09.07.2023
This indicator has been very helpful for making accurate market calls, and it can be very powerful when used as part of a non-discretionary trading system.
Recently on CNBC, a CMT charter holder explained that his distrust of our current rally in the S&P 500(SPX) from the October 2022 low is partly because “The percentage of stocks above their 200-day moving averages on the New York Stock Exchange(%>200smaNYSE) has yet to exceed 75%; 11 months into a new bull market, we’ve never not seen this threshold exceeded.” This idea that bull markets are confirmed with a reading of greater than 75% within 11 months will be the start of our investigation.
Note, this calculation is not standardized. The value of this indicator has different values for the same date on different platforms. This study uses data from Stockcharts.com. Their calculation includes common stocks only with stock prices adjusted for splits, other events, and for dividends.
THE DATA
The CMT charter holder on CNBC told us that there has not been a bull market without the percentage of NYSE stocks above their 200-day moving averages (%>200smasNYSE) exceeding 75% within 11 months, 231 trading days, from a major low. To investigate, we must define a bull market. Though disliked for being the arbitrary definition it is, one common definition is when price rises at least 20% from a low.
Below is Chart 1 and Table 1 summarizing Chart 1. The bottom panel of the chart shows the percentage of NYSE common stocks above their 200-day moving averages(%>200smaNYSE). The 75% level is marked with a horizontal line, and the indicator itself is colored green when greater than 75%.
The top panel is the price of the S&P 500 ETF, SPY. The green and red slanted lines drawn through price highlight price swings of more than 20%. The colored vertical lines, using the benefit of hindsight, mark the date of price bottoms after declines of 20% or more. The gray shading represents 11 months, 231 trading days, from those colored vertical lines which mark major price bottoms. The green arrows point out when the indicator in the bottom panel crosses above 75% for the first time after a major price low.
Chart 1: Advances of more than 20% from a low since 2002. All have seen %>200smaNYSE >75% within 11 months from the low except for the 2018 low. 6 trading days left until we miss the 11-month window from the October 2022 low. Click To Enlarge.
The vertical lines in the top panel of the chart show all 6 of the market bottoms, since 2002, after declines of more than 20%. The green vertical lines show the 4 of 6 market bottoms where the indicator exceeded 75% within 11 months of the bottom. The red vertical line, price bottom 4 on 12/26/2018, was a bottom after a 20% decline when the indicator did not exceed 75% in 11 months. The indicator came close with a 72.82% reading, just shy of the 75% threshold. A few months later, we had the 2020 Covid plunge. The vertical lines in orange show us our current position relative to the 10/13/2022 potential market bottom. The indicator has yet to reach 75%, corroborating what the CMT charter holder on CNBC told us. Time is ticking. As of writing this, we are just 6 trading days shy of our 11-month window, and the indicator is very unlikely to blast higher from the low 50s to more than 75% in just 6 trading days. The only other instance of this happening was price bottom 4 in 2018 ahead of the Covid plunge. Without more historical data, it is difficult to infer anything other than caution is warranted until we see the indicator exceed 75%. As table 1 below shows, after the signal, there is an additional average gain of 66%.
Table 1 below is color coded to match the vertical lines on the chart, which mark the major price lows. It shows all 6 advances for reference, though the summary statistics only include the 4 price bottoms where the indicator flashed the signal by exceeding 75% within 11 months:
On average, the price bottom to the signal took 5.9 months with a price rise of 37.8%.
On average, the signal to the top before a 20% decline took an additional 41.8 months with an additional a price rise of 66%.
On average, the price bottom after a decline of 20% or greater to a price top before decline of 20% or greater took 47.7 months with a price rise of 125.6%.
Table 1: All 5, potentially 6, major market lows since 2002. Click to enlarge.
THEORETICAL TO PRACTICAL
The above stats are interesting. So what? Who cares? How can this study help us manage, grow, and protect assets? How can this help us make market calls?
Can this indicator function as the basis of a stand-alone investment strategy? What if we buy SPY when %>200smaNYSE crosses above 75% and then go flat when the indicator crosses below 30%?
Chart 2 below presents our strategy visually. Table 2 below shows our strategy beats buy & hold. With its small sample size of 5 since 2002, It has a 100% win rate. The strategy has a total gain 305.49%, a maximum drawdown of 13.19%, and has only been invested 59% percent of the time. Less time invested and smaller drawdowns significantly reduce risk. Buy and hold has a total gain of 289.58% over the same time period with a maximum drawdown of 47.71%. Caution, these results do not consider reinvesting dividends, fees, taxes, or anything else which will affect net returns.
Chart 2: Buy SPY when %>200smaNYSE >75%. Go flat when %>200smaNYSE <30%.
Click to enlarge.
Table 2: Strategy outperforms buy & hold.
Click to enlarge.
2. Can this indicator help us assess the health of the S&P 500? Might using the indicator
in conjunction with a 200-day moving average be a reliable way to maintain conviction
after price closes below the 200-day average and still prevent large losses?
Chart 3 below shows price from the 2002 low into the 2008 bear market. Had we stayed invested or had a bullish market call until the indicator fell below 30% in August 2007, see the red and green arrows, we would not have been whipsawed by a close below the 200-day. The exit signal was timely and prevented a large loss.
Chart 3: SPY from 02-08. Closes below 200-day moving average did not foreshadow larger market declines unless accompanied by %>200smaNYSE <30%. Click to enlarge.
Chart 4 below shows the run from the 2009 low to the 2018 high. It was trickier than the run from the 2002 low. Had we been solely relying on the indicator, we would have made a bullish call in the middle of 2009 (green arrow), stayed bullish through 2010 despite the moving average whipsaw, and turned skeptical (red arrow) after a 12.5% decline in the middle of 2011 and avoided an additional 8% decline. We would have turned bullish again in early 2012 (green arrow), not been whipsawed in 2012 and 2013, and then turned skeptical in 2014 (red arrow) ahead of a 15% correction. The green arrow in the middle of 2016 would have turned us bullish, and we would have stayed bullish until late 2018 (red arrow) after a 10% decline but before an additional 11% decline.
Chart 4: SPY from 09-19. Timely market calls & whipsaw protection. Click to enlarge.
CONCLUSION
While we never rely on one indicator, this indicator has proven to be very powerful in the past. More testing needs to be done with regards to using this indicator as part of an investment strategy, but the preliminary findings are strong. There is also an impressive case to make for using it as part of a suite of indicators for market calls/commentary. We demonstrated how when used in conjunction with a 200-day moving average, this indicator helps avoid moving average whipsaws, stay invested and bullish while others would have turned bearish with price closing below its 200-day moving average, and has been very accurate at offering both bullish and skeptical market calls. Crossing above 75% has generally signaled more strength ahead, with average gain of an additional 66% over an average of 41.8 months. Closing below 30% has generally signaled more weakness ahead.
As always, thank you for reading. I’d love to hear from you.
E-mail: Louis@eastcoastcharts.com
This article is for educational and informational purposes only. The author may or may not have a position in the securities mentioned. Read our full disclaimer here.