Technicals Point to an Unhealthy Market
By Carl Swenlin, Decision Point
Decision Point publishes a daily Tracker report of our 152 Blue Chip list. This list is composed of the stocks in the S&P 100 Index, the Dow 65, and some large-cap Nasdaq stocks. We also track the Top 10 stocks in ths list, ranked by relative strength measured by Decision Point’s proprietary PMO (Price Momentum Oscillator).
I have observed this list over a long period of time, and my impression has been that the top stocks do exceptionally well during a bull market, and extremely poorly in a bear market; however, I wanted to develop a more objective way to measuring the performance of these top stocks.
To do this I constructed a “Blue Chip Top 10 Index”. This is done by calculating the daily change of the Index as being the daily average percent change of the securities in the Blue Chip Top 10 list. Stocks are tracked from the day after they enter the Top 10 list through the day they drop off the list.
The Top 10 Index is equally weighted, so theoretically one could only replicate the performance of the list with real money by reallocating an equal amount to each stock each day (and somehow avoid transaction fees in the process). More to the point, the Top 10 list are a good place to look for securities that will out-perform the market, but it will be impossible for you to duplicate the Index. You could also lose a ton of money if you are long these top ranked securities during an extended market decline.
The primary purpose of the 152 Top 10 Index (BC Top 10) is to how see well these top ranked large-cap stocks are doing in relation to the broader market. Specifically, in a bull market or extended rally we expect the Index to out-perform the broad market. This is because, when stocks reach the top of the list, they tend to stay on top due to persistent upward momentum. This is a healthy condition. In an unhealthy market, stocks tend to rotate through the Top 10 rather quickly, and the performance of the index poor in relation to the broad market.
Comparing three-year charts of the SPX and BC Top 10 Indexes we can see that the Top 10 have been underperforming for the entire time. Since the June low the BC Top 10 has advance only 5.9% versus 9.5% for the SPX. And while the SPX has been trending up for the period shown, the BC Top 10 has been trending down since the February 2011 top.
Conclusion: In spite of upward movement of the SPX, the Blue Chip Top 10 Index tells us that the leadership of the market has been rotating too rapidly, which suggests confusion and weakness. By the time a stock reaches the Top 10, it loses momentum and drops right back out again. This is evidence that for a long time the internal condition of the market has been turbulent and confusing, in spite of generally rising market prices.
16 Comments
What do you do with this?
What edge do you garner with this analysis?
Did you make money tracking these stocks?
Why are you tracking poor performing stocks and concluding the market is unhealthy? Looks to me like your 152 blue chip filter is unhealthy.
But what’s the point decision point? How do I make money with this. Isn’t that the point. What happens if I choose 152 stocks that show an increase. Does that mean the market is healthy?
The market may or may not be healthy. It will decide that. Not an analysis whos filter has you buying some losers.
My real question would be…. Now that you’ve figured what doesn’t work with the market going up since 2011… You are 348 stocks closer to finding out which ones are being targeted to lift up the SPX.
@VII, Welcome back to pragcap. Haven’t seen you here for awhile. There is another reasonable good technician who just came out with a call to short. This set-up presents an excellent opportunity to position yourself on the short side. http://www.marketanthropology.com/2012/08/989.html
Big question is whether the SPX can muster the strength to exceed the April 2nd high of 1422 within the next month (or week). This source argues it is unlikely to exceed, or stay above that level for long.
Hi Larry.
Follow Swartz closely. Tell me what you find.
There have been great setups short and long. A stock market not a market of stocks.
The end of the year is pure MMA. You better have more than one discipline or smokey will be standing over you yelling…”you got knocked the $&$& out”
If the SPX does this you must counter with that. It is market Jiu juitsu until Monday Dec. 31st. There is NO easy way home into 2013. If someone tells you where they think the SPX is headed…. Or worse offers to lay out a short pivot on the SPX they’re trading nothing but paper. I call them the burqa bloggers… Cause they have NO skin in the game. All covered up.
Why do I say this? Because this market has been Tough. At times impossible to pin down. Just when you got it all figured out… At the last second it gets out.
Let’s talk market.-
If it goes down… The monetary men will be called. If it goes up… Many underinvested PMs will be forced to do what they fear ….chase. NO ONE likes this market. Hated… I hate it. Everyone I visit with is ready to give up. frozen. When has the SPX topped with so many calling it? I’m not even sure the famous P3 Prechter wave is even remotely possible UNTIL the fed and everyone is comfortable again with taking risk. There is a huge risk apathy that has set in. I’ll say this what ever edge the shorts think they have …we can all see. I always favor the path no one expects and no one wants. The SPX to go to…. 1510-1525 quickly.
If this is a bear market the comps say it MUST fall this week by 15% over 10 days. The year over year ROC is getting too wide that only a true black swan would news to occur to take the SPX negative YoY.
I’m favoring a reflation trade into March it’s the one I can’t even defend with a straight face. Impossible right? RIGHT well guess what the SPX always does? Also look at the massive H/S pattern that could be forming.
Put up or shut up- fine- I’m 40% long too many positions, 5%. GDX, 40% 10% short,- 5%RWM 5% BBY-target 5
40% Bonds-
I think the fed is trying to let yields rise to push investors out. hilenrath inferred some frustration with what texts book said should occur. I read the July leak as the fed is going to get creative..I think yields are going to start rising just a little bit…1.5 up to 2%
I’m lowering my Fixed income this week if some signposts I watch play out
Hi VII. I would ask what you’ve been doing but I already know, bustin your butt trying to keep up with this hell hole of a market. 12 hour days and still not comfortable. Never before has so much work been done for so little money. As we approach 1400 the easy answer is lots of volatility and chop so that probably won’t happen. The set up as I see it: The weak holders have been run out. Money coming into equities because of lack of alternatives. Perception that CB’s can maintain control. If we can punch through 1420 convincingly then throw in some “fear of missing out”. I’m saying all this but I’m bearish and I’m long and obviously confused. There is no point in going over the bearish scenarios, they’ve been repeated too many times already and they’re not working out. Yet they can’t be ignored. The real problem with risk in this market is that it isn’t really risk at all it’s uncertainty, and you can’t apply a number to it. I went into this weekend protected by some VXX calls and as the week wears on I plan on consolidating individual names into one or two levered etfs hedged and supplemented by options in order to increase agility and cash. I am avoiding bonds because I don’t think the Fed wants me there and they are some bad mofos. I’ve been playing coal, apple and corn mostly on daytrades and very short swings, frequently with calls to minimize exposure, and will probably move money into QLD. Even though I’m bearish. This market is a mess and now I’m a mess.
MS-
Yes- Well said-
I would just say Keep Calm and Carry On. Continue keeping an eye on those things that are clearly sending warning signals and see what happens.
Remember one of my favorite Jeff Saut missives which I’ve shared here twice. I’ll share it again–I printed it out. Hold this tight when you feel like giving up and buy and hold is the new black. I think in the end this is the most important thing to remember-
From 3/5/2012-Reprint on Minyanville somewhere-
“Finally, in the mature stage of the bul market, the recently active and spculative accounts would tend not to overtrade or try to pick”tops” using short-sales, but would resolve to buy and hold. So many times previously they had sold only to see their stocks dance higher, leaving them frustrated and angry. ……………..the book’s author concluded that the public’s investing methods had undergone a pronounced, and obvious, unintentional change withe the progression of the bull market from one stage to another- A PSYCHOLOGICAL PHENOMENA THAT CAUSES THE GREAT MAJORITY OF INVESTORS TO DO EXACT OPPOSTIE OF WHAT THEY SHOULD DO…”…One Way Pockets- 1917.
“A Psychological Change”…. I love that. Are we there yet..rather are YOU there yet. Can you identify a social mood of a pyshological change that has investors frustrated and just giving up to buy and hold? Watch for this…I am. What level would investors just give up and say FKKk it I’m going long..what’s the point of worrying about Europe.
You must always be a bull and bear. Don’t give up either trait. Watch for what others are leaning toward and why. If many Bears give in…watch out.
But putting a number on the SPX is silly. What does it really mean and what did it take to get you there? The 13 year chart showing the SPX doing nothing…doesn’t speak to how much wealth was created and destroyed during those 13 years. Find opporunities…borrow money cheap…and seee if you can unload your investment to someone else at a higher price. Thats our job.
@VII, thank you for clearly letting me know where you stand, much appreciated. I’m still holding 65% in fixed income spread among BOND, DBLTX, VCLT, VCIT, LQD and EMB. 20% in equities in XLU, XLP, XLV , VOX, VYM and DVY, which are defensive & dividend oriented. 4% in IAU. Rest in cash. I am very surprised that the equity markets have done so well this year, and my performance is trailing the SPX, it’s +11% vs my +6% YTD. It will totally frustrate me if the SPX goes over 1500 here, so that is probably what it will do. As you can see, I am not positioned for it. And I hate to chase. Gun to head, if I had to say where the SPX ends up 18 months from now, I say down a lot. But what do I know? I woulda said the same thing 18 months ago.
The market is alrady above – .786 Fib…this gives you some more upside. Above this there isn’t much resistance now. So one could play it safe by using the former resistanc now support as your line in the sand.
That would be your first step. If you can get this thing above 1422 there is nothing but air up there. There is nothing that can stop this thing but excuses from ZH. Just keep raising your stops. We’re 5 weeks into the 2nd quarter and many have been left behind. Markets ups 2.7% 2nd Qtr..and alot of managers are lagging again.
Hi BL, I follow Mkt Anthro pretty much every day. Altho’ he is TALKING short, i have not seen him take a position yet, and he usually posts his positions on Stock Twits.
best,
rhp
your index is showing what’s been obvious to most value stock pickers. this has been a growth stock dominated rally since early-mid 2011.
You have analyzed 1 bull market run and are assuming a conclusion. Is this typical of other bull markets? You state that your “impression” is that top stocks do well in a bull and exceptionally poor in a bear. Impreesions are nice, do you have any data?
Given your hypothesis of “expecting the top stocks to outperform”, since your calculating the top 10 bases on percentage daily change, that means some “top 10″ could be beaten down stocks in a bear trend? That is, after a run up, stocks well above the 200dma won’t tend to out perform on a daily basis, but beaten down stocks can. Are you really measuring “top stocks” with this?
What do I need that for? Four months worth of chop tells me that the market isn’t healthy.
Here is another view:
SPX with the Value line Equal weight Index behind it
Some worry about “Bull or Bear” market conditons
This is a “Termite” market–the Foundation is being eaten away
http://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=3&mn=0&dy=0&id=p45580684806
On top of what others have mentioned, the 10 stocks with highest market cap is more likely to underperform the broader market. Think of what the top ten companies were 50, 40, 30, 20 and 10 years ago and which ones are now. They have changed, which means the ones that were the biggest lost market cap and others (and the broader market) outperformed them.
agreed, in the long term. small cap outperform, right now, small cap value stocks, especially international/EM small caps have been totally trashed and trading at 1/2 to 1/5 of book.
oops-3rd