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Market Strength Indicators

Started by Kenny Hawgins, August 04, 2016, 09:36:06 am

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Kenny Hawgins

I'm a bit curious what some of you might use to gauge the potential risk in equities.  I know most investors tend to buy and hold but I prefer to avoid the losses that come with the drops (or better: profit from it with puts).  Here's a couple things that I've been using that may give advance warning:

- Percent of S&P 500 stocks above their 200 day moving average:  This is a useful one in near to intermediate time frames.  For an example of this, before the significant drop that the market saw last August, the % of S&P 500 stocks above their 200 day m.a. dropped by ~20 percent from May to August. 
http://stockcharts.com/h-sc/ui?s=$SPXA200R

- Price ratio of cyclical stocks to defensive stocks:  This is more useful in intermediate to long time frames.  I measure this with sector ETFs for Consumer Discretionary:Consumer Staples (XLY:XLP).  I look for divergence between this ratio vs. market indexes (S&P, Dow, Nasdaq).  Basically, if the economy is strong, people are going to be more comfortable spending money on stuff that they don't need ($5 coffee @ Starbucks, vacations, $150 nikes).  Stock in these companies goes up relative to safer stocks.  If the economy is weak, these prices start to trend down compared to staples; after all, people still have to buy cereal to eat for breakfast, prescription drugs, toothpaste, etc.  This ratio dropped off sharply before the housing bubble crash and then started back up at the market bottom. 
http://stockcharts.com/h-sc/ui?s=xly%3Axlp

Hopefully, someone else can get some use out of these.  Anyone have any other metrics that they keep track of regularly?
Twirling round with this familiar parable
Spinning, weaving round each new experience

HawgWild

I don't use this one but I believe the guy won a Pulitzer Prize for coming up with it:
http://www.multpl.com/shiller-pe/

 

Kenny Hawgins

Quote from: HawgWild on August 04, 2016, 10:59:42 am
I don't use this one but I believe the guy won a Pulitzer Prize for coming up with it:
http://www.multpl.com/shiller-pe/

Nobel perhaps?  ;D

Yeah, I think the CAPE is a pretty good overall gauge as well.  Unfortunately, most measures such as PE, market cap/GDP, etc. are all pretty high right now.  Based on these, we're in a bubble that's just waiting for a sharp object.  The big question in this instance is whether central banks can continue to buy enough stocks, futures, and bonds to prop this thing up (at least until November).
Twirling round with this familiar parable
Spinning, weaving round each new experience

HawgWild


je100

Relies on backtesting, but I'm a fan of Gary Antonacci and his GEM momentum process.  Very simple to execute and low costs using TDA's no-commission ETF's.   Decades of impressive what if's.  Uses three funds including Vanguard Total Stock Market, Total Non-US ETF by Vanguard, and a fixed income fund.  Nothing steller during bull markets since you're indexing, but impressively addressed 2001-2002 and 2008, among other bear market runs.

http://www.optimalmomentum.com/gem_trackrecord.html

hog.goblin

I'm taking a little off the table (about 30%) over the next 30 days with plans to jump back in after the next dip.

je100

Quote from: hog.goblin on August 05, 2016, 09:56:52 am
I'm taking a little off the table (about 30%) over the next 30 days with plans to jump back in after the next dip.

Have you had success at timing those dips?

hog.goblin

Quote from: je100 on August 05, 2016, 10:37:25 am
Have you had success at timing those dips?

Yes, I've never gone all in or all out.  But I've found it fairly easy to sell into strength and buy into weakness.  The mistakes have never been too costly, though I've bought in too early a few times and needed time to recover.  It would have been worse had I never parked some on the sideline and tried to ride it out.