Investors' Forum

We meet twice a month to discuss the stock and bond markets, and investment strategies. All investors are welcome to come. There is no money collected or invested by this group. We meet on the first and third Fridays of each month from 10:00 to ~11:45 a.m. in the Board Room.

Call Don Whitford at 985-3964 or call ( ) Bruce Saunders at 245-0605 to get more information and to join our email meeting notification list. Our favorite investment websites can be found by clicking on the underlined words above.

All charts will be updated here weekly (usually Saturday) with comment by Bruce Saunders.

Health of the Market

The old four-month channel has been breached with a strong move up on Friday. Even more important was the rise above the 50-day MA and eight-month trendline show in yellow. It would have been nice if the 1.4% move on Friday was on high volume, but you can have certainty in the stock market!

[No change to text]  The bond market has done well in 2009. Shown here is a total return chart of the Fidelity Intermediate-Term Bond Fund (FTHRX). From the November 2008 low to the November 2009 high, the gain was 23.4%. The white dots indicate reinvested distributions. The uptrend is continuing.

[No change to text]  The Russell 2000 Small-Cap Index tends to lead the overall market both up and down as the small-cap stocks are generally more risky than large cap stocks.  This index is shown in red on the chart below. It's 200-day exponential moving average (EMA) is in light blue (top pane). This moving average often acts as support and/or resistance to price movement as many people watch it. Trend lines also act as support or resistance. The importance of these lines increases with the number of times the price bounces off them. 

The second pane below is the Relative Strength Indicator (RSI) for the Russell Index, a measure of momentum of the market. This is the relative strength of the Russell 2000 itself -- it's not relative to any other index. Below 50 shows negative momentum over the last 14 days, although between 47 and 53 is neutral. Currently the momentum is strong in the positive direction. The RSI did go above 70 indicating an overbought market.

[No change]  The third pane is the Nasdaq McClellan Summation Index (yellow) and it's 200-day EMA (green). This is a running sum of the difference of two moving averages of the number of advancing issues minus the number of declining issues. A 19-day and a 39-day exponential moving average are used. This shows whether a market move is broad based.

Dr. Alexander Elder in his book Trading for a Living says that the New Highs minus New Lows Index is "probably the best leading indicator of the stock market". This is shown for the Nasdaq market in the bottom pane. A 'buy alert' occurs if the Nasdaq Hi-Lo Index goes positive for three consecutive days, or a 'sell alert' if the index goes negative for three consecutive days.  To see a summation of these numbers, click here.   On 10/18/07, this indicator gave a 'sell alert'. There was a 'buy alert' on 4/6/09. This index has reached a new high of 236 on Friday. Another high reading of 230 occurred on 10/14/09 after a 7.5% rise, and it was followed by a 9.9% drop. Some retracement of the Russel's 13.6% run-up since the 2/8/10 low should be expected shortly. 

Stock Market Cycles

The 5-day MA of the equity put/call volume ratio is an indicator of market sentiment (fear & greed). On 1/11 this indicator dropped to .518 (low fear - high greed) and this Friday it was .596.  Greed has increased this week. Tops have formed recently when this ratio got to the .540 level. The horizontal line on the StockCharts plot, indicating that fear is high enough for a market bottom to form, was changed on the chart from .95 to .85. This is arbitrary and is based on recent history relating to market bottoms.  For a review of the theory, click here.  For a good video tutorial, click here.

The top pane below shows the S&P 500. The red background indicates when at least a 4% drop has occurred (after at least a 4% rise). The price would stay in the top Bollinger Band in a nice rally. The price hit the top BB. If it goes above this band, the rally will likely reverse.

The lower pane shows the various weekly price oscillators (see the color code on the chart). The dashed vertical lines show the times when the 10- and 20-week oscillators move out of the extreme area together. This occurred at the beginning of this rally. The shorter two oscillators have reached the overbought area. There is still time for this rally to continue before the longer-term oscillators get into the overbought region.  

Volume Study

[No change]  The Nasdaq volume is being used here. Over half of the issues traded on the NYSE are fixed income related, and that volume is not relevant to our study. Also:  The NYSE has been losing market share to NASDAQ and newcomer BATS, but many may still be surprised at the extent of the loss. In January 2007, the NYSE traded roughly 55% of all NYSE-listed shares. A year later that percentage was down to 40%. This past January it was down to 25%, and just recently there have been a number of sessions in which the NYSE traded less than 20% of total share volume. 

The top pane in the chart below shows the Nasdaq Composite Index.  The second pane is the Nasdaq volume with a green 19-day EMA. The measure of a strong move is strong volume. The verticle poles bracket the large increase in volume. The Nasdaq went up 1.9% in those two days. Friday's 1.48% rise was on lower volume. This lower volume may mean the rally will continue. Often a big up day on high volume means a reversal.

Volatility

[No change]  The Volatility Index (VIX) shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge".  This is from Investopedia.com.  Larry McMillan thinks that as more investors learn that VIX futures and options are effective portfolio hedges, the effectiveness of this indicator as a speculator fear/greed index may decrease.

[No change]  The volatility (red) normally makes a low at short-term market tops, or spikes to a high at market bottoms. VIX is not as good at indicating market tops. The top pane shows the VIX (20.02) coming down. This may mean that the current rally will continue for a while. The lower pane shows the VIX relative to it's 200-day SMA. It could go lower before the market rally ends. 

Stocks above 50-day Moving Average

This chart shows the number of Nasdaq stocks that are above their 50-day moving averages. As of Friday 64% of Nasdaq stocks were above their 50-day MA. Click here to get the latest. This could go higher before this rally ends.

On-Balance Volume

Last week the positive divergence between the Nasdaq On-Balance Volume (red) and the Nasdaq composite price (green) was stated to be a good thing. This did predict the continuation of the rally.  The significance of OBV can be found here.

Bull Market

[No change to text]  The S&P 500 weekly chart gives a good perspective on the market. A weekly chart should be used to determine the market trend. Within the secular bear market, a cyclical bull market started in mid-March 2009.

The S&P drop from its 1/19 peak to its 2/8 low was 8.1%. That's not really a full correction of the 30.8% run-up from the July 2009 low. However, the retracement the last four weeks was impressive, and the bulls are in control.

The technical indicators below give a feeling for the strength of the current move and whether there are signs of a turn. Most of the indicators show a strong market. Low volume is the one negative. 

Comparison to Past

[No change]  This a chart shows the bear market that started during the 1937-38 recession. The first correction went up 46.45% before dropping 10.35%. Then a rise of 21.68%.

[No change]  Our market today seems to be following this chart. The total Dow rally from the March low is 54.1% (81.8% for the Russell), not far from the +59.76% move shown on this chart.

[No change]  The first correction, similar to the +46.45% in 1938, was from the March 9, 2009 low to the June high, the Dow rallied 34.4% (the Russell 2000 was up 53.5%). Since then there has been a drop of -7.4% (-9.9% for the Russell) to the July lows. This compares to the chart Dow drop of -10.35%.

[No change]  The rally from the July 10 low to the January 19 high was 31.7% for the Dow (35.0% for the Russell). This compares to the chart Dow rally of +21.68% that took place in 1938. The next drop of -21.72% ended in late spring of 1939.