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First, the condensed good news – Happy days are here again! Now to the story behind the story.
Last week I highlighted the fact that a number of key indicators that I follow and methods that I use have been lining up on the bullish side. However, I also lamented the fact that one very useful warning sign type of indicator – the Nasdaq Hi/Lo Logic Index, or HLLI for short – was flashing an important, well, warning sign. Or so I thought.
The crux of the HLLI is that when many stocks are making new highs AND many stocks are making new lows, that is a bad thing for it indicates “churning” in the market. I also presented some historical data highlighting the sharp market declines that followed previous warning signs. It was all very ominous. Or at least it would have been if the data that I was using was actually correct. Any therein lies the story.
For some reason I recently was using Yahoo Finance to update Nasdaq new highs and lows. And that would have been all well and good had they in fact been posting accurate numbers. For example, for 7/6 Yahoo posted the numbers shown in Figure 1.
Figure 1: Yahoo Finance New Highs and New Lows for 7/6/2011
click to enlarge
As you can see they reported 247 new highs and 208 new lows with 2,701 total issues traded. Using the HLLI formula I laid out last week, this would result in a daily Nasdaq HLLI reading of 7.70% (208/2701 x 100), which is in theory a very “high”, thus “bearish” value. Especially if it was correct.
Figure 2 displays the “official” Nasdaq numbers for the same date from the Nasdaq itself.
Figure 2: Official Nasdaq New Highs and New Lows for 7/6/2011
click to enlarge
As you can see they reported 142 new highs and a miniscule 26 new lows with 2,733 total issues traded. Using the HLLI formula I laid out last week, this would result in a daily Nasdaq HLLI reading of just 0.95%, which is nowhere close to a bearish reading. And in fact, after I went back and updated my database (good times, good times) with – you know – correct values, the “ominous” HLLI bearish warning sign that I wrote so fervently about last week, simply disappeared.
So when it comes to the ominous Nasdaq HLLI warning sign - in the immortal words of Gilda Radner’s Emily Latella (sp) character from the early days of Saturday Night Live – “never mind”.
Now given human nature (and my own personal set of psychoses) I am tempted to bash Yahoo Finance and question what they are doing and how they are doing it and I could even have some fun and speculate as to “what’s wrong” with the people that work there and I could announce that I am launching an investigation to find the perpetrators and so on and so forth. And let’s be honest, it all sounds like a lot of good self-righteous fun. But the bottom line really is “shame on me” for not verifying the numbers in the first place.
Fortunately, I use advance/decline and high/low data more as perspective indicators than as a time critical timing buy and sell signal generators. As it turns out I also use it to write articles that turn out a week later to be inaccurate.
So I apologize for getting it wrong last week.
THE UPSHOT
Two things to note. First, if and when a legitimate warning sign is given by the Nasdaq Hi/Lo Logic Index, based on the historical results I presented last week, it will likely be a time for caution. Fortunately, as it turns out that day appears to be a long way off.
Secondly, with last week’s “false alarm” out of the way we now revert back to what appears to be a pretty bullish setup for the stock market between now and the end of the year. Now despite my years in the markets I do not claim to be a world class market timer, capable of calling every twist and turn in the road (OK, for the record, actually I do “claim” to be able to, it’s just not actually true – sorry, I warned you that I had my own personal set of psychoses). But I am pretty good at identifying “trends”, and at the moment the longer-term trend for the stock market remains “up”.
In Figure 3 please note the action of the four different market indices – the S&P 500, the Nasdaq 100, the Russell 2000 and Vanguard Total Market ETF (ticker VTI) – displayed. Despite all of the angst registered between the first of May and the middle of June, all four indices remain above their respective 200-day moving average and the 50-day average remains above the 200-day average. While this of course does not “forecast” what comes next, it does tell us that the current trend is undeniably “up.”
Figure 3: The major market averages remain in longer-term uptrends
click to enlarge
OTHER FACTORS
A few other notes on the bullish side of the ledger:
#1. It is a pre-election year – We haven’t had a down year for the Dow during a pre-election year since 1939. This in no way “guarantees” that this will be an “up” year – but for now I’ll take my chances. Figure 4 displays the growth of $1,000 invested in the Dow Jones Industrials Average only during pre-election years (blue line) versus $1,000 invested in the Dow only during all other non-pre-election years.
Figure 4: Growth of $1,000 invested only during pre-election years (blue line) versus all other years (red line) since 1939
click to enlarge
As you can see in Figure 4, market performance during pre-election years has been roughly 2.75 times greater than market performance for ALL OTHER YEARS combined. Interesting, no?
#2. We are now in the bullish “first six months” of the 212-week cycle – Rather than lay it all out again I will simply refer you to my recent article on the topic http://www.optionetics.com/market/articles/23779.
Summary
So all eyes now focus on the May highs. If the major averages shown in Figure 3 can take out these key resistance levels then the bull market will continue apace and you should be on board. In the meantime I will continue to monitor things and look for warning signs that are actually based on real data.
As it turns out – it’s a bigger job than I thought.
Jay Kaeppel – Optionetics.com |