Archive for the ‘Investment Tools’ Category

Breadth Indicators Suggest Weakening Bull

Thursday, July 30th, 2015
  • The broad market is demonstrably technically weaker than the S&P 500
  • Breadth indicators suggest the Bull market is weakening
  • 7 breadth indicators provide the clues
These charts compare breadth indicators for the NYSE composite (over 4800 securities, stocks, ETFs, CEFs and some bonds, but overwhelmingly individual stocks) with the S&P 500 large-cap stocks  These are all technical factors.  Two other big ones I will write about later are the yield curve and reported and forecasted earnings (and revenue) growth. Those are fundamental factors. 

The purpose of breadth indicators is to reveal whether more or fewer of the constituents of an index are participating in a move (whether an up or down move).   

Often the case on the upside is that few and fewer stocks (the largest ones generally) are “pulling the wagon” while  more and more of the other constituents move into their own correction or bear market – that bear markets are actually a rolling event that culminates in the largest stocks eventually capitulating and joining in.

Direction divergences between the price of an index and the breadth measures is either a prediction of, or confirmation of, a change in trend direction; and divergences between the breadth of the broadest market (NYSE) and smaller indexes (SP500) can indicate potential problems for the smaller index.


The first side-by-side is a 10-year daily comparison (NYSE on the left and SP500 on the right). 

(click image to enlarge)


The top panel in gold measures the percentage of constituents with Bullish Point & Figure charts (a classic chart type with clear objective standards for Bullish and Bearish).  This measure shows little difference in pattern and levels between NYSE an SP500 (NYSE currently at 49% and SP500 and 51%), with both weakening from a strong 70+% at the beginning of 2014.  The 50% line is the “warning” line.  70+% is overbought and less than 30% is oversold.

The next panel in red (not a breadth measure, but one indicating the degree of deviation from the 200-day trend  the “strength” of the mean reversion force) plots a horizontal line at “1” for 2 Standard deviations above the 200-day; and another at “0” for 2 standard deviations below the 200-day trend.  A horizontal line value of “0.5” is at the 200-day trend line. 

Under a normal probability curve (ignores “fat tail” risks) 95% of prices are expected to be within +/- 2 Standard deviations (only 2.5% chance of price being above or below the +1 and 0 lines).  The fact is that stocks can and do sometimes move outside those boundaries for extended periods, but the odds favor reversion toward the 200-day mean trend line outside of those bounds.  Both NYSE and SP500 are in OK territory, but note that the NYSE has been breaking below the 0.5 (trend line) multiple times and much more than the SP500 during 2015.  That is a sign of comparative weakness in the broader market.

The main panel (price in black and 200-day trend line in gold) shows the general shape of the price and the position of the price above or below the 200-day trend line.  You can see (as discussed with the standard deviations) that the NYSE has dropped below its trend line a lot more than the SP500 and is below now, whereas the SP500 is not.  That shows broader market weakness.  You can also see that the NYSE has been rather flat since mid-2014, whereas the SP500 has only been flat in 2015.  That show broader market leading weakness with the SP500 following on a delayed basis.

The bottom panel shows the record high percent shows new highs divided by the total of new highs and new lows normalized to a 100 point scale [ {New Highs / (New Highs + New Lows)} x 100 ].  The pink histogram is the daily value and the blue line is its 10-day average.  The horizontal lines are the 70%, 50% and 30% levels.  NYSE had significantly more below 50% levels in 2013 and 2014.  In 2015, NYSE dropped to about 50% a few times and the average is down to 25%, whereas the SP500 did not drop to 50% until recently and is now at 54%.  The broader market is weaker.

All this data is merely to validate the simple statement that you may have heard on Bloomberg or CNBC that a smaller and smaller number of large companies are holding up the SP500.  Not yet a big problem, but clearly a maturing Bull market.


Here are the same indicators on a 1-year daily basis.  It gives a better view of the current situation (but in light of the long-term picture in FIGURE 1).

(click image to enlarge)


The two main observations are that the NYSE 50-day average is declining steeply and is near the 200-day average; and the price is below the 50-day; whereas the SP500 50-day average is declining mildly and the price is above the average.  The broader market is weaker. The other observation is the 97% record high percent on the most recent day for the SP500 (a very powerful upsurge); and a “pretty good” upsurge at the NYSE (58%) suggesting that new buying interest came back to both indexes.


These 10-year charts show different indicators of breadth.  The top panel shows the percentage of constituents above their 200-day trend line.  The main panel shows the index price and its 200-day average.  The lower panel in red shows the cumulative Net New Highs (highs less lows).  The panel in blue shows cumulative Net Advances (advances less declines). The bottom panel shows cumulative Net Advancing Volume (advancing volume less declining volume).

(click image to enlarge)


The NYSE percent above the 200-day average is weaker than the SP500 (40% to 56%).  Levels below 30% seem to correspond to trend reversals (and an extreme low level defined the 2009 bottom).

The index moving below the 200-day average was not a good indicator with too many false signals (“whipsaws”); but when the 200-day itself turned down, it was a pretty good signal of a problem market.,

When the Net New Highs, and Net Advances, and Net Advancing Volume  (collectively the “Nets”) all exhibited a trend reversal, so did the NYSE and SP500 indexes.

FIGURE 4:       

These next charts are the same as immediately above, but are daily for 1 year.

(click image to enlarge)


The data to note is that since June, all three of the “Nets” turned down for the NYSE; but for the SP500 only Net Advancing Volume declined.  Net Advances for SP500 have been flat all year and Net New Highs are rising at a decreasing rate toward flat.  The broad market is weaker than the S&P 500.

The summation of these observations is that the broad market is tired; the S&P large-cap market is still rising, but with less participation among its constituents.  Overall, this is the sign of an aging bull market, and suggests that extra alertness, or extra cash, or both are appropriate.  It may also suggest that a bit more in select fundamentally and technically solid individual stocks at the expense of index allocations could be appropriate.

If we are lucky, this analysis is wrong and the party continues unabated.

Volatility-Based, Short-Term Price Probability

Friday, May 18th, 2012

The volatility of a security (historical or options implied) can be used to estimate the short-term range of prices that are expected at various levels of probability, using some basic standard deviation math.  You don’t need to know the math, because there are charting tools that do all the work behind the screen.

How It Looks On Charts:

The area on a price chart that covers the probable price range is a parabola laying on its side (a “price probability cone”). As time from the current date to the future date increases, the width of the price probability cone increases. Larger volatility estimates create wider cones, and smaller volatility estimates create narrower cones.


The approach assumes a nice symmetrical distribution of price (a normal bell curve).  That is not what the real world is like, but it is a fairly close approximator of behavior, and the basis of much of the math involved in options and other risk measuring tools.

Black swans, such as we experienced in 2008, kick the stuffing out of probability projections, but most of the time volatility adds value to decision processes by giving moderately reliable clues about the range of short-term future prices.

When using short-term historical volatility as the basis, the assumption is that the price volatility that  has been happening recently, is probably going to continue in the short-term at about the same level.

When using options implied volatility as the basis, the assumption is that options investors have an ear to the ground and eyes on the horizon with a pretty good idea of what lies ahead in the short-term.

The statistics are agnostic as to the direction of the price, but you can use other obvious sings (including the simple slope of the price plot) to decide which side of the price cone you wish to assume is more relevant.

Example Chart:

The chart we include in this explanation is for GLD (gold bullion) and is set for a probability of 96% (that corresponds to 2 standard deviations).  The math assumes that there is only a 2% chance of prices above the cone, and a 2% chance of prices below the cone.


The black cone represents the 96% probable price range for 1 month forward for GLD as of 05/17/2012 based on a volatility rating of 17 (a 17% annualized standard deviation) based on options implied volatility.

The green cone represents the 96% probable price range for 1 month forward for GLD based on 3-month historical volatility of the GLD price.

Additional Indicator Plots On the Chart:

The blue lines mark the 3-month price channel.

The gold line is the 200-day moving average.

The red lines plot offsets from the trailing 1-year high. The dashed red line marks a 10% offset (“correction”). The solid red line marks a 15% offset (“extreme correction”). The bold solid red line marks a 20% offset (“bear market”).

Use of Probability Cones With Cash Secured PUTs:

If you don’t believe the world will end, high fear times can be a good time to sell short-term (1-3 month) cash secured PUTs on stocks you’d like to own by setting exercise prices outside of price probability cones. If you are certain you’d like to own a stock at that lower price, and confident that you would buy some at that lower price, then why not get paid to promise to do so. Probabilistically, you will not be called upon to perform, but if you are, you buy what you were convinced you would buy at that price any way. Be sure you fully understand what you are doing before trying that.

Dividend Price Recovery Quick Estimator

Wednesday, April 18th, 2012