February 15th, 2008

S&P Oscillator, MACD and MTI

You may have guessed from some previous postings that I’m not a Jim Cramer fan. He’s very entertaining, he claims to have made millions from his hedge fund, he’s a relatively good teacher of basic for the complete novice – but for anyone who has to manage a stock account of any meaningful size he’s next to worthless.

He might have a track record of just barely 50% for his stock picks (that’s just my guess, for exact percentages I’d have to refer to the actual data) but don’t look to him to give you any guidance on when to sell a stock or to alert you when the market is heading down. And can anyone who concentrates exclusively on picking stocks (“there’s always a bull market somewhere”) be totally reliable? I don’t think so.

But in Jim’s words recently:

“I know I am not a chartist, but I have sworn by two technical indicators all my trading life: the S&P Oscillator and the bull-bear ratio. Any time we get severely oversold, I hold my nose and buy, any time we get the bull cohort below 40%, I have to buy something, and when it gets too close to 35%, you have to cover all shorts and get long.”

And what is an Oscillator? One definition comes from Investopedia:

A technical analysis tool that is banded between two extreme values and built with the results from a trend indicator for discovering short-term overbought or oversold conditions. As the value of the oscillator approaches the upper extreme value the asset is deemed to be overbought, and as it approaches the lower extreme it is deemed to be oversold.

One popular Oscillator is the S&P (Standard and Poors) Oscillator. In Jim Cramer’s ‘Real Money: Sane Investing in an Insane World’, he mentions that the S&P Oscillator, which is proprietary to Standard & Poors, as one way to spot a market bottom. He says that it costs around $1000 to subscribe.

Another market timing indicator is a ratio of the percentage of S&P 500 stocks that are above their 50-day moving average vs. the percentage that are below their 50-day moving average.

A third commonly used momentum indicator is the MACD, the Moving Average Convergence Divergence line. This indicator is defined as:

A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting a faster exponential moving average (EMA) from a slower EMA. An EMA of the MACD, called the “signal line”, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

My Market Timing Indicator (MTI), is a blended momentum/MACD/stochastic indicator since it is constructed with 4 moving averages, an MACD to track their convergences and a stochastic to measure the relationship of the Index itself to the MAs. It distills the 44-year history of all these variables into 1600 data points.

The uniqueness of the MTI is that it relies on the market’s own historical track record, how the Index performed at each data points over the course of 44 years and assumes that momentum is unchanging and history will repeat itself.

To see how the MTI works in action, click here.

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  • john hartmaqn

    Great, you’ve managed to figure out Cramer’s secret. He’s here to teach novice investors and not to predict the fututre. Good job!

  • Anonymous

    Have you ever watched the show?

  • perry

    What is your track record, and do you make your money using your own money, or someone elses?

  • Guru

    I spelled out my performance for 2008 on January 4. I you’re interested you can click here.

    I’m retired and self-direct my portfolio.

  • jim

    Cramer is a entertainer for DIY investors. Cramer daily antics and diatribes are great but must be filtered if taken for advice.
    I was googling for the makeup of the S&P Oscillator and stumbled upon your blog. Your MTI sounds interesting the link did not bring up any info…will try to caome back soon
    Jim in Indiana

  • Anthony

    I just want to know if you read any of the books. The show I find sometimes goes against what the book teaches you. I will have to say he did get me into the stock market, and by doing that I know have got others in the game. So before people talk crap, they should do their homework. Thanks to him I caught the March 9th bottom. It's like a class, the TV show is more for fun, the books are where it is at.

    "THEY KNOW NOTHING!" – Jim Cramer

    The Fingerprint Man

  • Tom

    Anthony got it mostly right on Cramer. He is an entertainer and teacher. His most recent advice to watchers of the program was to "listen to everyone", not just the stock "experts". I'd say that's pretty good advice. Show me one individual who got it all right all the time and I'll show you a liar. Thanks for you post, Tom

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