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Update: The Best Stock Market Indicator Ever?

  • Written by Syndicated Publisher No Comments Comments
    December 4, 2012

    The $OEXA200R Monthly (the percentage of S&P 100 stocks above their 200 DMA) is a technical indicator available on StockCharts.com used to find the “sweet spot” time period in the market when you have the best chance of making money. See Is This the Best Stock Market Indicator Ever? for a discussion of this technical tool.

    The charts below are current through Friday’s close.

     

    Daily OEXA200R past 12 months

     

    Click to View

     

    Monthly OEXA200R since April 2007

     

    Click to View

     

    Interpretation:

    The OEXA200R ended the week up 3 points at 70%.

    Of the three secondary indicators:

    • RSI is Positive (above 50).
    • MACD is NEGATIVE (black line below red).
    • Slow STO is NEGATIVE (black line below red).

    (I only display the three secondary indicators for the monthly chart since they are less subject to short term “jitters” than the daily.)

    Commentary

    According to this system the market remains untradable.


    Background on How I Use This Indicator

    The OEXA200R is a valuable metric used to accurately assess the state of the market in order to make profitable trading decisions. That is, whether we are in a bull, a bear or transitioning from one to the other, as well as market volatility and risk within each of those situations. Historically, it has also given traders a clear early warning signal of impending serious market downturns and later safe re-entry points. While not intended as a day trading tool per se it can certainly be used as background information by day or highly speculative traders. Simply put, the OEXA200R gives traders the ability to identify the most opportune conditions within which to execute their various long, short or hold strategies.

    Following a major market correction, the conditions for safe re-entry are when:

       a) Daily $OEXA200R rises above 65%

    And two of the following three also occur:

       b) RSI rises over 50
    c) MACD black line rises above red line
    d) Slow STO black line rises over 50 and is also above red line

    Without the solid foundational support of two out of three secondary indicators it is unsafe to trade even if OEXA200R edges above the 65% line. Once two turn positive, the market is considered safely tradable as long as OEXA200R remains above 65%. Volatility and risk for long traders are relatively low. The trend is on their side.

    When Daily OEXA200R drops to 65% it is taken as the conservative signal to exit all long positions, sit on the sidelines with your cash and wait for some clarity before proceeding. Volatility and risk increase substantially. Since 2007, this has usually been a “tipping point” condition presaging a major market drop.

    If the OEXA200R does not rebound but remains below 65%, how to proceed depends on the overall trend of the market, the macro-picture. During the cyclical bull of 2003 to 2007, the market was still safely tradable with OEXA200R in the 50% to 65% zone because there was enough upwelling lift in the S&P at that time to minimize the chance of a sharp, significant market downturn.

    The problem is that we can by no means confidently compare our present situation to that of 2003 – 2007. There is no strong, steady wind pointing the market weathervane in one direction, it is being buffeted by swirls and gusts in unpredictable ways. To better understand this, take a look at the charts below, in particular the overall trend of the OEXA200R during the 2003 – 2007 cyclical bull compared to the trend from 2007 to present.

     

     

    Click to View

     

     

    Click to View

     

    The S&P chart indicates that for the past five years we have not had a steady upwelling trend in the market comparable to 2003 – 2007. Absent that underlying support, the OEXA200R has undergone significant gyrations since 2007 and is ominously exhibiting a trend of lower highs. The MACD for OEXA200R has also been trending lower overall. Notice that S&P volume has experienced a steady decline since 2009, another classic Bear indicator.

    Since 2007, every time the OEXA200R has stumbled below the 65% line it has not rebounded but continued to fall along with the S&P. For that reason, trading the 50% to 65% zone in our current economic situation is going to be volatile and ambiguous at best. Since there will be much more downside than upside potential it will be especially risky for long traders.

    If the OEXA200R drops below the 50% line we regain clarity as to the market’s direction. That will be the unambiguous signal to exit any remaining long positions immediately in expectation of a serious, imminent market decline. Conversely, it will also be the clear signal to go short to take advantage of that sharp decline.

    In my opinion, the most significant indicator of where we stand today is the fact that the market is above both its 140 year historical trend line and the trend line for the secular bear that began in 2000. These are the marco-forces that will gravitationally pull the market back into equilibrium at some point in the near future, likely beginning in late 2012 to 2013. Add to that any number of catalytic world events which could exacerbate such a correction. QE has been a countervailing force to recent market slides but, realistically, Fed Chair Bernanke can only feed the market so many cans of QE Red Bull before it eventually crashes.

    How far will the market drop? QE3 might save the day once again, temporarily. But in light of the factors mentioned above, it should come as no surprise if in 2013 – 2014 we end up experiencing a market event worse than that of 2008 – 2009. Luckily, OEXA200R should give us ample advance warning of the next major correction however we want to trade it. Buckle up!

     


    NoteStockcharts.com offers free access to the $OEXA200R indicator on a daily and weekly basis. The monthly view requires a subscription. Stockcharts allows users the option to download the last two years of indicator data. Unfortunately, I have not found a source for longer-term $OEXA200R data for performance back testing. Meanwhile, here is a link to a chart that gives a better look at the correlation between the $OEXA200R and the S&P 500 over the past decade.

     

     

    (c) John F. Carlucci

    John F. Carlucci is a regular contributor to Advisor Perspectives and the author of “Ashes to Riches: How to Profit Spectacularly during the Economic Collapse of 2012 to 2022″, available on Amazon.com.

     

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.

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