April 23rd, 2009

Only 1.1% of Stocks in Clear Up Tends

As regular readers know, I put much stock (no pun intended) in the alignment of the S&P 500 Index and four of its moving averages: the 60-, 90-, 180- and 300-day MAs.

Nearly a year ago in “Precursor to a Healthy Bull Market” (May 2, 2008), when we were all so innocent about the severity of the emerging Bear Market, I described the typical arrangement of these moving average in Bull vs. Bear Markets. On May 2, 2008, the Index was about to cross above the 180-day moving average just as it hopefully is on the verge of doing soon. Back then, the Index and 180-day MA were 1413 and 1427, respectively. As to today’s close they were 843 and 943, respectively. I inserted the following chart to demonstrate that difference:

While that arrangement of MAs measures the strength of the Index’s trend, it does the same for individual stocks. Stocks whose prices are above all their moving averages which, in turn, are arranged from fastest to slowest are stocks in clear uptrends; the same can be said that stocks clearly in a downtrend have a mirror images of the arrangement. I wrote last may, rather naively:

“Before we can become complacent about moving to new high ground, it’s going to take quite some time for this reversal to be completed. The Index could lurch ahead to 1500 but that could be followed with some backfilling. The Index could crawl slowly uphill dragging the moving averages behind it. It took 5-6 months for the averages to flip from the Bull to Bear configuration. We should expect another 6-8 months for it to right itself back to Bull (remember, things happen much quicker going down than they do going up)…..While we can celebrate a recovery in the making, it’s not here yet. A 7-8% recovery (from 1410 to 1520) can help the portfolio regain some of its health, we’ll have to be patient for the easy gains until sometime after the election.”

On October 1, in “When’s the Bottom and What to Do Then“, as the market was on the verge of accelerating its descent from 1161 that day to the low of 676 on March 9, I hearkened back to the May 2 and wrote:

“It takes a long time for the averages to flip and until they do, whenever that might be and for reasons unknown to us now, the market remains vulnerable…That was written just before the Index crossed over – for only one day – the 180-day moving average. We cautiously rejoiced and heard talking heads say that I bottom had been put in. And we know what has happened since May 2….I’m just as much an optimist as the next bull, I love buying stocks and I hate the state of this economy and the financial system. But I just can’t own stocks now and don’t know when I will be able to again.

Back to the original question: ‘Suppose the market does get to 1050, 1000, 950, ….. What will you do then?’ My direct answer is ‘I’ll buy the strongest stocks (best momentum) whenever and for whatever reason the market proves that it’s stopped declining. I’ll know the time is right from the index relative to its moving averages and how those moving averages are aligned.’ Sorry, I can’t make it any simpler or plainer.”

So the obvious question for this inquisitive mind was “how many stocks are now in clear up trends and how many in down trends as measured by their MAs?” Out of 5294 stocks in my Telechart system (excluding ETFs, companies subject to acquisition and other delisting), the answer shouldn’t come as a surprise given the the fact that stocks, on average, have been cut in half over the past 16 months:

  • Stocks in clear Bear trends: 860, or 16%
  • Stocks in clear Bull trend: only 60, or a mere 1.1%

Stocks in clear up trends include such familiar momentum names (many are IBD 100 stocks) as:

  • AZO (Autozone)
  • JOSB (Joseph A. Bank)
  • GHL (Greenhill)
  • PEGA (Pegasystems)
  • HOTT (Hot Topic)
  • GMCR (Green Mountain Coffee Roasters)
  • GHDX (Genomic Health)
  • SMG (Scotts Miraclegrow)
  • NFLX (Netflix)
  • QSII (Quality Systems)
  • SIGA (Siga Pharma)
  • CENT (Central Garden & Pet)
  • BPSG (Broadpoint Security Group)
  • KIRK (Kirkland’s)

I’ve been monitoring and reporting the effort of stocks to become healthy again (number of stocks closing above their 90-, 180-, 300-day MAs and the number of “golden cross” stocks) and of the market’s effort to cross above its 180-day (the “green light”). Even though the market has just scored a 23%+ move, we still need to be cautious.

Subscribe below or click here to learn more about help for navigating turbulent markets.