Fact Vs. Fiction: Indexes Not Showing Bullish Signs

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February 18, 2009
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A technical and fundamental screening of U.S. stock indexes reveals a drop in the S&P 500 to the 600-range is a distinct possibility.

 

Stock indexes in the U.S. are not ready to be bought yet.

There are many opinions, but only one reality—the price trend. The fact is, the indexes are not going up and the majority of index constituents do not yet show bullish signs.

Here is some tangible evidence of the situation. We performed a custom filter for bullishness, and charted some pre-existing index bullishness indicators with data through Feb. 13.

Neither speaks of pending disaster (although disaster could lie ahead), but both say, “not yet.”

CUSTOM BULLISHNESS SCREEN

We screened the entire U.S. stock market for bullish and bearish profiles as described below.

Bullish Profile:

  • Simple Moving Averages 5-day > 10-day > 20-day
  • Average Directional Index > 20 (an indication of trending)
  • Positive Directional Index > Negative Directional Index (positive trending)
  • Average Volume over 20 days > 100,000 shares
  • Average Price over 60 days > $10.00

Bearish Profile:

  • Simple Moving Averages 5-day < 10-day < 20-day
  • Average Directional Index > 20 (an indication of trending)
  • Positive Directional Index < Negative Directional Index (positive trending)
  • Average Volume over 20 days > 100,000 shares
  • Average Price over 60 days > $10.00

Results:

The results of that screen showed that bearish profiles outnumber bullish profiles by about 2:1. In addition, the small numbers of stocks with either bullish or bearish profiles indicates the vast majority of stocks are in a middle-ground condition.

United States stocks: 171 bullish / 287 bearish (bullish/bearish ratio 59.6%)

S&P 500 stocks: 27 bullish / 56 bearish (bullish/bearish ratio 48.2%)

INDEX CONSTITUENT INDICATORS

Three indicators of the bullishness of major indexes show the percent of index constituents that: (1) have bullish point and figure charts, (2) have prices above their 50-day moving average, and (3) have prices above their 200-day moving average.

We charted those three indicators for the companies traded on the New York Stock Exchange, and for those traded through NASDAQ, as well as the 500 stocks in the Standard & Poor’s 500 index.

This table summarizes the results:

Here are the daily charts that show the current statistics along with one year of history of the statistics:

 

 

 

On balance, the situation is much better than the October/November 2008 period, where the point and figure bullish percent and the percent above the 50-day moving average were deeply in bearish territory. The percent above the 200-day average is improved from October/November, but still a long way from a balanced or bullish condition.

CONCLUSION

The indexes are essentially in a sideways trading pattern. Sometime, the market will break out from the trading range. It could move up or down, but we believe the adverse and worsening fundamentals favor further declines, before movement above the current trading range. New S&P 500 lows in the 600 +/- range are distinctly possible based on bear market multiples on projected “as reported earnings.”

We continue to believe that with respect to the U.S. stock market, holding cash is better than taking risk. There is plenty of room to benefit from a rising market once it actually starts to rise. We would rather be late to the next bull than early to a possible extension of this bear.

The index prices are not yet going up, and the index constituents are less than 50% in bullish mode. We don’t have interest in buying hope and expectations in this market. We only have interest in buying rising prices. Until the indices rise, instead of being forecasted to rise, we will keep our US stocks allocation in cash ready for deployment.


Richard Shaw is president of QVM Group in Glastonbury, Conn. He invites comments and suggestions for future columns at:

richard.shaw@qvmgroup.com

This e-mail address is being protected from spambots. You need JavaScript enabled to view

 


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