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NYSE Bullish Percent Primer, Part Two



Editors note: This is the second in a two-part series. To read part one, click here.

Just as important as it is to understand what the NYSE Bullish Percent tells us, it's important to understand what the NYSE Bullish Percent does not tell us. It is not a strict timing trigger. The bullish percent concept has often been criticized as a lagging concept, but I think that criticism misunderstands the value of what bullish percent indicators can tell you.

This indicator is not a measure of what the Dow Jones or the S&P 500 is going to do, because these indices measure just a handful of stocks. The S&P 500 is cap-weighted and the Dow is price-weighted. In other words, much of their movement is controlled by a relatively few number of stocks. The NYSE Bullish Percent is a simple voting mechanism constructed the way most people build their portfolios: one stock -- one vote. Do you cap-weight your portfolio? Because this indicator oscillates between 0% and 100%, it is a measure of risk in the marketplace.

In addition to charting the percent of stocks on the NYSE on point and figure buy signals, we also construct Bullish Percent charts for the S&P 500, the Nasdaq, the Nasdaq 100, the stocks in the optionable universe, and stocks trading above their 10-week moving average just to name a few. The rules are the same for each Bullish Percent chart. Above 70% is high-risk, below 30% low-risk.

Risk indicators are as important as timing triggers. The value of the Bullish Percent concept is that it always gives you a clear picture of current risk in the marketplace. Suppose you are using a combination of MACD, stochastics, and other timing triggers to work your trades. The Bullish Percent concept used in conjunction with your timing triggers can tell you when you're betting dollars to win twenties, or when you're betting dollars to win nickels.

So where are we now?

Through Wednesday's action the NYSE Bullish Percent is at 70% in Xs. In other words, with respect to the NYSE, the offensive team is on the field, but the field position is pretty poor and risk is getting very high.

(Illustration courtesy Dorsey Wright)

We often get this question: What would it take for the NYSE Bullish Percent to reverse to Os indicating it's time to move from offense to defense? Right now, the NYSE Bullish Percent is telling us that 69.5% of the stocks on the NYSE are on point and figure buy signals. Think of two piles of stocks. One pile contains those stocks on a point and figure buy signal, the other pile contains those stocks on a point and figure sell signal. In order to move from Xs to Os on the NYSE Bullish Percent chart, we need a total of 6% net new sell signals. In other words, every day a number of stocks may change piles. To move to defense, we need a net 6% change from buy signals to sell signals.

We consider the NYSE Bullish Percent a long-term indicator for our purposes. We rely on short-term and intermediate-term indicators that are similarly constructed to give us a "heads up" on changes that may be taking place in the market place. In the future, we'll look at some of these other indicators and how you could incorporate them into your own methodology.

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No positions in stocks mentioned.

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