Here we go again…

August 12, 2020  |  Michael Reilly

Here we go again… if you listen to the media you’ll hear something like this “We’ve come too far too fast”…

It’s just noise, don’t buy into it. The media can’t help themselves. But you can!

Just months after the fastest decline in excess of 30% in market history, the major U.S. indices are either at or flirting with all-time record highs.

And this lightning fast rebound has investors worried that markets are now overbought.  For the average investor it looks that way.

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Here’s the problem – most investors look at the wrong data.

Most investors think the S&P 500, the DOW or the NASDAQ are “the market” – when in fact nothing could be further from the truth. 

Without getting too far into the weeds here, these major market indexes are weighted, either by price or by size (cap weighted)… So the biggest or most expensive stocks have more influence on the direction of the daily moves of the index.

And that means the index doesn’t tell you what is really happening behind the scenes with the true market, which can result in costly mistakes.

So, today I’m going to open our toolbox and share a twist on one of our favorite technical indicators.

Not many investors know about this particular indicator, but they should – as this one indicator is a reliable source confirming market momentum.

But first, here is a recent snapshot of the Grand-Daddy of risk and participation indicators. 

You’ve heard Chris and I talk about it often – it’s the New York Stock Exchange Bullish Percent Indicator or BPNYSE. 

It’s a snapshot of every stock that trades on the NYSE in one chart, and it indicates what percentage of all the stocks trading on the NYSE are on Point and Figure Buy Signals.

As of Friday nights close, 66% of all stocks that trade on the NYSE are on a buy signal. That’s well off the March lows when only 8% of all stocks were on buy signals. 

So, it’s fair to say the market has come a long way since March.  However, that does not mean its overbought.  

An overbought condition won’t happen until the NYSE BPI gets above 70. And a market that is overbought is not a bad thing! Since when is an overwhelming amount of buying a bad thing? Overbought conditions can last a long time and are often when some of the market’s strongest gains are made!

So now that we see the NYSE BPI showing considerable strength, lets see if there is additional data we can use to access market conditions… Here’s the twist I promised.

It’s the Multiple Buy Signal for the NYSE. So where the  BPNYSE shows us what percentage of stocks have moved to buy or sell signals, the BPMBNYSE shows the percentage of stocks trading on the NYSE that are giving multiple buy signals – confirming price momentum.

Last week, the Multiple Bullish Percent Buy Signal for the NYSE reversed into a column of X’s at 32% – revealing that 32% of all stocks that trade on the NYSE have enough demand to push through previous areas of resistance to new higher prices resulting in an additional buy signal.

The BPMPNYSE allows us to lift the hood of the NYSE and see beyond what we can view from the NYSE BPI to an even deeper analysis of the percentage of stocks that continue to show increased price momentum. 

So, to all those investors that are worried the market has peaked and is now doomed to fall -step away from your T.V. 

Let stock prices (not the index) guide your decision making. Remember, this is a market of stocks, not a stock market. 

Based on the technical indicators above, there is still room for profits as we move into Q4.  

Sure, we can have down days or even down weeks, but pay attention to the technicals, not the index – until our major risk and participation barometers tell us otherwise – I’ll remain optimistic about the future direction of the equity markets.

Until next time, trade safely…

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