Our Most Important Stock Market Participation And Risk Barometer Is Flashing Red

March 9, 2021  |  Michael Reilly

Here at Rowe Wealth Management, we use a very specific technical indicator as a means to help see market action that most investors miss.

While most investors rely on the DOW or the S&P 500 as a gauge of market health, years of experience have taught us otherwise.

You see, by the time major market indexes, like the Dow Jones Industrial Average or the S&P 500 index turn south, a lot of damage has already been done to the real stock market.

Don’t believe me? Ever look at your account after “the market” (S&P 500) is has moved up, maybe even to all-time-highs…. and wonder why your account is down. 

Yeah, it’s because the DJIA and the S&P 500 index are weighted, based on the size of the company (cap-weighted) or based on price (price-weighted). So the biggest companies or the most expensive have more clout and therefore more of an impact on the direction of the index. 

As a result, the S&P and the DJIA are not very helpful in guiding investors like you to navigate what’s really happening in the stock market. 

That’s why we rely on the supply and demand relationship found in the New York Stock Exchange (NYSE). 

More stocks trade on the NYSE than on the S&P 500 and the DJIA combined – and, unlike the DOW or the S&P, that only trade Large-cap and Mega-cap stocks, the NYSE trades small stocks, mid-size stocks, and large. So, just by its design, it captures a greater breadth of stocks.

Now, back to what I said at my open – that one of our most important risk barometers is flashing a warning sign.

The NYSE BPI or NYSE Bullish Percent Index measures stock market participation and risk level of the market.

It does this by adding up the percentage of stocks that trade on the NYSE that are currently on point and figure buy or sell signals on their own price charts. 

Don’t worry if that doesn’t sound familiar – just stay with me here…

Here’s what you need to know:

For a stock to go on a buy signal, it first has to break above a key resistance level on its own price chart.

And for that to happen, there has to be a lot of buying by large investors – usually, that’s the big institutions that actually can drive the market.

But stocks just don’t go up. They can also move to a sell signal – they do that when their price crashes through former support levels on their charts.

Here again, it’s usually the institutional investors impacting the stock’s direction – in this case, they are selling a lot of that stock for whatever reason. 

Rather than looking at over 2500 individual price charts, The NYSE BPI plots the buy and sell signals of every stock that trades on the NYSE and presents the data on a single chart using a series of columns with X’s and O’s. Where the X’s represent buy signals and the O’s represent sell signals. 

The NYSE BPI Chart looks like this.

Here’s how to interpret the data. 

When looking at the NYSE BPI, the column is considered short-term and is always in either X’s or O’s. The most recent data is on the far right.

If the column is in X’s it’s reflecting short-term strength in the market – as there is buying/demand for stocks. On the other hand, If the column flips to O’s it’s an indication of short-term weakness and selling pressure.

We can also determine if stocks are overbought – if the column rises above the 70% mark or falls below 30%. These two important areas are highlighted on the chart above.

If stocks are overbought and above 70% on the BPI, there is more risk to the downside than room left to the upside. Conversely, if the column finds itself below 30%, it’s oversold. This time last year the NYSE BPI fell to a low of 8%. Meaning only 8% of all stocks trading on the NYSE were on buy signals! Talk about an oversold market. So from a risk perspective, there was very little risk left to the downside! 

That’s part of what makes the NYSE BPI such a great tool for measuring the risk in today’s markets. We can clearly see if stocks are overbought or oversold or if supply or demand is in control.

So now you know about how the BPI helps identify short-term strength or weakness and overbought or oversold market conditions.

But there’s one more thing to consider. The NYSE BPI can also clue us in on longer-term signals…. Is the NYSE BPI on a “buy signal” or a “sell signal”. 


What we see today is that not only did the column recently flip from X’s to O’s – indicating short-term market weakness, but it also broke below its previous column of O’s and that’s an important long-term indicator and tells us more and more stocks are now selling off and breaking below key price levels on their own charts. 

What’s important to understand today is that we now have a column of O’s that is lower than the previous column of O’s.  That means more stocks are participating in the current sell-off than participated in the previous down move. In other words, we’re seeing lower lows. That’s a sign of long-term weakness in the equity market. We like higher lows, not lower lows. 

Bottom line, the NYSE BPI is indicating that as of today, there is more risk to the downside for stocks trading on the NYSE. Investors should take note and use caution as they choose their next move.

Note to investors: The NYSE BPI is just one indicator, albeit an important indicator, of the health and direction of the market. It is best to use this indicator along with others to form a weight of the evidence approach to your market thesis.

Markets look like they are trying to stage a rebound today, however, one day won’t change the current market environment – but it is a positive development.

If you like this information and would like a free consultation to review your portfolio, just click the link below and schedule a call.

Click here to schedule a free consultation

Until next week…



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