How Risky Is This Market?

Investment U Daily View in browser Add This to Your Portfolio Now 64% gross margins. Ten years of record profits. Never-decreased dividend payments. Best of all, the company I'm talking about is set to take over three huge markets that could add mountains of cash to its bottom line. This stock will not be available at its current price for long, as you can see here. Tuesday, December 9, 2014 | Issue #2433 Technical Tuesday: How to Gauge Market Risk Christopher Rowe, Technical Strategist, The Oxford Club Since the October 15 intraday low, the S&P 500 has climbed more than 13%. That's about double the annualized performance an investor can expect over long periods of time (such as multidecade time frames). Are you wondering if we have come too far, too fast? Many would look at this chart of the S&P 500 and feel like the risk must be high. This is an assumption often made when it appears that prices are high. View larger image But "price level" does not go hand in hand with "risk level." Let's look at a true risk barometer of the stock market and see what it's saying about today's stock market. The Bullish Percent Index (BPI) A BPI tracks the percentage of stocks that are on point-and-figure "Buy" signals. It can track any group of stocks, like the common stocks of the New York Stock Exchange or a sector like the oil service sector. Today we will focus on the BPIs of the major market indexes like the New York Stock Exchange, the Russell 2000 or the Nasdaq. Basic points: When a stock moves to a point-and-figure "Buy" signal, it is more likely to trade higher than it is to trade lower. A point-and-figure buy signal occurs when the stock breaks out above a known area of resistance where sellers were previously selling. The fact that the stock is able to move above that historic resistance level tells us there are now more buyers than sellers at that level. When a large group of stocks is moving to buy signals at the same time, it's an indication that there is general demand in that large group of stocks. When an overwhelming number of stocks (for example, 75% of stocks on the New York Stock Exchange) have moved to point-and-figure buy signals, it's a sign that lots of buying has already occurred. But when such a high percentage of stocks had seen enough buying occur that they were able to overcome those historic resistance levels, we know an enormous amount of money must have already been deployed by funds. At this point, risk is elevated because funds' cash positions have likely shrunk and they have likely already taken their positions. That means less money to deploy, which means buyers are becoming "exhausted." What's the BPI saying? Breaking Information on Stock Exchange Bylaw "Section 703" Thanks in part to a little-known stock exchange rule, some pre-retirees and retirees are now collecting 6 to 21 times more income, over time, than the average investor. It's called Regulation "Section 703," and we estimate not one in one thousand Americans have heard of it. But you can get all the details on this little-known, portfolio-juicing plan right here. There are two things to consider when looking up the BPIs of the various market averages: the reading and the direction. Generally speaking, the higher the reading is, the higher the risk is. But we wouldn't view the stock market as having elevated risk until we first saw the BPI with a high reading and then see it reverse direction from advancing to declining. This change is key. In fact, when a large percentage of stocks within an index are on buy signals (the BPI has a high reading) and the most recent direction is up (more stocks moving to buy signals), that's one of the strongest conditions possible. Below is a table of the BPIs of the major market averages. As you can see, all of them are still moving up. That tells us that demand is in control and the most recent trend is that more and more stocks are moving to point-and-figure buy signals. The indexes that are focused on the biggest companies have higher readings than the others. For example, the Dow Industrials, the Nasdaq 100, the S&P 100 and S&P 500 focus on the largest companies. The indexes below the top four listed above are mid-cap, small cap or all-encompassing. Bullish Percent Index levels above 70% are considered "overbought." But don't let this technical term mislead you. As the old adage goes, "overbought" doesn't mean "over." Identifying Real Risk Levels The majority of the BPIs in the table are in the 50s and 60s. That means they are pretty far from being in overbought territory, and funds are likely still able to deploy a significant amount of cash to fuel prices higher. Of course, we will experience normal stock market dips (as if you even need me to explain that to you). But with the low readings we are looking at today, I wouldn't be too concerned about them. Instead, I would be looking at them as buying opportunities. The BPIs that track the bigger indexes are above the key 70% level. But the most reliable signals come from the NYSE BPI, which is made up of large caps, mid-caps and small caps. It paints the best picture of the overall stock market. And the NYSE BPI is showing us a sweet-spot of risk: Relatively low levels and moving up! Here's a link to the NYSE BPI chart with a description on how to read it. Go ahead and bookmark the page. The herd believes risk level and price level go hand in hand. And the stock market is a place where you can profit form the herd. Good investing, Chris Click here to post a comment on InvestmentU.com Decades of History... Proven Results It's the most profitable investment strategy in the history of the stock market. And a recent article in Kiplinger's Personal Finance provided detailed evidence that it has outperformed the market for the last 81 years. To find out how you can access select stock recommendations based off of this strategy, go here now. Reader Favorites From Investment U What an Investor Should Do in This Oil Bust by Alexander Green Monday, December 8, 2014 Whenever things heat up - or cool off - in the natural resource markets, the first man I turn to is Rick Rule, CEO, president and director of Sprott U.S. Holdings. I interviewed him recently about the recent volatility in the oil patch. His thoughts, as always, were both insightful and provocative. Here are a few of them. Read On... Target Back on Billion-Dollar Track by Tom Sandford Tuesday, December 9, 2014 What do Home Depot Inc. (NYSE: HD), Staples Inc. (Nasdaq: SPLS), Target Corp. (NYSE: TGT) and Kmart (Nasdaq: SHLD) have in common? They're all victims of hack attacks... Read On... Investment U Plus by Bob Keaveney Tuesday, December 9, 2014 Its recent earnings report was a home run, and Momentum Alert subscribers are up11.5% on their positions in just six weeks. And Alexander Green expects more good news ahead. Readers of Investment U's premium edition are learning more today. Find out how to join them by clicking here. You are receiving this email because you subscribed to Investment U. To unsubscribe from Investment U or to manage your account, click here To cancel by mail or for any other subscription issues, write us at: Investment U Attn: Member Services 105 West Monument Street Baltimore, MD 21201 Keep the emails you value from falling into your spam folder. 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