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Visualizing Risk



In the past I've discussed the bullish percent concept as it applies to our broad market indicators. For a refresher on the bullish percent concept go here. In addition to charting bullish percent risk indicators for the broad market, we also chart bullish percent risk indicators for each of the 40 broad sectors we follow. The concept is identical to the market bullish percents.

The sector bullish percents simply chart the percent of stocks in a given sector on a new point and figure buy signal. For example, if there are 100 stocks overall in, say, the Semiconductor sector, and 50 of those stocks are on new point and figure buy signals, we would have a reading of 50%. This concept basically divides the stocks in a given sector into two piles: one pile for buy signals, a second pile for sell signals.

Now, an appropriate question is if a sector is in a column of Xs, suggesting demand is in control of that group, what would it take to move the sector to defense? The answer is it would take 6% net new sell signals. In other words, in a universe of 100 stocks a net total of six stocks would have to move from the buy pile to the sell pile.

As with the broad market bullish indicators we chart, the sector bullish percents are considered high risk at 70% and above, and low risk at 30% and below. At any given moment we can obtain a visual image of sector risk by viewing these sectors plotted along a bell curve and looking at the average sector bullish percent reading. We consider an average sector reading of 60% fairly high since under normal circumstances and market conditions there will typically be some sectors overbought, some oversold, and most around the 50% level.

Below are two bell curve images; the first one from late March when the average sector bullish percent reading was 34.9%, the second one reflecting activity through yesterday with an average reading of 71.4%. The average sector bullish percent reading first moved above 60% on May 23, 2003.

I've written in the past that these indicators can remain overbought for an extended period. That's why we don't anticipate our anticipators, as the old saying goes, and try to game potential reversals. Nevertheless, it is critical to understand your field position. The NYSE Bullish Percent, our primary long-term indicator, may be positive, but looking at our present field position the amount of risk one is assuming by entering the market here is far different from the the risk one assumed back in March.

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No positions in stocks mentioned.

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