I want to say up front that I have no crystal ball for the future. I closely monitor trends but I have found no reliable way to forecast trends, To be a knowledgeable investor you have to monitor both the economy and the stock market. They are 2 separate but overlapping concepts. It is possible to have an expanding economy and a shrinking stock market and vice versa.
I try to be fully invested when we have both an expanding economy and a rising stock market and on the sidelines when we have a contracting economy and a sinking stock market. I can sleep well either way. I loose sleep and get anxious when the 2 are going in opposite directions because that is revealing change but what will happen next is the mystery,
At the end of each month I like to gauge what has happened recently to rationally try figure out what my odds are in making a few buck in the next month. Here's how I do that.
For years I have used the research of the Conference Board to evaluate the economy for me. I read their report on Leading Economic Indicators (LEI) each month. This month the results are:
Jun - 123.5 up
Jul - 123.5 flat
Aug - 123.5 flat
Sep - 123.3 down
The number isn't import to me but the trend is. In the last 3 month we were flat to slightly down. That means to me we have either peaked and should be prepared to admit that the expansion in the economy started around April of 2009 is over or we are just taking a breather from a big expansion or in the end will continue to expand.
For those of you who would like to read more a link: Conference-Board.org
Next I look at the stock market and use 4 different indices to get a feel of what is happening. I use Barchart to chart the Value Line Arithmetic Index (VAL), the Dow (DOW)), the S&P 500 (SPX) and the Russell 3000 (RUA). The first is not capital weighted the other 3 are:
You can see that the weighted indices are back to where they were in July but the non-weighted Value Line is slightly down. That means the larger stocks are driving the market while smaller stocks are down.
If I look at all the stocks in Barchart's database - a little over 10,000 stocks to see if they are trading above or below their moving averages I see:
- 54.40% trading above their 20 day moving average
- 59.94% trading above their 50 day moving average
- 42.74% trading above their 100 day moving average
My most reliable benchmark is the Value Line Arithmetic Index and its 50-100 Day MACD Oscillator. At the present time that indicator has not come back yet to a buy.
It covers the 1700 largest stocks and comprises almost 95% of the US stock markets capitalization. If I plot it like a stock here is how the chart looks:
You can see those 1700 stocks have been trending down but stocks are now touching the higher range of the 14 day turtle channel.
Conclusion: Both the economy and the stock market have recently been taking a breather and neither are really taking a strong trend either way. Although I am presently back in the market I am closely monitoring both the economy and stock market and will not hesitate to jump back out.
I got back in when the market hit that double bottom you can see first around August 24th and then again around the end of September. I listened to many of my technical analysts friends and invoked that old double bottom rule and I pray I was not too premature.
Although my personal accounts are up abut 1.08% since I got back in around 10/15 I'm not ready to call myself a full grown bull - maybe more like a new born calf.
Have a good month but stay alert.