June 14th, 2008

Again, the S&P Oscillator

For all of you out there searching for the S&P Oscillator that Cramer talks about on Mad Money, stop looking, you won’t find it. About the only thing that happens whenever Cramer “S&P Oscillator” is my traffic stats get a huge boost. He mentioned it first in February, then again in May and now, according to all of you, again tonight.

But either Cramer doesn’t know what he’s talking about or S&P doesn’t since the S&P 500 Index closed today just about spot on to where it was back in February and in May.

On May 24, after the previous flurry of activity, I wrote:

I have 44 years worth of S&P Index closing data and have tried to replicate their Oscillator using methodology described in an excellent article entitled The Relative Strength Index (RSI) at the StreetAuthority.com. Needless to say, it’s been a waste of my time. I’ve tried all sorts of variables (for example, the traditional 14 day, 30-day, 60-day, moving averages of each) and have always found it too volatile and giving too many false signals. I believe I read somewhere that S&P charges $1000 for access to their oscillator data.

People, you have to stop being afraid of missing the S&P 500 train should it leave the station. Stop hoping and praying that today’s 1.5% increase in the S&P 500 was a turning point and bulls are going to charge from here on.

From a technical perspective, nothing much happened today. And from a fundamental point of view, you need further confirmation before acting than: a slight firming in the $US, a relatively benign CPI report, a slight down tick in commodity prices (just think back to where they were 6 months ago to see where we came from), no new financial institution crises or any other news you wishful-thinkers might have heard today. Here’s the picture I look at:

For those familiar with this blog, the above chart will be familiar (see May 31, S&P 500 “Video”). The only time when my Market Timing Indicator (MTI) even got close to signaling a buy was May 16, the day the Index crossed above the 180-day moving average. Yes, like you I was excited but the euphoria lasted merely two days because the Index crossed back below the 180-day moving average and has been careening lower ever since.

Some of you have asked for more information about the MTI. What I can tell you is that it’s the product of 3 months of work, back-testing 45 years of market history. While similar to other oscillators based on MACD’s (the diverging and converging of multiple moving averages), the MTI is a refinement in that it incorporates the position of the Index itself relative to those moving averages. By back testing, I found the conditions (uniquely different in bull and bear markets, by the way) under which, historically, there were probabilities of either high and low market risk.

The MTI has indicated an “all-cash” posture consistently since Dec 28, 2007 (with the exception of the two days noted above). The Index must rise a minimum of 5.3% to 1415 and stay above that level for several days before the all clear signal will sound. You can try to pocket that 5.3% but, I for one, would rather let others do the heavy lifting.

(To be absolutely truthful, I’m violating the MTI call with only about 50% cash and the rest in coals, energy, some momentum stocks making new highs and hedges like silver and PowerShares UltraShort ETFs.)

Thank you to all those who expressed interest in buying my forthcoming book. It’s in the final editing stages and I hope to have it published before the end of the summer …. just in time, perhaps, for the break out one way or the other from this nearly 6-month 1300-1400 range.

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