Ratio of Stocks Above 50 and 200 Day Moving Averages

As part of my ongoing effort to posts charts that you (probably) won’t find anywhere else, I offer up this monthly ratio chart of NYSE stocks above their 50 day and 200 day moving averages.

As the 2002 data show, this chart is capable of flagging extreme readings. Given that I use the 200 day SMA as the numerator and the 50 day SMA as the denominator, the chart tends to show short-term pullbacks as upward spikes in the 4 period EMA of the ratio and longer term extreme bear moves as downward spikes. Not surprisingly, the current 4 period EMA 0.76 is the lowest since late 2002.

Unfortunately, the data only goes back about six years, so I am unable to construct a chart that includes the end of the 1990’s bull market and the first two years of the bear market that followed.

While this chart may give you some things to chew on, the larger point is to consider changes in the percentage of stocks above certain moving averages as good measures of market momentum and ratios covering two different periods as good measures of relative market momentum or acceleration/deceleration.

ISEE 50 Day SMA Is Bullish

A week ago, I posted about the ISEE and the predictive power of the 50 day SMA. I have since updated that chart to reflect a buy signal at 120 (-1.5 standard deviations from the mean) and sell signal at 192 (+1.5 standard deviations from the mean.)

After hitting a record low on March 8^th and printing three record lows for the 10 day SMA two weeks ago, the ISEE’s 50 day SMA is now comfortably below the 120 buy level. Perhaps more importantly, with extremely high numbers due to scroll off the average in the next 10 days and relatively high numbers set to scroll off over the next month, it is a good bet that the 50 day SMA will be flashing a buy signal for most of April, if not the entire month.

If you put any faith in put to call ratios, then this is the time you want to get long, perhaps in a big way.

Simple Moving Averages and the ISEE

In "A First Look at the ISEE" a reader asked about September 2006 and the predictive power of the ISEE.

Like most oscillators, the ISEE is great for getting you to buy on a pullback and less effective in timing when longer term bear trends will turn around. Depending upon where you set your trigger (say, a 10 day SMA of 120, 110 or 100), you can fine tune the percentage of downturns you want to catch and how early you might be in calling a bottom.

As an accomplished over-trader (not to be confused with uber-trader), I have a tendency to try to call turns too early. If you suffer from a similar affliction or just want to eliminate some noise from your charts, you might prefer to use a longer SMA with the ISEE, such as the 50 day version.

In the chart of the 50 day SMA below, you can see that while absolute values of the average are important, the rolling over of the trend is even more telling.

Getting back to September 2006, no the 50 day SMA had not rolled over then and it would not roll over until October. While looking at absolute numbers in the 50 day SMA might have had you long back in July, if you waited for the 50 day SMA to roll over, you would have missed out on the July to October rally.

This raises three points:

1. No indicator is perfect and the ISEE is a good illustration of that point
   
   
2. It is possible to maximize the value of the ISEE using both absolute SMA numbers and the rolling over of these SMAs
   
   
3. It can be very expensive to try to time markets exactly as they turn; generally, it is much more profitable to target the middle 50% of a move than to try to capture the entire move

Canary or Canard?

Earlier in the week, I introduced a ratio chart of the percentage of S&P500 stocks above their 50 day SMA divided by the VIX. I described this as an attempt to find a rough approximation of greed ÷ fear. Since this chart received some favorable reviews, let me unveil another VIX ratio chart that attempts identify the same market sentiment extremes and provide a warning about the increased probability of near-term market highs and lows.

The chart below is a weekly chart of the ratio of the new 52 week highs in the NYSE divided by the VIX. I focus primarily on the raw number and the 4 week SMA. You can see from the chart that raw reading above 30 and a 4 week SMA readings above 20 tend to signal that a top is near.

In fact, this chart provided excellent advance notice of the 2/27/07 top, the 5/11/06 top, and previous tops in March 2004 and March 2005. With bottoms, the record is not quite as good, with an excellent advance call of the October 2005 low, but calls that were too early for May-July 2006, March-August 2004, and July 2002-March 2003.

You can decide if this ratio chart deserves a spot in your toolbox or bird cage or whatever it is that you use to try to divine the future. For me, it’s a keeper.

Are We Done Yet?

The answer, of course, is that nobody knows. For the most part, panic and fear are not fleeting emotions.

For the curious, the photo on the left is of Colca Canyon, located in southern Peru. The canyon is twice as deep as its more famous relative, the Grand Canyon. What I find particularly interesting about Colca Canyon is that despite a vertical drop of over 10,000 feet, much of the canyon is terraced and relatively flat.

In thinking about the current investment topography, one of the more obscure charts that I refer to from time to time is a ratio chart of the percentage of S&P500 stocks above their 50 day SMA divided by the VIX. It is a rough approximation of greed ÷ fear and prints some interesting extreme numbers from time to time, particularly for market bottoms. Because the values of this ratio chart are one ratio divided by another, it is possible to compare values over time and get meaningful results.

In looking at the weekly ratio chart below, one of the first things that jumps out is the toppy readings (6.0 – 8.0) that persisted over the past six months or so, as compared to the previous high readings, which tended to last only a month or two.

The downside spikes are even more pronounced and tend to be much more short-lived. We know that the moves in the VIX over the past week have been unprecedented, but what the chart indicates is that given the steepness of the decline and the current low reading of 1.55, the ratio is not likely to deteriorate much further, if at all. Don’t expect the ratio to stay in the Colca Canyon area – or even below 3 – for much longer.

I am certainly not going to declare that this ‘correction’ is over, but I will go out on a limb to say that the worst of it is likely behind us and that further declines, if any, should be a lot more orderly.