Posts filed under “Technical Analysis”

Major Trend Analysis

Major Trend Analysis

The 2000-2003 Bear Market

The Major Trend Indicator (MTI-black line) is helpful in identifying when the market is vulnerable to an intermediate correction within a bull market, and the onset of a bear market. Ongoing bull markets are confirmed when the MTI climbs above the green line. When a rally fails to lift the MTI above the green line, the market is vulnerable to an intermediate correction. When the MTI falls below the red line, after failing to rally above the green line, a bear market is confirmed. The 2002-2003 bear market was signaled on October 6 and confirmed on October 12, 2000. The S&P also broke below a rising trend line signifying a breakdown and chart support on October 6. The F signifies a failed bear market rally as measured by the MTI, since the rally failed to lift the MTI above the green line.

The 2007-2009 Bear Market

When the S&P rallied to a new high in October 2007, the Major Trend Indicator failed to move above the green line. This indicated that the market was susceptible to an intermediate decline. The S&P broke below chart support on November 7, 2007, trend line support on January 4, 2008, and confirmed a bear market on January 10, 2008, when the MTI fell below the red line.

Bear Market Rallies

Bear market rallies are signaled when the MTI crosses above the red moving average, with sell signals indicated when the MTI rolls over and declines by a specific amount. The market experienced a failed rally in May and August 2008. The August rally didn’t even rise above the red line, suggesting the market was very weak. The numerous bear market rallies during the 2000-2003 bear market were more protracted and offered better profit opportunities.

Bear Market Bottoms

The formation of a bottom and end to a bear market is a process. First, the Major Trend Indicator reaches an oversold level, as it did in July 2002 and November 2008. After another failed rally and subsequent market decline, the MTI bottoms above the prior oversold level, as it did in October 2002 and March 2009. In 2003, the S&P made a higher price low in March 2003 and the MTI was significantly less oversold. The initial entry signal occurs when the MTI crosses above the red moving average,(3- 18-03, 3-17-09) since it is not possible to know when a bear market rally will blossom into a new bull market. The new bull market was confirmed when the MTI pushed above the green line weeks later in April, 2003 and May, 2009.

Intermediate Declines within Bull Markets

After the new bull market was confirmed by the Major Trend Indicator in April 2003, there were intermediate declines in 2004, 2005, and 2006 that were presaged by rallies that failed to push the MTI above the green line. These Failed rallies indicated the market was vulnerable. However, the overall economic environment remained healthy, with most economic reports being supportive of further growth. As a result, selling pressure remained muted and none of the declines in 2004, 2005, and 2006 were severe enough to drop the MTI below the red line and signaling a bear market. The flow of negative news plays an important role in determining the depth of intermediate declines. Most mutual fund managers will typically remain 90% to 96% invested all the time, since their investment objective is to find companies that meet certain fundamental criteria, and their investment time horizon is often three to five years. If their economic expectations are positive, they will not be sellers until the economic fundamentals turn sour. The intermediate declines after these failed rallies were 7%-9%.

In 2011, the Major Trend Indicator failed to reach the green line in July, as the S&P was retesting the high it reached in May. The failed rally in July indicated the market was vulnerable to negative news. On August 2, the S&P 500 broke below trend line support near 1,250 on the S&P, and by August 8 the MTI fell into bear market territory. In early August Congress argued about raising the debt ceiling and Standard and Poors lowered its rating on U.S. Treasury debt from AAA to AA. This provided institutional investors reasons to sell. The S&P broke out above the trend line in December, and by January the market was back into a bull market based on the MTI.

Jim Welsh
Portfolio Manager

Category: Markets, Technical Analysis, Think Tank

Advance Decline Line (Market Breadth) Says No Top Yet

Source: Chart courtesy of Carl Swenlin, Decision Point (annotations by Ritholtz)   One of the best ways to identify a market that is exhausted is to look for divergences between Breadth (i.e. the number of advancing equities versus the number of declining ones) and Price (i.e. new highs). That is a concept that Paul Desmond…Read More

Category: Markets, Psychology, Technical Analysis

Merrill’s Secular Road Map Projects S&P 500 2300 in 2017

S&P 2300? Give It Four Years: Ritholtz Chart Source: BAML   It took more than 13 years, but the S&P 500 managed to eclipse its 2007 highs of 1576 earlier this year. This move takes it out of a long term trading range, and according to the Technical Analysts at Bank of America Merrill Lynch,…Read More

Category: Cycles, Technical Analysis

Does Too Few Bears = Correction?

  What do you get when you cross an overbought market with too few bears? Often, that combination of complacency leads to a correction. So far, all it has produced is a lot of frustrated contrarian traders. Stephen Suttmeier, technical strategist at Merrill Lynch, put the situation into broader context in his monthly chart book…Read More

Category: Sentiment, Technical Analysis

What Indices Are At All Time & 2013 Highs?

A hedge fund manager friend had mentioned a research report that had noted the Dow, FTSE and Nikkei were at neither all time nor 2013 highs. Those there indices sounded like it a bit of cherry picking to me. So rather than succumb to the usual confirmation bias, I decided to see what major indexes…Read More

Category: Investing, Markets, Technical Analysis

Shiller: U.S. Stocks Are ‘Highly Priced’

Shiller’s cyclically adjusted price-earnings ratio click for ginormous chart Source: Bloomberg     Robert J. Shiller, a co-winner of this year’s Nobel Prize in Economic Sciences says US stocks are expensive. They are the most expensive relative to earnings they have been in more than five years — since the lows follwoing the great collapse…Read More

Category: Technical Analysis, Valuation

90% Up Days Are Bullish

A 90% up day is bullish & the stats support a year-end rally click for giant table Source Merrill Lynch BA     On Thursday. we had a huge up day, with US markets gaining ~2%. Some folks credited the possibility of a debt ceiling deal, while others called it a low volume short covering…Read More

Category: Markets, Technical Analysis

Bull Market Corrections, 2009-2013

click for ginormous chart Source: Investech     We are almost through September and despite its reputation for volatility, the month has seen strong upside and new bull market highs. The S&P500 lost “only” 4.6% in August, but based on the Sturm und Drang you are forgiven for assuming it was 3X that amount. As…Read More

Category: Cycles, Markets, Technical Analysis

Stock Market Sentiment & Technical Indicators

You know I love these sorts of things: Dr. Ed Yardeni has a nice set of monster sentiment charts posted at his site. The link is Stock Market Indicators: Fundamental, Sentiment,. & Technical and its 20 pages of fun.   courtesy of Yardeni Research, Inc. September 17, 2013.

Category: Sentiment, Technical Analysis

Dow Theory or Buy and Hold?

Reading through the classic textbook, Technical Analysis of Stock Trends, last night I stumbled upon a stunning stat comparing the returns of a strategy using Dow Theory versus buy and hold. Using Dow Theory buy and sell signals would have turned an initial investment of $100 in 1897 into $492,597.38 by the end of 2010. …Read More

Category: Dividends, Technical Analysis