I Guarantee You’ve Never Seen this Stock Market Indicator

Business charts and markets, media concept
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Road trips are one of my favourite pastimes…

All you need is a car, a loose plan, and a spirit of adventure.

I’ve enjoyed many such trips…from a youngster, through to present day. They’re a source of some terrific memories.

My family and I recently returned from a few days in Dubbo, in central NSW. If you’re not familiar with the region, it’s about six hours northwest of Sydney.

The last time I made this trip was January 2004. It was 40 degrees, and I remember watching Steve Waugh play his last Test innings from a country pub.

Back then, it was just my wife and I. We packed a bag and hit the road in my open top MGB. The general idea was to drive from Sydney to Dubbo, and return via the coast.

There was only one set plan — avoid the highways. The trip was all about taking the backroads. We stayed in small towns, and got lost more than a few times. It was a true adventure.

Fast forward to 2016, and a few things had changed.

Sadly (at least for me) the two-seat roaster had gone. In its place was the family SUV with two rows of kids. There was also a schedule of places to be and things to do.

But not everything was different. It was still 40 degrees. We also mostly stuck to the backroads. I wanted to show the kids part of the countryside many people miss.

Navigation was much easier this time. Gone are the days of asking for directions at a remote country servo. The smartphone’s GPS constantly updated our location, speed, and time to destination.

Not only that, it also identified traffic delays in the most unlikely of places. Miles from anywhere, on an isolated road, it alerted us to roadworks ahead. Sure enough, it was right.

GPS has changed the nature of overland travel. There’s no longer any uncertainty about where you are. If only there was similar way to navigate the markets…

So where are we?

I’d like to tell you I have a GPS for stocks. But I can’t. There’s no special formula to pinpoint the stock market’s every move. Trading is uncertain by nature.

But there are ways to gauge where things stand.

I’m going to share an indicator with you in a moment. It helps me access the market’s location within its bull and bear cycle. I think you’ll find it interesting.

Let me tell you a bit about it.

I designed this indicator myself. It helps me identify if the market is overbought or oversold. It does this by calculating the number of stocks that meet my bullish criteria.

The indicator analyses the top 300 companies. These change over time, but the number remains fixed. This allows me to compare readings for different periods.

There are two sub-indicators that determine if a stock is bullish — the 100 day moving average and a 40 day break out. Quite simply, if a stock breaks above both, then it’s bullish. A stock then remains bullish until it breaks below the moving average.

Okay, it’s time to take a look. You’ll also see a chart for the All Ordinaries. I’ll explain a bit more in a minute.


Source: BigCharts

[click to open in new window]

Let me explain what’s going on.

The top chart is the indicator — I call it the Quant 300. It shows the number of bullish stocks. You can see it mostly ranges between 25 and 225. The data goes back to January 1993.

Below this is the All Ordinaries over the same period. I’ve aligned the charts so that the dates match.

The next thing to note is the red lines. These represent the low point for the Quant 300. I’ve marked the points where the number of bullish stocks falls below 50.

Now this is where you need to study the chart closely. Follow each red line down to the All Ordinaries chart. What do you notice? Take your time, there’s no rush.

I’ll tell you what I see.

In most instances, a reading below 50 leads to a multi month rally. A number of these have been major turning points. Others have resulted in strong bull market extensions.

Another thing I notice is the timing of big declines. They typically occur when the Quant 300 is above 150 — it’s currently close to 100.

An exception to this was during the GFC. The indicator rebounded from oversold levels in January 2008. The market initially surged, but then began collapsing in May.

Make no mistake…this isn’t a GPS for stocks. I’d describe it more like a barometer for predicting the weather — it sometimes forecasts clearing skies ahead of a storm.

A clue to the coming months

An indicator is just one piece of a big puzzle. There’ll be times when it doesn’t add much value, but there’ll be others when it offers important clues. The key is to know when to pay attention.

Have a look at this next chart. It shows the recent years in more detail.


Source: BigCharts

[click to open in new window]

I believe this is one of those times to pay attention to the indicator.

There are still plenty of analysts talking about a potential market crash. This could of course happen — anything is possible. But I don’t think it’s likely any time soon.

You see, the Quant 300 was recently below 50. It’s now back above 50, and rising. This has historically been a predictor of bullish conditions — not a crash.

No one can say for sure where the stock market is going. But there are ways improve the odds that you’re on the right side of the next big move.

I designed my Quant 300 indicator for this exact purpose. It doesn’t have the pinpoint accuracy of a smartphone’s GPS, but it can be a useful guide to where the market’s going.

Until next week,

Jason 

Editor’s note: Have any of your stocks hit an all-time high this month? Chances are the answer is no. And that’s understandable…the All Ordinaries is well off its peak. But some stocks are surging. They could make a big difference to your portfolio.

Take SeaLink Travel Group [ASX:SLK] for instance. You’ve probably never heard of this stock, but it’s trading at record levels. And that’s good for Quant Trader’s members. You see, Quant Trader has signalled this stock three times since last September. The signals are up by as much as 66% (the average gain is 44%).

Anyone can get gains like these. It’s all about having the right strategies. You can learn more about these here.

Jason McIntosh

Jason McIntosh

Jason is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. After Bankers Trust was taken over in 1999, Jason, already financially independent, co-founded a stock market advisory and funds management business called Fat Prophets. At 37 he sold his part of that business and retired. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.
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