I’ve presented a multi-factor collaboration of indicators I follow in the past on this blog. Since my last mention of the “Bearometer” I’ve adjusted the compilation to include a couple of new indicators. But the basic mix of WHAT I’m trying to follow remains the same. That is – I want to follow trend, valuation, sentiment, breadth, and seasonality.
I always get a kick out of the players in my industry who try to make the system they follow sound exotic and unattainable by common folk. They do this by calling their system “proprietary”. Seriously, folks, there’s not much to be “proprietary” about in this business. We deal with four not-so-exotic factors: price, momentum, volume, time. That’s it. All technical indicators are comprised of one or more of those four factors. Sure, I may change a moving average to watch price trend differently than you (e.g.—say I use a 205 day MA—you use the common 200 day MA—mine is sooooo much more exotic and proprietary than yours!). Perhaps I combine that incredibly exotic 205 day MA with some other stuff in a different way than others do—gosh I’m smart!
Seriously—everything I or anyone else use in TA contains those 4 factors. And that means we can all look at the same stuff – it’s how we interpret it that counts!
OK, so enough of that rant. Here are the exotic, never before seen factors I use (grin!)—please destroy this page after reading it, Ethan Hunt (Mission Impossible). Please note that I am not providing all of the exact breakout levels for these indicators – but you can study them for yourself to get some feel for how they measure risk/return potential. Remember- If I told you my secret levels, I’d have to kill you.
Trend: 50 day MA, 200 day MA – above or below, plus slope of 200 day MA
Breadth: AD line with a 40 week MA above or below, Divergence (Y or N) vs S&P500, INDU vs. TRAN
Valuation: PE ratio
Sentiment: Smart/Dumb $ spread (www.sentimentrader.com), % above 50 day MA, New High New Low line, Put/Call ratio, VIX
Seasonality: Best 6 months, worst six months
Each of the above factors gets a score depending on their respective levels vs. historic buy/sell/ neutral zones. I look for a total score to get a feel for risk and return. The indicators are largely big-picture and provide a longer termed heads-up if they are – on the whole, indicating extreme buy or sell levels.
Right now, we are “neutral”—at least, as of March 18, 2016 when I took a reading. However, I did note that quite a few of the indicators were closer to sell zones than they were a month ago. Specifically, the Put/Call ratio, the % stocks above their 50 day MA, New high/low indicator and smart/dumb spread are all approaching a higher risk zone—although officially not in their respective danger zones yet. In a nutshell, the market looks to have a very short termed life of upside left in it- unless it peels away some of the overbought conditions in the coming days.