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%.
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[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.
- Price Trend of S&P 500 - DOWN
- Above/below 50-day SMA: DOWN
- Weekly RSI(14) Confirmation - above
50: DOWN at 45
- Weekly MACD Histogram Confirmation - FLAT
- Weekly higher highs and higher
lows? No - BEAR
- Moving Averages (simple daily averages) - DOWN
in BEAR Market
- Bull: 50 SMA above 200
- Bear: 50 SMA below 200 - YES
- UP: Both SMAs moving up
- DOWN: Both SMAs moving down - YES
- MIXED: averages not moving together
- Market Leadership (relative strength) - During
last 25 market days: DOWN
- Small caps generally lead large caps - DOWN
- Technicals (NDX) tend to lead the general market (S&P 500)
- DOWN
- Growth stocks lead value stocks
(large-cap) - FLAT
- Volume of Nasdaq (price trend when volume rises) - see
chart!
- McClellan Summation of Advances & Declines of
Nasdaq (slope) - DOWN
- Highs and Lows of Nasdaq - DOWN
- New Highs - 39-day EMA moving DOWN
- New Lows - UP if less than 70 for three days, DOWN
- Highs minus Lows - NEGATIVE SELL ALERT 8/12/10.
- Consensus of the above
- Moving DOWN in a BEAR 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.
The first chart and the cycle chart were
generated from AmiBroker
software. Most of the other charts use FastRube
software with FastTrack
data. This page is for amusement only, and should not be
taken as advice to buy or sell anything.
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