Technical Analysis—Insider Buying vs S&P 500

The Catalyst Insider Buying Fund (INSAX) seeks to offer investors an opportunity to invest in large capitalization U.S. companies that are experiencing significant insider buying.

The Fund only invests in companies where corporate insiders (CEO, CFO, directors, etc.) are purchasing their own company stock on the open market. We believe corporate insiders understand their own firm better than any outsider possibly could.

Note that the Gross Expense Ratio of INSAX is very high (i.e., 1.70%) and its Morningstar Rating has only one star.

Portfolio Holdings

As of 03/31/2022, the INSAX's top 10 holdings are shown below:

Credit: Charles Schwab

INSAX vs $SPX

Short Term

Figure 1. INSAX showed a strong positive correlation (+.89) with the S&P 500 recently

Long Term

Technical Analysis—Bullish Percent Index

Figure 1.  $SPX Bullish % Index on 02/25/2022 (thrust: > 75% and washout: < 25%; Source @mark_ungewitter)

Mark Ungewitter has posted the below comments on $BPSPX (i.e., S&P 500 Bullish Percent Index) on Twitter (See Figure 1):

$SPX still lacking breadth washout, defined by BPI <25%.

 

Figure 2.  Similar chart (Courtesy of stockcharts.com)

 

It is also interesting to see that @MrBlonde_macro has posted the below analog chart (2022 vs 2018) which also says that the real bottom of market probably is not in yet.  So, it's worth monitoring.

Figure 2.  Analog of stock markets of 2022 vs 2018 (Source: @mrblonde_macro)

Relation between VIX, S&P500 and the CDX-Index

The VIX-index is a measure of implied volatility in the S&P 500 and is often referred to as a fear index.  CDX.NA.IG is a credit default swap-index consisting of 125 North American investment grade companies and the S&P 500 is a stock index consisting of the 500 largest companies in USA.

In [1], authors use ordinary least square (OLS) regression to study if VIX can be explained by CDS and S&P 500. and find that the VIX, CDX.NA.IG (will be referred as CDX in this article for short) and S&P 500 have a high correlation.

Figure 1.  A mean-reverting pattern of inverse relationship of VIX and S&P 500 played out cleanly in 2022.

VIX

VIX is measured as the weighted 30-day implied standard derivation of annual changes in S&P 500.  For example if the value of VIX is 20, then S&P 500 is expected to increase or decrease by 20% over the next year.^[2]  This will be true in 68% of the cases, because standard deviation is in this case assumed to come from a normally distributed random variable, where 68% of the outcomes lies within one standard derivation fro  its mean.

Values of VIX above 30 are often observed in distressed markets while values below 30 are associated with calm periods.^[3]

On 12/08/2022, Yahoo Finance has also published a similar observation from Jared Blikre.  Here is the gist of it:

• Sell at 20 and buy at 35 are retro-fitted thresholds in the VIX for year 2022
• It took about six weeks for the VIX to travel from 20 to 35 the last go-around
• Also monitor the below developments for more clarity:
• S&P 500 could flash a bullish signal by simply reclaiming its 200-day moving average to the upside.   This would likely (but not necessarily) occur in confluence with a simultaneous close over its 2022 negative trend line (the red line in the first chart), which would strengthen the signal.
• The U.S. dollar could also add clarity 
• Note that a strong dollar tightens financial conditions, which generally weighs on risk markets and commodities.

CDX.NA.IG

CDX stands for Credit Default Swap which is a credit derivative used to hedge the risk against a credit event such as a default on a bond issued by a company, it can be seen as insurance on credit loss.

By studying CDX, we get a sense of the credit risk associated by the companies.  The CDX indexes are broken out between investment grade (IG), high yield (HY), high volatility (HVOL), crossover (XO) and emerging market (EM).

CDX.NA.IG indices are comprised of 125 North American corporate credits that are Investment Grade when the index begins trading. Taking a position in the index allows traders to hedge or speculate.  Note that the 125 companies in CDX.NA.IG are also included in S&P 500.

Figure 2. A historical price chart of VIX and CDX.

Figure 3.  Current price chart of VIX and CDX.

Figure 4.  Current price chart of inverse VIX and S&P 500.

VIX and CDX

In Figure 2&3, we have shown a historical and a current price chart of VIX and CDX and, in Figure 4,  a current price chart of inverse VIX and S&P 500.

In [1], the authors has concluded that:

There is a strong positive correlation between VIX and CDX.NA.IG as well as a strong negative relationship between VIX and S&P 500.

Why we need to monitor both $VIX and CDX.NA.IG?  Alastair Williamson on Twitter has suggested that (01/04/2019):

With CDX NA IG coming back in, this is supportive of a bear market rally in the stock market, but the moment when spread widens again, that should be the top of the bear market rally

Once $VIX & CDX NA IG find meaningful unfair lows - that should mark the top of the bear market rally in the stock market 

References

1. A study on the relation between VIX, S&P500 and the CDX-index
2. Williams, M. (2013).  VIX: What Is It, What Does It Mean, And How To Use It.  Seeking Alpha
3. Oeoutibem H, (2011).  Runnin' scared: VIX fear gauge spkies 35%. CNN
4. The dollar holds the key to a burgeoning bull run in stocks: Morning Brief
5. Why stock bulls are sitting on their hands again: Morning Brief

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)
• $NYADV:$NYDEC
• 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
• $DJCB:$UST
• Overlay $DJCB:$UST with $SPX to see the trend
• $DJCB (Dow Jones Corporate Bond Index)
• $UST (10-year US Treasury Note)
• $SPXUDP (S&P 500 Volume Advance-Decline Percent Index)
• Advancing Issues/Declining Issues is a picture of current market breadth. 
• $SPXUDP w/ 4 & 13 week EMAs and a 13,26,5 MACD. Chart Type is Cumulative

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.
• Since 1950, April has been one of the best months for the stock market, as it has been up 47 years and down just 21 years, with an average return of 1.34%. Over the past ten years, April has been the third best month with an average return of 2.2%.^[3]

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]

References 

1. Weighing The Week Ahead: The Return Of Volatility
2. 9 Key Steps to Avoid a Bear Market, And Catch a Bull
3. The Week Ahead: Rough Waters or Smooth Sailing Ahead For Investors?
4. Technical Analysis—200-day Moving Average
5. Technical Analysis—Percent Above Moving Average