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Point & Go Figure: Are Stocks Unloved? Not By This Measure


Who loves ya, baby?


Today, Brian Reynolds wrote a piece titled "Stocks Are Unloved," stating his belief that, despite the rally since mid-October, investor sentiment remains decidedly negative toward equities. With all due respect to Brian Reynolds, I disagree, and I want to show you a technical indicator that, in my opinion, shows that, far from being unloved, stocks today are actually loved by investors as much as they have been at nearly any point since 2000.

Our "love" indicator is the NYSE Bullish Percent Index. The "bullish percent" concept was 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. We use Xs to display when demand is in control, Os to display when supply is in control.

A Bullish Percent chart goes from 0 to 100%. We use 2% increments to eliminate noise. Bullish Percent charts can measure almost anything. Remember, they simply measure the percent of "something" doing "something." One of the cool things about them is that we have the flexibility to specify both "somethings." For example, we can chart the percent of stocks trading above their 200-day moving average where our "somethings" are stocks and the 200-day moving average. We can also chart the percent of stocks on point and figure buy signals.

Before we all share the love, or the hate, whichever the case may be, let's do some group therapy and establish a baseline for our feelings. What, exactly, does the market look like, historically, when it is loved?

The NYSE Bullish Percent can tell us exactly that. There are two lines of demarcation on the Bullish Percent chart that help us evaluate the "risk conditions" of the stock market. 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. In other words, stocks are "unloved."

Conversely, when the NYSE Bullish Percent gets near the 70% level and above we are in the Red Zone, or high-risk area. This 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. At these levels, stocks are "loved."

The NYSE Bullish Percent does not move to 70%, or below 30%, very often. In fact, since 1955 the NYSE Bullish Percent has only been above 70% 28 times, and below 30% only 19 times.

In a very simplified sense, the column the bullish percent chart is in indicates whether supply or demand is in control: in a column of Xs, demand is in control and, importantly, regardless of what newspapers, television and investors themselves are saying, stocks are in favor, while, in a column of Os, supply is in control and, regardless of what newspapers, television and investors themselves are saying, stocks are out of favor. The value of the NYSE Bullish Percent chart is that it shows what is, not what a journalist, commentator or analyst might hope for things to be.

What is the status right now? Attached and in love. But how in love are we? So in love, that since April 2003, the NYSE Bullish Percent has not fallen below 50% even once. Meanwhile, as the current chart of the NYSE Bullish Percent, below shows, even though our love affair with stocks remains strong, the market's reciprocation of that love has been steadily weakening since January 2004 when it peaked at 86% - the highest level of stock "love" since 1982.

In each rendezvous with investor love, (characterized by a reversal to Xs) the participation, or reciprocation of that love, by the stock market has weakened. That is why this chart, despite having remained above 50% for more than two-and-a-half years now, is showing lower highs, and lower lows.

NYSE Bullish Percent

While the "high-risk level" for the NYSE Bullish Percent is near 70% in a strict sense, by definition, when this indicator is above 50%, that means the majority of stocks are on point and figure buy signals, and that the market is therefore biased toward "love." So, given that we have now been above 50% for two-and-a-half years dating back to April 2003, how does this extended period of love measure up with the history of this indicator going back to 1955? Using data available from Dorsey, Wright and Associates, it turns out that we are now in uncharted territory, so to speak.

This is the longest period that the NYSE Bullish Percent has been above 50% since 1955. The second longest period was between January 1988 and January 1990, about the mid-point of the secular bull market netween 1982-2000. The runner-up was a tie: the NYSE Bullish Percent was above 50% for roughly 18 months between August 1982 and February 1984 (coincident with the kickoff to the 18-year secular bull market), and for roughly 18 months between March 1958 and September 1959 (about halfway through the 16-year secular bull market between 1950 and 1966).

Meanwhile, here we are having been above 50% for two-and-a-half years, and the market, as measured by the Dow Jones U.S. Total Market Index is down 9.9%, and as measured by the Dow Jones Industrials is down 6.3%, by the S&P 500 is down 14.3%, and by the Nasdaq Composite is down 44.5%. Weird, huh?

This indicator tells me that stocks are very much loved and, more importantly, that they are not returning the affection. In fact, if you take "stocks" out of the analogy and just look at this situation on a mutual reciprocity basis, say over lunch with a lovesick friend, it might make more sense to refer to stock investors here as stalkers instead of lovers.

If you would like a chart reviewed, let me know here.

All charts courtesy Dorsey, Wright & Associates.

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No positions in stocks mentioned.

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