Sunday, February 4, 2018

Stock Market—Primary Trend & Secondary Trend

Two main indexes are used as metrics in the analysis:
  • S&P 500
  • NYSE
    • Which is broader than S&P 500
For discussion, terms used here have the following meanings:
  • Primary trend
    • Long-term trend 
  • Secondary trend
    • Short-to-intermediate term trends
In this article, I will summarize ways of monitoring the primary or secondary trends of  stock market.

Primary Trends

When SPY hits all time high on 01/26/2018, it is around 11.5% above its 200-day moving average (MA), which is historically frothy.

To monitor the primary trends, here are some gauges you can use:
  • Slope of the 200-day moving average ($SPXEW)
  • $SPXA200R
    • For a primary uptrend to manifest itself, most of the index constituents need to trade above their 200-day averages
  • Death Cross
    • Considered a bearish signal within the market, a death cross occurs when the short-term, 50-day moving average, also called a price trend, crosses below the long-term, 200-day moving average.
    • Some analysts use   EMA (50) and EMA (200)
  • $NYAD
    •  In the past, the NYSE Advance/Decline Line (measure of breadth) has always topped out several months before the end of the bull-market and its ongoing  strength is favorable for the broad stock market.
  • $NYA200R
    • Generally speaking, the line has to be above 50% to be in an uptrend. 
      • In other words, more than half of NYSE stocks need to be above their 200-day averages. 
      • But some analysts prefer to use the 60% and 40% lines. During market corrections, it's not unusual for the black line to drop to 40% before turning back up again.
      • Drops below 40% usual signal a bear market. Moves back above 60% reinstate the major uptrend. That's especially true after a bear market.
    • Some analysts also look for MACD bearish crossover for signals
  • MA (200)—200-day Moving averages
    • Uptrend
      • When the 200 DMA has an upslope
      • Conservative Mutual funds tend to stay in growth sectors (Technology, Energy, Consumer Discretionary, Financials) 
    • Downtrend
      • When the 200 DMA has an downslope 
        • Or $GSPA:$SPX in an uptrend
      • Conservative Mutual funds tend to stay in slower growth , dividend paying defensive sectors like health care, consumer staples (toothbrushes, groceries) and Utilities. 
      • If the market can move above the 200 DMA, they start allocating money to more aggressive sectors.

Secondary Trends

To monitor the secondary trends, here are some gauges you can use:
  •  $SPXA50R (S&P 500 % Above 50-day MA; a breadth indicator)
    •  If fall below 70%, it triggers a immediate-term sell signal
    •  If rise above 30%, it sends a immediate-term buy signal
  • $NYA50R (NYSE % Above 50-day MA)
  • $SPXA150R (S&P 500 % Above 150-day MA)
    • Monitors the health of intermediate-to-long term trends
  • $NYA150R (NYSE % Above 150-day MA)
    • Readings of its MA(10) below 1.50 suggests market is in downtrend
  • SPY:$VIX (with SPY shown "Behind Price")
    • As long as the SPY:$VIX line remains above the SPY line, it signifies that the smart money is comfortable and confident in the bull market,  and one should stay long.
    • Same for SPY:XLU ratio
  • Bollinger Band
    • When the weekly mid Bollinger band turns down, it implies the intermediate term trend turns down. 
    • When the bottom band is starting to move lower, it suggests price action could be starting to head that way. 
    • When the price bumping into the upper band lines, it doesn't inherently mean the price has to pull back.
    • The upper Bollinger bands could end up simply guiding the index higher indefinitely.
  • $BPSPX (S&P 500 Bullish Percent Index)
    • Overbought
      • $BPSPX > 70%
    • Oversold
      • $BPSPX < 30%
    • Strong buy signals occur when the Bullish Percent Index falls below 30% and then reverses up by at least 6%. 
    • Conversely, promising sell signals occur when it goes above 70%, and then reverses down by at least 6%. 
    • Some analysts use its point-and-figure graph (P&F) to look for signals too
  • $SOX:$SPX
    • If the ratio in in uptrend, the market is bullish
    • Could be used as a market leading indicator
  • MA (50)—50-day Moving averages
    • An intermediate technical indicator that will rise and fall with the trend or not at all if there is no trend. 
    • Typically, when the market is trending, it will act as a support for the trend.
  • RSI
    • In down markets if the weekly RSI tops in low 50's
    • Overlay $DJCBP:$UST with $SPX to see the trend
      • $DJCBP (Dow Jones Corporate Bond Index)
      • $UST (10-year US Treasury Note)
  • $SPXUDP (S&P 500 Volume Advance-Decline Percent Index)

January and April Effect 

January’s bonus money buys stocks and April’s IRA contributions have a similar impact and they will likely remain the best bet for bulls.  
  • January effect
    • Performance in January has been proven to quite closely predict the subsequent full-year performance.
    • Sort of measures investors’ appetite to buy up stocks that were sold off for tax purposes before year-end.
    • The first five trading days of the year accurately predict the next 360 something like 84% of the time.
  • April effect
    • April still commands the best inflows as IRA money and pension money tends to be invested before the April 15th tax cutoff.

Time to Buy 

The best time to buy a stock (assuming the market has not topped yet) is after a
  • Price correction
  • Time correction
    • When the stock trades sideways for a couple quarters while it digest earnings growth after reaching the upper end of its valuation.
If a market is in a price correction (i,e, not entering a bear market), drawdowns of 5-10% are completely routine, often occurring several times a year. The last two years have been quite unusual for not seeing such corrections.[1]