Tuesday, July 31, 2007

A Toothy Bite

We're gonna need a bigger boat.

On Tuesday, a yawning, 62-point outside day engulfed two days of NASDAQ action and part of a third. Volume surged 18% as the Composite led the blue chips 1.4% lower, closing at session lows. Unfortunately, this suggests more downside ahead.

Curiously, internals were bad but hardly catastrophic (see charts). However, New Lows did smother New Highs yet again, 657-132.

In a similar twist, the IBD100 didn't see a selloff as much as a street fight. The index closed down just 0.8%, while stocks that saw Accumulation and Distribution were evenly matched at 25 each. This is unusual, conflicted behavior during a broad market selloff.

The NASDAQ 200-day is just 2.2% lower, and tagging up there would mark an 8.7% pullback. This is light by NASDAQ standards. The RUT is already below its 200-day, the MID is there now, and the SPX, NYSE and WLSH are each less than 1% away. Buyers usually defend these levels, but a third Bear Stearns fund meltdown -- as well as structured credit and currency fiascos -- is unlikely to inspire much confidence on Wednesday.

Below is a 17-month NASDAQ chart that includes the May 2006 correction. As you can see, the current pullback is lightweight by comparison and is even less than the Feb slide. If the 200-day fails, important support lays near the 50% Fibonacci retrace -- a.k.a. the 2007 lows -- about 7.6% lower.

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One of the more troubling developments for stocks on Tuesday were hard selloffs in AAPL, AMZN, IBM and ORCL. All have been leadership stocks for months, and tech is on an upswing. It's a bad sign when stocks with solid earnings within a leading sector are hit by heavy selling on the same day.

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The VIX is offering little comfort, and continues to be a disturbing chart for equities. After a 5-month, 160% rally in the face of rising stocks, the VIX is once more poised to hit new highs. There's ample fear, but so far there's been little panic. The VIX is up 60% in two weeks, while the SPX is down just 6.4%.

What is the market so afraid of?

Options expert and CNBC contributor Jim Kingsland makes a strong case that carry trade woes intertwined with US credit pathologies is the invisible chupacabra the market fears. If Jim is right -- and this area is his strong suit -- the worst days are still ahead for the stock market.

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Over the past two days, I've noticed a surprising number of analysts say, "financials are starting to look interesting here." Oh, really? After today, XLF is down just 13% from its high, a 50-day Death Cross looms, and there's no evidence that the coast is clear for financial stocks. Be late to this party. You'll have a much better time.

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The market continues to offer few signs that it's near a bottom, even as tricky storm clouds seem to be gathering. Be patient.

And keep an eye on the VIX.

Wednesday is going to be interesting, to say the least.



Monday, July 30, 2007

A Well-Timed Bounce

Investors bought the dip on Monday, with a few even shrugging off last week's selloff as merely "a flesh wound".

This could prove true of course, but it would be rare to see Monday's 14% decrease in volume mark an important bottom. In fact, Charles Kirk put together a list of stocks appearing on his Stock Screen Machine that bounced at their 50-day over the past 3 days. Of these 19 stocks, just 10 did so on heavy volume.

The IBD100 produced even skimpier results. On Monday, the index outpaced the market with an impressive 2.2% romp as 85 of 100 stocks posted gains. But volume was suspiciously thin for such a move. Just 20 stocks printed accumulation, while a sluggish 74 stocks saw volume lower than on Friday. This isn't the action you want to see after a big selloff, and it's a sign that institutional investors are cautious.

Investors skewered the NASDAQ perfectly on the 61.8% Fibonacci retracement on Monday. However, the Composite is dangling in mid-air between the 50- and 200-day, hardly a place known for its stability.

Most pedigree bottoms start with a giant up day -- at least 1.5% -- on massive volume (FYI -- Investor's Business Daily is calling Monday Day 1 of a new rally attempt). Then, four to ten days later, this is confirmed with a similar, big volume follow-through day. Without these two steps, the failure rate for bounces is very high. In fact, no bull market in US stock market history has ever begun without a follow-through day. This is why there's so little need to be hasty.

MACD is now negative, while Monday's action was technically an inside day. This means that the short-term downtrend is still intact, but tomorrow is another day -- and the odds for more upside are high.

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For the first time in five months, the 5-10-20 Timer flipped to a Sell on Friday. This is an IT indicator -- not a short-term one --and of all of the mainstream timers, it has one of the more reliable track records.

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By now, most investors have discovered the cruel truth that ProShares inverse ETF's don't move in precise, mirror inversion to their indexes. However, Monday offered an unusually bitter demonstration. While the RUT bounced just 0.8%, TWM tumbled (oops) -3.5%! That's 4.4X strength -- in the wrong direction.

Regardless, even with Monday's anomaly, TWM has been very generous to investors. While the RUT is off 8.4% from its July high, TWM has vaulted 19.8%! That's an advantageous 2.35X performance.

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A few months back, Shanghai was an obsession for US investors. What a difference a few months makes. On Monday, Shanghai notched its second all-time high in the past three sessions, and no one noticed. Obviously, this time it's different.

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It's impossible to generalize, but many investors have fallen into one of two camps. The first believes that the bull market is still intact, and that stocks will soon recover to new highs. From a pure data standpoint -- economic and market-based -- this view has a lot going for it.

The other view holds that the market's most destructive threat lies just off camera. The proof of this is less tangible and more future-weighted, but the indirect signs are unmistakable: a soaring VIX, epic New Lows, options shenanigans and a record selloff.

The truth is that -- as of now -- we really don't know which one is correct. When someone says they do know, you may be learning as much about that person as you are about the market. The data is clear, but the outcome isn't. This is what corrections are for -- to help shake out the truth.

Should be a lively day of trading tomorrow, and unfortunately I'll be in a long meeting for most of it.

See everyone after the close.



Saturday, July 28, 2007

Bottom Quest

The worst thing about last week is that the there are so few signs that a bottom is near.

Both the mainstream press and the blogosphere offer some excellent reading this weekend. There's also large amounts of windbag speculation and a fair amount of bellyaching. While this all makes for titillating journalism, an evidence-based approach to the market tends to be more productive for your portfolio.

As investors ponder a sea of red, below are five sets of market-based observations:

1. Panic

All rumors to the contrary, there was no evidence of panic selling this week. Even though the Dow shed 585 points in its worst week since 2003, trading was orderly, and from an historical perspective, the declines were chump change. This correction might accelerate into panic, but it hasn't happened yet.

On the left below is a chart of this week's NASDAQ. On the right is the Composite during the LTCM scandal in the summer of 1998. From the July high in 1998, the NASDAQ tumbled 33% in 12 weeks. In the last two weeks, the NASDAQ skidded a sickening 23% (imagine the Dow falling 3100 points in eight days).That felt panicky, especially because --doh! -- everyone thought the bottom had occured four weeks earlier (red arrow).

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2. Bottoms

I received numerous e-mails, comments and questions this week about identifying bottoms. Of particular interest was whether the IBD100 offered an edge. The short answer is no, the IBD100 is essentially useless at calling bottoms. Most leading stocks are bloody stumps at market lows. Most recover; many don't.

However, other indicators are helpful. When these are used in combination, they're generally accurate (but look again at the red arrow on the 1998 NASDAQ chart just above).

While some are crying oversold! this weekend (and the odds for a ST bounce next week are actually pretty good), almost all of the popular "bottom finders" show a market still above a Queen-approved bottom. Below are three classic proximity alerts. There are others, but those aren't there yet either.

Despite the HUGE surge in New Lows this week, the blue 10-week on both the NYSE and COMPQ High-Low Indexes remains well above important bottoms. Below are 5-year charts of the High-Low Indexes, which include the Oct 2002 bottom as reference. Historically, the blue 10-week line crosses below 40 -- and even below 30 -- before a meaningful bottom is in.

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The percentage of NASDAQ stocks trading above their 50- and 200-day is still high for a bottom. NYSE versions of this metric produce similar results.

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NASDAQ market breadth as measured even by the unforgiving NASI is still above the rising trendline off the Oct 2002 bottom. NYSI offers a similar take.

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3. Crash Alert?

Regular readers know that I'm hardly an alarmist, but -- believe it or not -- important market evidence emerged this week that raises the chance for a 1998-type stock market crash. First of all, we're not there yet and the odds are still long. [Re-read the previous sentence]. However, as I was preparing notes on this, I read Adam at Daily Options Report quoting Jason Goepfert on the same thing.

NYSE New Lows spiked to severe levels this week. In fact, New Lows have been this high only four times in the past 10 years. Making matters weirder, the NYSE is just 7.1% below an all-time high.

Also, the Dow wasn't the only chart that set a 4-year record this week. The VIX surged an ear-popping 43% to a new 4-year high, even though the SPX fell a relatively meager 4.9%. In fact, the SPX is up 6.9% from the March low, but instead of falling, the VIX has skyrocketed 160%!

The VIX is now parked 36% above its 10-day, a very unstable spread for the VIX. This week, option traders priced in something ferocious -- and still unseen. Given the New Low spike and a 24-handle VIX, my observations mirror Goepfert's about what stock market history says are three plausible scenarios:

--- the worst is over, and it's time to go long for the mother-of-all short covering rallies

--- this isn't just a correction, but the 4 1/2-year bull market is done and we're grinding lower into a lengthy bear market

--- the market detects something bad on the horizon, and we're about to see a rapid, convulsive selloff

The odds of a crash are long, but the market itself has thrown these scenarios onto the table, and not just the guys at Safehaven. Below is a 10-year chart of NYSE New Lows, along with the VIX.

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4. Decent Economics

Juxtaposed against the doom and gloom is that the underlying US economics are surprisingly good. GDP is recovering, earnings are solid, valuations are nominal, employment is high, inflation is stable, and yields are low. If the market does plunge wildly lower, the economics point to it being a superb buying opportunity.

It's worth noting that, as subprime contagion and a rising yen threatens the US economy, the 2-year/10-year yield spread detects nary a whiff of recession. In fact, it's printing a 3 1/2-year low.

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5. The Penalty Box

Below are the six worst performing groups this week. Housing is no surprise, but it's noteworthy that the metals continue to offer no refuge despite a dollar perched at the abyss. The next two losers -- energy and cyclicals -- are the most troubling economically. Utilities took out the 50- and 200-day in five sessions, and small caps lived up to their reputation as the style to avoid.

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Pullbacks separate the wheat from the chaff, and one useful feature of this correction is that it started during earnings season. Companies that beat estimates are holding up better than the broader market, and the fresh earnings data is useful in preparing high-quality watchlists. No single investing strategy works for everyone, but stocks that pull back the least are typically the ones first out of the gate when the selling stops. Historically, they also run the farthest.

The week's best performers? Biotech, down 1.8%, followed by the NDX, down 3.9%.

Also, it's useful to track which stocks closed higher on a week like this. It's a great set of stocks with which to start a new watchlist.

--- On the NDX, 13 stocks closed higher on the week: AAPL, AMAT, AMLN, AMZN, BIIB, BMET, CELG, CHKP, GRMN, GENZ, ISRG, TLAB, VRTX, WYNN.

--- On the OEX, 6 stocks closed higher on the week : CL, IBM, MRK, PEP, PG, T

--- On the MID, 23 stocks closed higher on the week: ADVS, AJG, BEC, BRL, BRO, BSG, CCMP, CVD, DCI, EXBD, FFIV, GGG, GPRO, MFE, PAS, PLT, RFMD, ROL, RSG, VARI, WOOF, WPO

It should be a lively week ahead, as investors learn how good they are at following the ball in the other direction.

Hope everyone's having a great weekend.



Thursday, July 26, 2007

IBD100 Strikes Again

The value of monitoring leading stocks was revealed in spades on Thursday.

Stocks with the very best fundamentals function like an early warning system for the stock market. Until they sell off in heavy volume, a rally almost always keeps moving higher. As a proxy for this leadership group, I've used the IBD100 since May 2003.

On Tuesday, the NASDAQ fell -1.9%, but the IBD100 went into a freefall. The index tumbled -3.7%, 96 of 100 stocks closed lower, and 54 stocks saw heavy selling. This was highly unusual behavior, and a sign to raise cash.

On Wednesday, the broader market recovered, but the IBD100 kept falling. The selling stayed heavy, and by Wednesday's close, 69 different stocks had seen distribution on one or both days. The IBD100 was now off -4.4% in just 13 hours, and the number of stocks trading below their 20-day had tripled to 62. This was not a good sign.

On Thursday, the meltdown finally spread to the broader market, and stocks had their worst day in five months. NASDAQ volume ballooned 38%, and a stunning 87% of all stocks closed lower. Internals were a mess (see charts), and New Lows flattened New Highs a jaw-dropping 1119 to 105 -- a ratio greater than 10-to-1.

Making matters worse, the IBD100 continued falling hard. The index shed another -3.5% -- nearly twice the NASDAQ's slide -- and 93 of 100 stocks closed lower. 60 stocks printed distribution -- a three-day high -- and stocks below their 20-day increased to 78 -- up from 21 just three days earlier.

After such a big selloff, is it time to buy?

Traders profit mightily from this type of action. Also, Adam at Daily Options Report notes a Dr. Brett discussion of improved odds after extremes of new lows. However, it's important to recognize that the market itself is showing no signs that it's reached a bottom. In fact, all of the indexes have ruptured and confirmed below their 50-day, and the RUT is below it's 200-day. This market has a lot of work to do, and it's going to take some time.

Consider as well that the SPX is down just -4.7% from its high, and the NASDAQ fell farther on Tuesday than it did today. Soon the market will bounce, but the odds favor more downside ahead. The economic environment is offering little stability, so it's time to be patient.

Bargain hunting and short-covering drove stocks well up off their lows, but the NASDAQ remains a messy piece of business. Swim at your own risk.

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The best thing about selloffs is that they show the market's true colors. What doesn't fall is a big clue about the market's next move. Of the ten market sectors, Thursday's best performer comes as no surprise: Technology.

As a slaughter ensued, the Tech Ratio surged to a 3 1/2-year high.

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Not only was the NASDAQ the day's best performer, QQQQ bounced off its 50-day to close down just 0.9%. Tech will see more selling, but it's essential to note what institutional investors are buying during a bloodbath.

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The most troubling chart on Thursday was arguably the Cyclical Index. If investors are bailing on the cyclicals during a global expansion, serious weakness is afoot.

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If you believe the cyclicals are headed lower, then an inverse ETF play is the Basic Materials inverse, SMN (it's thinly traded -- at least until today). Also, if you think large cap will outperform small, subprime woes haven't peaked and real estate hasn't bottomed, then consider TWM, SKF and SRS. Below are all four, and they will likely prove better performers than QID.

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Finally, a flight to puts produced a Sell signal for the TOF Ratio.

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The biggest take-away is to not get in a rush on the long side. As the Financials fell through their 50-day five sessions ago, a number of pundits said they were "nibbling" on bank stocks. Well, that was 5% ago.

On a lighter note, the gag about Boone Pickens marrying Becky Quick has taken on a life of its own. The story was picked up by Dealbreaker.com, who ran it by the Fashionistas with very catty results. It's become Jane Wells vs. Becky Quick, which suits me just fine - lol.

See everyone tomorrow.



Wednesday, July 25, 2007

The Four Horsemen

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Cramer's Four Horsemen (not pictured) have now all reported Q2 earnings -- and only one spent any time in jail.

While GOOG sits with an ankle bracelet, AAPL, AMZN and RIMM are on a tear. Like RIMM and AMZN, AAPL reported a monster quarter on Wednesday, and shares closed up 9% AH. Technology is leading again, and sellers will have trouble keeping this market down.

The housing data was terrible on Wednesday -- and leading stocks slumped again -- yet the bears still couldn't deliver the killshot. Once more, the NASDAQ reversed an ugly selloff to close higher. This was no cheap, inside day either, as volume was heavy. In fact, not only was it 1% greater than on Tuesday's selloff, it was the fourth heaviest NASDAQ trading day in 2007.

It's not like the market got any help from leading stocks either. As the indexes rose, the IBD100 fell another -0.7%. Just 37 of 100 stocks closed higher, and institutional sellers didn't back off either. A disturbing 40 stocks saw selling pressure greater than Tuesday's dumpfest. Internally, the IBD100 weakened further, as stocks beneath their 20-day swelled from 42 to 61.

In the past two days, the IBD100 has tumbled -4.4% while the overall market internals have deteriorated (see charts). Meanwhile, the market has barely budged: the NASDAQ is off just -1.6%, the NDX -1.2% and the Dow a scant -1.1%. Now, the market appears ready to move higher again. What's going on here?

On Tuesday evening, the NASDAQ announced that its short ratio had increased to 4.5 days in July. This is 9.3 billion shares sprinkled across 3,274 stocks, and that's on top of the stomach-churning 8.4 days of volume held short on the NYSE. Pre-sales are good for Deathly Hallows, but pre-selling a stock market correction is a terrible idea. An epic short ratio has put a floor under the market, and it shows.

The NASDAQ remains in an uptrend, just 2.8% below a new 6 1/2-year high. Leading stocks or not, this is a strong chart, especially if it resumes climbing without even touching the 50-day.

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The Tech Index caught itself at the Bollinger midpoint and makes a compelling case for a reversal doji. While the NASDAQ is up 13.9% off the March low, the Tech Index has rallied 17.9%. The Bollinger bands suggest tech stocks can run for a while.

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Another promising sign for the market are the Biotechs. After printing a new all-time high in April, the BTK pulled back 9.2% over the next three months. The BTK is now making a great case for a double-bottom, and the market always does better when the riskiest groups show strength.

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Just before 11am on Wednesday -- as stocks were in a power dive -- VIX maven Bill Luby posted a seven-word entry:

VIX at 19.46. Time to buy equities.

As if some magic rune had been spoken, stocks immediately reversed to close higher, while the VIX reversed to close lower. This action bodes well for higher stock prices on Thursday...but Bill, you're scaring me.

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Another guy who scares me is TOF, who was very unimpressed with Tuesday's selloff ("Too damn obvious if you ask me"). The TOF Ratio agrees, and a flight to calls leaves stocks prepped to fight another day. Nice call, TOF.

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If you look around, Wednesday's action left countless potential reversal dojis. The MID, RUT, Transports, Utilities, Cyclicals, Tech Index, SOX, and even the forlorn Housing and REIT Indexes are all showing a market that arrested its decline and stabilized.

It's highly unorthodox for a market to climb without the Financials. For it to climb without the Financials AND the fundamental leadership is even more unusual. But this market eats "unusual" for breakfast, and AAPL, BIDU, SYMC and QCOM are catering on Thursday.

See you then.



Tuesday, July 24, 2007

Leadership Freefall

For the first time in 14 months, the market is flashing genuine signs that it wants to correct.

As the SPX, NYSE, MID, SML and WLSH all took out 50-day support on huge trade Tuesday, leading stocks went into a freefall. In fact, this marked the single worst day for the IBD100 since Feb 28. Even worse, the internal metrics haven't been this bad since May 2006.

On Tuesday, the IBD100 tumbled a stunning -3.7% as 96 of 100 stocks closed lower. A decisive 52 stocks printed distribution days vs. just 3 stocks that saw accumulation. The selling was so widespread that 62 of 100 stocks shed -3% or more.

It's time to raise cash.

42 IBD100 stocks now trade below their 20-day -- a number that doubled on Tuesday. Neither the February Shanghai selloff or the June subprime meltdown produced this type of reaction from the market leadership.

This weakness is something new, and nearly always signals a shift in trend. It will take downside follow-through to confirm the signal, but the odds now favor the bears taking control. How long and how far they can carry the ball is unknown at this point.

The NASDAQ fell -1.9% on the second-highest volume since the February selloff. Still, the Composite, NDX and Dow are all in better shape than the rest of the market, and all three trade above their 50-day. If sellers take out the NASDAQ 50-day at 2620, the first Fibonacci support is 2575, then 2528.

To size things up, bottoming at the 200-day would be an 8.8% pullback. A 15% correction returns the NASDAQ to just below the Fib 0% line on the chart below.

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As the bears will attest, this has been an unusually stubborn market, one that has not fallen easily. As a result, even though the NASDAQ closed just 3.2% below a record high, New Lows have already spiked to levels associated with key IT bottoms. This type of spike so close to a record high deserves attention going forward.

The chart below goes back to Oct 2002. As you can see, similar spikes marked bottoms, not tops. Welcome to the road less traveled.

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Though Financials got the headlines on Tuesday, Utilities were actually the worst performing sector on the SPX. On a day that saw both 10-year Treasury yields and energy fall, Utilities acted very strange and took a -3.5% shellacking.

It's hard to know for sure, but on Tuesday North Carolina lawmakers passed a measure requiring NC electric utilities to use more renewable resources and energy efficient programs. Meanwhile, the Illinois electric utility Ameron began a $1 billion give-back program at the urging of IL lawmakers.

Utilities pay nice dividends and are often viewed as a safe haven in times like these. However, they've been under selling pressure since early May, and were surprise losers again on Tuesday.

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While everyone loves their QID, technology stocks may prove unwilling participants as a pullback develops. As the charts below show, the odds favor SKF and SRS producing far better results. If you want to short an index with a ProShares inverse ETF, consider TWM. All four are included below.

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Finally, what a difference a day makes on the option floor. The TOF Ratio took a sharp hit on Tuesday. Not a crossover yet, but almost.

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It's rare to see the IBD100 take a beating like on Tuesday without the broader market shifting gears. Institutional investors are taking profits on the canaries, and it's a sign worth heeding. That said, the bears still need downside follow-through to make this pullback really stick.

Financials, Utilities and now Energy stocks are big reasons that the blue chips are suffering. However, the NASDAQ is still in an uptrend. With tech stocks rising, it's likely to require extra effort to push the Composite lower.

Also, like the spike in New Lows, the massive short interest is an unusual variable here as well. A NYSE short ratio of 8.4 days to cover suggests that pullbacks could be interrupted by fat bursts of short-covering. An 18-handle VIX is certainly giving this type of volatility a thumbs-up.

The bears haven't organized an advantage like this in a long time, and it's clearly their opportunity to lose.

Until tomorrow, have a great evening.



Monday, July 23, 2007

What Do You See?

If you think you're seeing things, that's because you are.

Like an optical illusion, the market appeared both bullish and bearish on Monday. Stocks started out strong, then gave back gains, especially on the NASDAQ. Composite volume fell 13%, which explains why the bulls couldn't hold the gains: the volume wasn't strong enough to support even normal selling pressure. Unfortunately, after a big selloff, light gains on lower volume isn't what you want to see.

Fundamentally, the bears have well-discussed advantages. Now, they're technically putting together yet another credible setup to drive the stock market lower. This is a post-expiration week, and 11 of past 18 have been negative. Also, with 800 companies reporting by Friday, the earnings picture will be much clearer in four more sessions. Lots of things send markets lower, but one of the few things that keeps them there is crappy profits.

One problem for the bears is that leading stocks aren't telegraphing any long-lasting change. After an off week, the IBD100 came back strong on Monday. As market volume slid, an impressive 29 IBD100 stocks printed accumulation days, while just 7 stocks saw selling pressure. Monday saw buying return to the fundamental leadership, and the IBD100 gained 0.8% as 62 of 100 stocks moved higher. Also, a solid 22 stocks hit record highs. This is inconsistent with forecasts for a big, near-term tumble in stock prices.

Monday marked the 18th straight day that the NASDAQ closed above its 13-day. A close below has rarely been good for the bulls ST, so defending a level just 10 points below Monday's close is unusually important.

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Without question, one of the most fascinating features of this market is that it is so stupendously "pre-sold" for a hefty pullback. Not only is professional short-interest at goat-gagging levels, Odd Lot Short Sales are now at a 5-year high of 8.4 million shares!

The chart below shows that over the past two weeks, retail investors swung hard to the short side. This is inconsistent with market tops, and complicates market dynamics even more than they already are. This chart is not a good look for the bears.

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You know we're in a strange, new world when the VIX can be harnessed by a 6-month rising trend channel! Even weirder is the fact that stocks have climbed in the face of this volatility rise. The short-interest ratio and trending VIX are just two signs that there is no lack of investor fear in this market.

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The TOF Ratio is in excellent position, suggesting that stocks still have room to run. In an unusual twist, option investors seem to be hedging the historic short interest with calls.

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The bears are perched in the Book Depository once more, awaiting yet another clean shot at the motorcade. They have a lot of things going for them, but market collapse pre-sales aren't one of them.

Whether you see a woman's face or a sax player, reports on US housing, GDP, the Beige Book and earnings point to an interesting rest of the week.

On a lighter note, "Fake Jane" Wells blogged about Pickens in China this morning at Funny Business (I certainly hope Becky Quick has a sense of humor - lol).

Until tomorrow, have a great evening.



Sunday, July 22, 2007

Timing Indicators

Investing is so complex that one-decision timing indicators have a natural appeal. There's a near-limitless smorgasbord from which to choose, including a huge number of paid systems (like those seen on late-night infomercials).

However, every technical indicator -- MACD, stochastics, Williams%, ADX, etc. -- is a condition metric of some type, and can be easily pressed into service as a timing indicator free of charge.

This post examines nine, non-proprietary indicators, and includes live links for each (bookmark this page and keep up with their progress). It's a completely arbitrary list, so please share any favorites that aren't included here.

Do they work? Critical caveats aside, timing indicators can be effective if used correctly. However, the caveats are very important, and below are five of the biggest:

1. There is no such thing as a perfect timing indicator. Period.
2. All timing systems have statistically significant margins for error.
3. To improve their efficacy, timing systems should be used in combination with other metrics.
4. Even the best timing indicators give false signals.
5. One of the biggest problems is lag: the signal may be correct, but it happens either early or late.

Bottom Line #1: There are no genuine shortcuts to being a good investor. No timing system in the world can compensate for poor stock selection.

Bottom Line #2: The very best timing systems are good at avoiding drawdowns. However, the vast majority underperform the indexes over time.

For the record, as of Sunday, July 22, eight of the nine indicators listed below are on a Buy.



The indicators below are in grouped in five types: Moving Average, Options, Volatility, RSI and CCI.

Moving Average Systems

1. 5-10-20 Live Link

This is perhaps the granddaddy of all market timing systems. It uses EMA (20), (10) and (5), and has above-average effectiveness. A Buy is triggered when both EMA(5) and (10) cross above (20). A Sell is triggered when both EMA (5) and (10) cross below (20). Note that the current chart has been on a Buy since March, and wasn't shaken out during the May-Jun consolidation. For novices, 5-10-20 is a good place to start.

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2. Beisiegal Live Link

Dan Beisiegel of Illuminant Capital developed a system that uses two EMA pairs. A Buy is triggered by EMA (11) crossing above EMA (47). A Sell is triggered by EMA(21) crossing below EMA (55). Beisiegel cites great backtesting results, but in practice both Buy and Sell signals have a huge lag.

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Option-based Systems

3. TOF Ratio Live Link

Long-time message board regular The Old Fool, aka TOF (Richard McRanie), was the first person I observed using this indicator. The TOF Ratio divides the NASDAQ by the CPC, and Buy and Sell signals are triggered by EMA (21) crossovers above and below EMA (50). Historically, the first negative crossover is a warning shot; the second negative crossover triggers the Sell. This is a clever indicator with a long history of accurate market signals.

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4. CPCE Ratio Live Link

The put/call ratio was developed by Marty Zweig in the early 1970's. In recent years, Zweig has questioned the usefulness of the CPC as a contrarian indicator due to distortions in index option activity from hedging activities. Zweig now favors the CPCE in these types of calculations, a sentiment widely shared by the technical community.

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5. BPI Ratio Live Link

Message board regular hari_seldon at Clearstation is the first person I noticed divide the Bullish Percentage Index by the CPCE. The BPI's are breadth metrics that track the percentage of stocks printing bullish Point & Figure charts. Seldon uses the raw ratio data for his triggers, and this data can be noisy, triggering false signals at both ends of the range.

Filtering the noise with moving averages and watching for crossovers produces useful signals. The chart below uses the NDX BPI, and EMA (21) crossovers above and below EMA (50) serve as the Buy/Sell triggers. Like the TOF Ratio, the first negative crossover is a warning shot; the second negative crossover triggers the Sell.

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Volatility Systems

6. MarketSci.com VIX Timing System Live Link

Bill Luby posted about the MarketSci.com VIX Timing System, which is in itself based on a Credit-Suisse VIX study. The MarketSci sounds (and looks) complicated, but in practice it's quite simple. Backtesting reveals that it's also very reliable, but it has a tendency to keep investors out of profitable trades.

Buy the S&P 500 when:
---- (a) the 11-day SPX EMA (red) is below the 11-day SPX SMA
---- (b) the 11-day VIX EMA (purple) is above the 11-day VIX SMA.
---- Exit the position when either of the two conditions above are not met.

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7. VXN Timer Live Link

My preferred volatility timer simply divides an index (NASDAQ, SPX, INDU, RUT) by its volatility metric (VXN, VIX, VXD, RVX, respectively). Smooth the data with EMA's, and watch for EMA(21) crossovers above and below EMA(50). Below is the NASDAQ:VXN.

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8. RSI Live Link

The Relative Strength Index (RSI) was developed by J. Welles Wilder in the 1970's, and like moving averages, you can't talk about timing systems without mentioning RSI.

Trading Markets has a good RSI timer overview, and both Bill Rempel and David at The Shark Report are dedicated practitioners of the most common version, RSI (2). There are countless variations, but in its simplest form: Buy when RSI(2) falls below 10; Sell when RSI(2) rises above 90. Note on the chart below that this "strict" version would have kept you out of many profitable trades.

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9. Nocona Live Link

iHub regulars are familiar with Nocona's Early Retirement System. Nocona is based on CCI(100), and there are many variants. In it's original form, a Buy is triggered by a move above CCI +100; a Sell (short) is triggered by a move back below CCI +100. Once short, you hold short until CCI breaks back above -100, at which time you cover and go long.

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