10 Bullish Charts, Signals, Indicators
Earlier this week, we discussed several anecdotal pieces of evidence that suggested we were closer to the bottom then the top.
Today, we look at specific data and charts that can provide some insight as to how extreme these present levels are. All these suggest to us that we are increasingly close to a bottom that can be purchased for an upside trade of 20-30% from these levels.
NOTE: We scale in over time, in 10% increments, and recognize that the bottoming process can take several months to several quarters to complete. Hence, slowly buying in is the key.
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1. Relative Strength Indicator, SPX, 1928-2008
Ever since the beginning of the S&P500, the RSI's monthly indicator has only dropped below 30 on four occasions: 1929, 1973, 2002, and 2008.
All 3 prior instances were very close to lows.
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2. SPX Losses
The S&P has given up nearly the entire gain from the 2002-03 period to the October '07 highs.
This is a major correction that, like the many trading rallies in the 1970s, should set the stage for the next leg up.
Note that these were not buy and hold rallies, but 6 - 18 month trades.
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3. Dow Components and the 200 Day Moving Average
All 30 Dow stocks are below their 200 day moving average -- a condition that has only occurred once before -- and the last time was right after the 1987 crash.
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4. Cash Allocation
Investors current allocation to Cash is well above its 21 year mean and are at the highest levels since ’02, ’98 and ’90 lows.
Chart courtesy FusionIQ
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5. 90/10 days
This week has seen three 90% downside days, reflecting massive liquidations.They can only continue for so long.
As noted above, we believe in scaling into long positions. We would become more aggressive buyers after the first 90% upside day. This has historically created a good entry for a 1 to 3 to 6 month holding period.
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6. Percentage NYSE over 200 Day MA
The percentage of stocks trading over their 200 day moving average is at multi year lows:
Yet another historically excellent entry point.
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7. Gold vs SPX
The cost of an ounce of Gold is now greater than the S&P500; This last occurred in the early phase of the 1982-2000 bull market -- around 1984.
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8. VIX Moving Average
The VIX (also known as the Fear Index) hit a multi-year high of 70.90, reflecting extreme levels of emotion in the markets. We like to look at this on a 50 day moving average
VIX Deviation From 50-Day Moving Average
Readings above 15 over the last 10 years have produced significant rallies. The present reading on this indicator is 26!
1998 Reading Market Up + 27 % (3 Months Later) and + 36 % (6 Months Later)
2001 Reading Market Up + 22 % (3 Months Later) and + 22 % (6 Months Later)
2002 Reading Market Up + 14 % (3 Months Later) and + 19% (6 Months Later)
If History bears out this should be a good buying opportunity with a 3 to 6 month horizon.
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9. S&P500 is down 47% from its peak level one year ago. Transports are down 38%. These are relatively rare degrees of loss, and suggest a near term upside move.
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10. The following two charts show the 2002 lows, and the current market. Can you tell them apart?
Highlight for answer: The first chart is 2002, the second chart is current as of 10/10/08
Friday, October 10, 2008 | 12:30 PM | Permalink
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Comments
Should get a very signficant rally from November 1st to January 15th.
Posted by: DL | Oct 10, 2008 12:35:18 PM
Barry: I flipped the one year BJIA chart yesterday. If the flipped chart represented a stock, I would have shorted it today.
Posted by: APB | Oct 10, 2008 12:40:11 PM
the s+p will have its countertrend rally at some point but it's truly a guess as to where it commences. we are in liquidation deleveraging crash mode and all indicators might as well be tossed out the window. hope the discilpined one;s get their rally but i'm afraid it won't be as great as most think.
Posted by: harold hecuba | Oct 10, 2008 12:40:18 PM
Once the credit crisis is fixed, maybe.
If there are several hundred TRILLION in derivatives going broke, then I'll wait.
Posted by: hr | Oct 10, 2008 12:42:36 PM
%Stocks below 200 DMA & 50 DMA at 1987 crash levels....close to 0
Posted by: RDS | Oct 10, 2008 12:45:03 PM
%Stocks below 200 DMA & 50 DMA at 1987 crash levels....close to 0
Posted by: RDS | Oct 10, 2008 12:45:11 PM
May or may not be relevant, but after the ’29 crash, the Dow rallied 35% (11/14/29 to 4/15/30).
Surely the SPX can muster a 15% move in the next rally.
Posted by: DL | Oct 10, 2008 12:45:56 PM
I have the odd thought that we're going to be looking back, and wondering if DJIA 10000+ was just a 'dream'...
One thing is for sure, this current Chapter will be entitled: "Mission Accomplished"
Posted by: Mark E Hoffer | Oct 10, 2008 12:47:23 PM
Barry, please please don't get pissed. You have done a fabulous job presenting a contrarian view for a long time and you capably represent those of us who are less optimistic to the rest of the world.
But does anybody know of any other good blogs that represent a really pessimistic view of the world? I don't mean an appeal-to-authority, ad hominem, immature sexist rant blog like mine, but something that consistently makes convincing analytically based arguments that we remain far, far from even thinking about bullish indicators.
Posted by: CNBC Sucks | Oct 10, 2008 12:48:20 PM
Dear Barry
I've been studying the "credit default swaps" market for some time. It is said that there are $58 trillion of these outstanding. Though some are off setting many may be built on leverage and unreserved.
What will happen as a result of the Lehman auction today and similar events is that those solid institutions that underwrote CDS contracts which they than turned around and hedged with an off-setting CDO will still be obligated contractually for the CDO they underwrote while losing their protection to a bankrupt counter-party. They will than have unhedged exposure and may be taken down by the same bankruptcy or another depending on whom they underwrote. A few major bankruptcies will take down the whole $58 trillion edifice like a "house of cards."
The only way to resolve this is for the U.S. government to declare "force majeure" and annul these contracts. Parties will be relatively little scathed financially as they will lose only the premium flow and un-callable protection where they have underlying securities to protect.
An Economist
Steve Sposato
Posted by: Steve Sposato | Oct 10, 2008 12:52:51 PM
good call barry..
i am selling far out of the money puts at this levels.
AAPL strike 45 puts are yielding nice premiums.
msft strike 15, intc strike.
choose any stock...and discount by 20-30% (crash scenario) and if you think it is cheap, you go ahead and sell the puts.
but keep plenty of cash for margin(in case market crashes).
i am starting with 20% of my cash, will add 20% after every 10% drop in my specific stocks.
worst case scenario....we may get a 50% sell off. but if we have enough margin money, our puts wont hurt.
volatility is at record high its time to sell it.
Posted by: aram | Oct 10, 2008 12:54:27 PM
BR is correct, there are bullish indicators out there that suggest opportunity is nigh. Watch the price action as that will tell when it is true or not. Probably very close to a bottom/floor for price levels.
Posted by: Big J | Oct 10, 2008 12:56:01 PM
It's contained!
(sorry for the redundancy)
Posted by: Marcus Aurelius | Oct 10, 2008 12:59:40 PM
For the past 5 years, we were told to ignore the excessive leverage, the trade deficits and the "one way carry trade" because it's "different this time".
The irony is that since it turned out that it wasn't "different this time", we've now reached a point where, indeed, it may actually be different this time.
Nonetheless, you make a compelling argument, though...
Posted by: Dan Duncan | Oct 10, 2008 1:01:25 PM
The liquidity crisis is on its way to be solved through our hard work (selling papers and derivatives) pushing liquidity in our coffers and scaring our piggy bags, and we are not ready to resume the up trend until we get full attention of our bail out governments .
We have since two weeks discovered our predicaments and thank you for noticing!
Posted by: the bankers association | Oct 10, 2008 1:02:41 PM
Wow - Did CNBC just quote Greenspan as saying he sees a bottom in housing in the first half of 2009? He's needs to stay quiet.
Posted by: Brian | Oct 10, 2008 1:03:09 PM
Isn't the sum of all these "indicators" really just the thought that "Hey, we are so far down that we have to go up from here."
Posted by: Mr. Obvious | Oct 10, 2008 1:03:16 PM
Wonderful stuff Barry, and rational as ever. It's just a very, very long day for rational beings today, when we are surrounded by lizard brains who are determined to lock in their losses...
Posted by: leftback | Oct 10, 2008 1:14:17 PM
Can't disagree, for the most part. The market is in a position to buy back in a big way as soon as it looks safe. It won't stop falling until the bad new stops coming on a daily basis.
On the good side, all this new government liquidity should propel the markets to a good place when the ballast is dumped.
McCain finally had a good idea. He wants to temporarily stop mandatory withdrawals from IRAs for those over 70. It just goes to show, if you give a monkey a typewriter, eventually something that looks interesting will emerge.
Posted by: dead hobo | Oct 10, 2008 1:16:55 PM
28-08 chart looks like Al Gores global warming and intense hurricane frequency stats
Posted by: Greg0658 | Oct 10, 2008 1:17:17 PM
Well, Mr. Obvious, I think you are ignoring the goat-bones evidence when you can see it quite clearly there before you.
Posted by: wally | Oct 10, 2008 1:17:32 PM
Similar evidence from Faber's quant model that is 100% in cash - has only happened 4 times before....
http://worldbeta.blogspot.com/2008/10/100-cash-out-of-sample-returns-and.html
Posted by: UpYourAssets | Oct 10, 2008 1:17:57 PM
Equities go up if cash flows into equities. I don't see cash flowing into equities. Have you studied the charts around 1929? The sucker rallies were devastating.
Posted by: johnnyvee | Oct 10, 2008 1:20:15 PM
Raise your hand if you want to hold
over the weekend?
Anybody??
Seriously, the rally would have been good on Wed. or Thurs.
Posted by: Dru Nelson | Oct 10, 2008 1:20:40 PM
I'm flat. Made a killing this week long volatility. Staying in cash until we hit some kind of support.
Posted by: Jay | Oct 10, 2008 1:20:55 PM
