Cycle Highs and Lows Using the NYSE Bullish Percent
Nothing moves in a straight line, especially me
The Bullish Percent concept was actually created by a guy named Earnest Staby in the 1940s. One of the criticisms often leveled against technical analysis is that charts, in a very general sense, look best at the top and worst at the bottom. Obviously, it would be far more valuable if charts looked their worst at the top and their best at the bottom.
The Bullish Percent concept was created to help solve this problem. It was actually A.W. Cohen who took Staby's insights and created what is called the New York Stock Exchange Bullish Percent in the mid 1950s. Bullish Percent charts are simply charts that measure the percent of "something" doing "something." As point and figure chartists we plot these charts in Xs and Os. Xs display when demand is in control, Os display when supply is in control. In the case of the bullish percent for the NYSE, it measures the percent of stocks on the NYSE on point & figure buy signals.
A Bullish Percent chart goes from 0 to 100%. We use 2% increments to eliminate noise. In the three-box reversal method of point & figure charting, it takes three boxes (in this case 6%) to cause a reversal. Otherwise, you always continue in the column you are going unless that 6% (or three-box) threshold is triggered. For the NYSE Bullish Percent, we take all the stocks on the NYSE and divide them into two piles. One pile consists of NYSE stocks on a point & figure buy signal, the other pile consists of stocks on a point & figure sell signal. If there are 100 stocks on the NYSE and 50 are on a pnf buy signal, then our NYSE Bullish Percent plot would be at 50%. From 50%, it would take a net 6% of the stocks moving from one pile to the other to cause a reversal. Assuming we are at 50% in a column of Xs, it would take a net of 6 stocks to move from the buy pile to the sell pile to create a reversal down.
The Bullish Percent tells us two important things: what the overall context of the market is, and what the field position is. There are two lines of demarcation on the Bullish Percent chart that help us determine the field position. The 30% level and below is the Green Zone, or low-risk area. When the Bullish Percent gets down to this level it tells us that most everyone who wants to sell has already sold. The availability of supply to continue to push the market lower is limited. Conversely, when the NYSE Bullish Percent gets to the 70% level and above we are in the Red Zone, or high-risk area. When the indicator gets near the 70% level or higher, it tells us most everyone who wants to be in the market has already bought. Here, the availability of demand to continue to push the market higher is limited. The NYSE Bullish Percent does not move above 70%, or below 30%, very often. In fact, since 1955 the NYSE Bullish Percent has only been above 70% 29 times, and below 30% 19 times. Below is the current NYSE Bullish Percent chart courtesy Dorsey, Wright & Associates.
NYSE Bullish Percent 1999-present
As you can see, this chart is right now in a column of Os at 54%, very close to a triple bottom break at 52%.
Ron Griess of Thechartstore.com recently presented us with a fascinating chart looking at the four-year cycle of highs and lows in the stock market. See the chart here.
I went back to look at the NYSE Bullish Percent, combining this key contextual indicator with the S&P 500 cycle highs and lows to see if the additional context helped us evaluate where we are in the cycle. I realize that the S&P 500 is far smaller than the group of stocks used to create the NYSE Bullish Percent, but because it serves as a broad measure of overall stock market supply and demand relationship, I believe it can add value to the S&P 500 cycle since supply and demand within those stocks are naturally going to be related to broad market psychology.
The results were very interesting at these key inflection points. Note that sometimes the indicator turned well in advance of the cycle peak, sometimes a bit later, but that the field position corresponded very well to these cycle highs and lows, allowing us to judge very well the context of the market at these inflection points. Again, most of the time the NYSE Bullish Percent is somewhere in between 30 and 50%, but moves above and below these extreme levels do provide us with very helpful context for the market at these cycle highs and lows.
NYSE Bullish Percent contextual indicator (column and level) at four-year cycle highs and lows: (Note: the NYSE Bullish Percent data only goes back to 1955, so dates before that are indeterminable.)
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