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 ~11:30 a.m. in the Board Room.

Call John McGrath at 296-4343 to get more information and to join our email meeting notification list. After general discussion, we usually focus on a specific topic. Our favorite investment websites can be found by clicking on the underlined words above.

The chart with the black background below shows the health of the market, and will occasionally be discussed at the meetings. All charts will be updated here weekly (usually Saturday) with comment by Bruce Saunders.

Harry and Dawn Schultz have been investment analysts for over 40 years and have collaborated on many books and papers.  Dawn spoke to our group on 4/18.  She spoke about the current recession and how it is like or different from previous recessions.  She thinks that we are in the early phase of the recession and that it could be more than two years before we start to see real growth again.  Europe is sliding toward recession also.  The European central banks will have to lower interest rates for economic stimulation.  This will strengthen the dollar.  She expects the stock market to be flat to down for the next two years. 

Health of the Market

This weekly chart shows that the Nasdaq market dropped below it's 200-day (40-week) moving averge last week. The first couple weeks of September have been fairly good to Nasdaq stocks, but then it's down to the October lows. For the S&P, it's been the first couple days, and then down.

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 with the black background 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. The trend lines also act as support or resistance. The importance of these lines increases with the number of times the price bounces off them. ** This index had a six-week rally. This has happened only twice before in the last five years. It broke the resistance of the downtrend line, which is very positive. Now it is consolidating it's gains.   **

The second pane below is the Relative Strength Indicator (RSI) for the Russell Index, a measure of  momentum of the market. Below 50 shows negative momentum over the last 14 days.  ** The momentum is positive and fairly steady.   **

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. ** The broad market participated in the rally and now it has paused.  **

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.  To see a summation of these numbers, click here.  **  On 10/18/07, this indicator gave a 'sell alert'. There were three consecutive days of positive readings giving a 'buy alert' on 8/15/08. Then there were four consecutive days of negative readings so we are back to a 'sell alert' as of 8/21.  ** 

Stock Market Cycles

Sell in May and go away?  The 5-day MA of the equity put/call ratio had a low of .59 on 5/15.  This entered the 0.60 to 0.55 level were intermediate-cycle market tops have occurred before, and was a good predictor this time. The ratio peaked at 0.88 on 7/15, which was not quite as high as it has been at previous price lows. Friday's reading of 0.710 is not close to the levels for a market top.

The top pane below shows the S&P 500. The red background indicates when at least a 4% drop has occurred (after a 4% rise).

The lower pane shows the various price oscillators (see the color code). The longer-term oscillators are in overbought territory. Short term a small market rally is likely. It would be dangerous to go into the market now, but if the next market low is above the July 15th low, that would be the time. 

Volume Study

The top chart is one year of the NASDAQ Composite Index with vertical lines showing the recent drop in price of 13.2%. The second chart is the NASDAQ volume with a green 19-day EMA. The measure of a strong move is strong volume. Notice that the volume increased significantly during the price drop between the vertical lines. Currently the volume is dropping. In September, things should pick up.

[No change]  After the January low, the bulls were not excited about a buying opportunity and the volume dropped off even though the market went up. Then the market dropped to the March lows on lower and lower volume (a good thing). The volume went down in the rally from the March lows (a bad thing). The volume did not increase on the April-May rally.

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.

The Volatility (red) normally spikes to a low at market tops. It is not there yet, so this rally, shown by the S&P in green, would seem to have a bit more upside to go.