Yesterday after hours Microsoft and Apple reported earnings. There were disappointments all around though some were just missed whisper numbers. Add that to IBM’s miss Monday and Wednesday may be a tech-wreck. Part of the problem was caused by a big run-up in advance of earnings.
HIGH LOW LOGIC INDEX BY NORMAN FOSBACK
Mark Hulbert called the Fosback High Low Index an “…indicator that has correctly called every major market top and bottom in recent decades—with few false signals…” So let’s look at it in some more detail.
In his book “Stock Market Logic” Fosback noted that the High Low Logic Index is easy to calculate. It is simply the lesser of daily new-highs or new-lows, calculated as a percentage of stocks traded, totaled to form a weekly value and then smoothed with a 10-week exponential moving average of the weekly values.
At first it may seem to be an odd duck, but Fosback noted that in a normal market, the markets have many new-highs or many new-lows, but not both. For example, if many new-highs are observed with few new-lows it would be bullish. Interestingly, many new-lows and few, or no new-highs, would also be bullish because a turn-around would soon follow. In each case, the Logic Index would be low because it is the lesser of the highs and lows (assuming the condition persisted over the 10-week period). Thus, low readings of the Hi Lo Logic Index are bullish, but high readings are bearish.
Ned Davis research found that…”Whenever the 10-week exponential moving average of the High Low Logic Index is below this level [2.5%], according to the firm, the S&P 500 index (SPX) has appreciated at a 17.9% annualized rate. Whenever it has been above 4.05%, in contrast, the S&P 500 index has declined at a 12.5% annualized pace.” – Pub 18 Oct 2011. MarketWatch story at…
http://www.marketwatch.com/story/indicator-with-great-record-turns-bullish-2011-10-18
Fosback’s own research found that if the Index exceeded 5%, stocks were (on average) down 1.4%, 3-months later and 0.1%, 6-months later. He further found that “A double digit reading has nearly always been followed by sharply declining stock prices…” and has “…presaged every major bear move in the last quarter century.” (data thru 1980)
The Fosback High Low Index was high on a 10-day basis in Dec and January of 2014/15. Perhaps more importantly, it was in double digit territory back in January and February of 2015 on a 10-week EMA basis. We observe now that the S&P 500 has gone nowhere since then. Currently, the High Low Index value is rising again.
It is 8.3% as of Tuesday, based on a weekly, 10-week, EMA. That number is worrisome, but it will be a real worry if it climbs above 10%.
MARKET REPORT/ANALYSIS
-Tuesday, the S&P 500 was down about 0.4% to 2119 at the close.
-VIX was down about 0.2% to 12.22 so the Options boys weren’t too worried today.
-The yield on the 10-year Treasury was down to 2.34%.
The lower trend line is around 2110 so a drop significantly below that level will be very bearish.
The 50-dMA of advancing stocks DIPPED to 48% Tuesday. Below 50% is not good.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) dropped to 51% at the close Tuesday. (A number above 50% is usually GOOD news for the markets.
Once again, New-lows outpaced New-highs Tuesday. The spread (new-highs minus new-lows) was -133. (It was -195 Monday.) That is not good news for the bulls. I noted yesterday that further deterioration would be cause for alarm; internals aren’t a disaster, yet and Internals are still neutral so I won’t get too worried yet.
The 10-day moving average of change in the spread rose to +12 Tuesday. In other words, over the last 10-days, on average; the spread has INCREASED by 12 each day. (The large rise on an otherwise down day is a result of what happened 11-days ago and that’s the nature of a 10-day simple moving average. The 10-dMA drops the 11th day and adds today. Here, it shows that this stat has improved in the last 10-days and especially when compared to 11-days ago.)
Internals remained neutral on the markets.
Market Internals are a decent trend-following analysis of
current market action, but should not be used alone for short term trading.
They are usually right, but they are often late. They are most useful when they diverge from
the Index. In 2014, using these
internals alone would have made a 9% return vs. 13% for the S&P 500 (in on
Positive, out on Negative – no shorting).
Of course, few trend-following systems will do well in an extreme
low-volatility, nearly straight-up year like 2014.
NTSM
Tuesday, the NTSM long term indicator is HOLD. All long-term indicators are neutral.
MY INVESTED STOCK POSITION
On Monday, 13 July, I increased my investments from 30%
invested to 50% invested in stocks. I spilt stock investments roughly equally
between S&P 500, Euro/pacific ETF (EFA), and the Dow Jones Completion Index
(DWCPF) as noted in an earlier post. TSP ALLOCATION (This is a conservative position most appropriate for retirees or conservative investors.) I think all investors would be well served to cut their stock investments to a lower than normal (for each individual) allocation. Until longer term technicals look better, the old adage that one’s stock allocation should equal your age subtracted from 100 seems reasonable. (40years old: 100-40 = 60% in stocks) 50% would be the minimum.
G-Fund (Risk-free yielding 2.1% over the last 12-months): 50%
C-Fund (S&P 500): 15%
S-Fund (DWCPF): 15%
I-Fund (EFA): 20%
