| Tuesday, August 19, 2014 | Issue #2356 | |
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Technical Tuesday:
Here's What the Stock Market Really Looks Like Christopher Rowe, Director of Investor Education, The Oxford Club
 Lately I've seen a stark reminder that major market indexes don't always paint the clearest picture of what's really happening in the stock market.
The large cap S&P 500 broke out to new all-time highs in July, moving 4.3% above its March high. But the small cap Russell 2000 still sits 4.4% below its March high. Most investors think the major indexes define "the stock market."
But when I close my eyes and think of a picture of the stock market, here's what I see:
Above is the Sector Bell Curve. It is the most accurate picture of the entire U.S. stock market that I know of.
The Sector Bell Curve shows where 41 industry sectors fall on their "Bullish Percent Indexes," which are the sectors' risk barometers.
Simply stated, a sector's BPI shows the percentage of stocks in the sector that are on "Buy" signals. The reading moves between zero and 100% (almost never hitting either extreme). Click here for more detail on how the sector BPI works.
The Death of an Industry
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And when MP3s replaced CDs, a whole new crop of investors got filthy rich.
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But the truth is, we believe the next great moneymaking opportunity could be upon us right now with "The Death of Cable TV." Here's why... | |
A.W. Cohen, who invented the indicator in the 1950s, said that when a sector's BPI is above 50 and advancing, it should be considered bullish, and those below 50 and declining are bearish. As you can see in the bell curve, three-quarters of all U.S. sectors are above 50.
So here is what the chart above is saying about the current market:
The supply side is currently in control of the majority of U.S. stocks and sectors. In most cases, prices have dipped down to levels that are typically low-risk buying opportunities. The question, as always, is whether prices will bounce off of an intermediate-term low within a strong bull market or if prices will weaken further, causing much stronger downside.
In every notable price decline within every bull market, investors inevitably ask: "Did we just see the bull market top, or is it a good time to buy the dip?"
The vast majority of the time, it's best to buy the dip. The long-term trend, which is the strongest trend, is most likely to resume. It's that simple.
During bull markets, the sector BPIs tend to move to the right of the bell curve. They move back to the middle (closer to 50%) during sharp dips.
At the beginning of a bear market path, the sectors move leftward, below the 50% mark. For example, here's what the bell curve looked like in August 2007, after a sharp correction:
And here's what it looked like on November 20, 2008. You can see that in the teeth of the market collapse, almost every sector was hugging the left side of the bell curve:
This extreme example is meant to give you a clear understanding of how the Sector Bell Curve works. It also shows that we have plenty of time to adjust our stock market posture whenever it does experience a long-term breakdown.
Using the Sector Bell Curve, we have seen the current stock market pull back to a healthy lower-risk area. This is typically where stock prices find some support and regain their strength.
The trend is our friend until the end, so we have to assume this is shaping up to be a good buying opportunity.
As always, it pays to invest responsibly with automatic stop loss orders and reasonable position sizing and diversification. If you do this and buy when stocks pull back to lower risk levels, like we are seeing today, you should be OK over the long haul.
Good investing,
Chris Rowe | |
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Pick up a newspaper or turn on the TV and it seems like the world is going up in flames. As a global investor, how should you react to these unsettling events? Read On... | |
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Alex Green recently discovered three stocks likely to experience the so-called "golden cross" - perhaps the market's most powerful buy signal of all - beginning on August 29. Opportunities like this are very rare. To learn more, click here. | |
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All over the U.S., bans are popping up on what we consider our safest investment. 
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