February 15th, 2008
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.”
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.