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 S&P 500 major support at 1040 held last week. If this doesn't hold, a big drop can be expected. The next support level down is 945.

---  Bond Market  --- The bond market continues up -- interest rates down. Since a peak in the 10-year treasury bond rate on 4/5 of 4.01%, the rate has dropped 37.7% to the low of 2.50% on August 26th. The Barclay Treasury 20+Year Fund (TLT) has gone up 25.6% during that time. It was down 2.83% Friday. [No change to text]  Shown here is a total return chart of the MetroWest Total Return Bond Fund (MWTRX). This fund was highlighted in the 4/12 Barron's as one of the best five bond mutual funds. This fund has a mix of intermediate-term bonds and is not necessarily representative of the whole bond market. Note the annualized return over the time shown is 19.42%. The price is staying above the 40-day EMA quite nicely. The white dots indicate reinvested distributions. An interesting chart of global government bond yields can be see by clicking here. [No change to text]  For contrast, the second chart shows the Fidelity Intermediate-Term Government Bond Fund (FSTGX). The The threat of deflation and the economy uncertainty around the world has caused a strong demand for U.S. Treasuries so that these bonds have rallied recently. The annualized return over the time shown is 4.72%.

[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. 

[No change to text]  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.   

The Russell 2000 is back in the channel between 585 and 650. The momentum measured by the RSI is still negative at 46.9. Indicators have all turned negative.

[No change to text]  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. On 5/7/10 a 'sell alert' occurred. A 'buy alert' occurred on Tuesday 7/27 followed by a 'sell alert' on Thursday 8/12 when the index was negative for a third day in a row. This indicator is good at calling turns in the market, but a trendless market causes false signals.

Stock Market Cycles

[No change to text]  The 5-day MA of the equity put/call volume ratio is an indicator of market sentiment (fear & greed). There was a lot of fear when the ratio went to 0.80 in May. This usually occurs at a low in the market, but this time a consolidation occurred.  For a review of the theory, click here.  For a good video tutorial, click here.

A peak somewhat above the (arbitrary) line at 0.70 signals a likely low in the market. OTOH, there is quite a bit of investor fear so this ratio could go much higher -- that was last week's comment. The fear level must have been sufficient so that all fearful bulls sold during the week even as this ratio came down, and the market on Friday started up with help from our friend Bernake.

[No change to text]  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 upper Bollinger Band in a nice rally. An extreme price move above the top or below the bottom of the band is typically followed by a short-term reversal.

[No change to text]  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 on 4/29 at the beginning of the big drop. There was a false green signal on 6/15 as shown. The 'sell' occurred Wednesday 8/11 when both 10- and 20-week oscillators moved out of the over-bought area. The 39-week oscillator has dropped enough to give a 39wkSig 'sell alert' as indicated by the red arrow at the bottom. 

Mike Burke stated: September has the reputation of being the worst month of the year and, by some measures, it is.  Since 1963, over all years the OTC in September has been up 62% of the time with an average loss of -0.2%, the only month with a negative average return.  During the 2nd year of the Presidential Cycle September has been up 45% time but with an average loss of -1.0%.

Since 1928 the SPX has been up 45% of the time in September with an average loss of -1.1%.  During the 2nd year of the Presidential Cycle the SPX has also been up 45% of the time with an average loss of -1.1%.  The best ever September for the SPX was 1939 (+15.2%) the worst 1931 (-30%). 

Volume Study

[No change to text]  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. Notice how the volume increased during the market drop in late April. During the current drop, the volume has not expanded. This is a sign that the drop may not be major. However, August is not generally a high-volume month, and September is the worst month of the year. 

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 to text]  This VIX chart from stocktiming.com covers from June 7th to August 27. The recent market high was on August 9th. The drop since then was on fairly low volatility. Typically the volatility goes up dramatically with a market drop. So maybe this drop will be short lived.

[No change to text]  The volatility (red) normally makes a low at short-term market tops, or spikes to a high at market bottoms. The green is the S&P 500. The lower pane shows the VIX relative to it's 200-day simple moving average, which has been flattened to the horizontal white line.

Stocks above 50-day Moving Average

[No change to text]  This chart shows the number of Nasdaq stocks that are above their 50-day moving averages. Click here to get the latest. The Nasdaq composite index is shown below on a percentage scale for correlation.

[No change to text]  In the recent past, for an uptrend to start, the number was below 15%. This occurred on 7/2.

Bullish Percent Index

[No change to text]  The Bullish Percent Index is calculated by reading either a buy or a sell signal from the point and figure chart of each of the 500 stocks in the S&P 500. The value of the index represents the percentage of stocks in the S&P 500 that signal a buy.

[No change to text]  The basic rule for using the bullish percent index is when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. Therefore, the market is not yet oversold -- more bulls need to switch to the bear camp.

[No change to text]  For a simplified analysis of how to use this index, read this article.  If you have read the article, you will want a P&F chart of the BPI.  Click here.

Dropping in a BEAR 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. It peaked on April 26, 2010, and a cyclical bear market has been underway since. 

[No change to text]  The technical indicators below give a feeling for the strength of the current move and whether there are signs of a turn. The confirmation of a bear market used here is (1) lower highs and lower lows on a weekly basis, or (2) the 50-day SMA below the 200-day SMA. Both have occurred. The indicators below signal an intermediate-term DOWN market.

Comparison to Past

[No change]  This 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 3/9/2009 low to the 3/23/2010 high is 66.3% (101.1% 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]  After this drop on the chart, a 21.68% rally occurred. Our current situation produced two rallys totaling 37.5%, with a 7.6% drop between them.

[No change to text]  On the chart, the next jagged drop of -21.72% ended in late spring of 1939. Our current market peaked in April and is now dropping.