG, FXY ICN, MUB, BZF
Next week, I will post on how I use VIX, Put Call ratios etc as another side of this market indicator coin.
