Trader’s Narrative

Most technical analyst junkies are already familiar with the percentage of stocks above moving averages. This is where we look at the percentage of stocks within a group that closed above a certain moving average.

The shorter the moving average, the more short term the significance of the signal. Although, Lowry’s has intriguing research which shows that very short term measures (10 day moving average) can indeed be a sign for more long term signals as well.

Rather than look at this indicator as most do, I give it a twist by calculating a ratio between the medium term and the long term. That is I take the percentage of stocks in the S&P 500 trading above their 200 day moving average and I divide them by the same for the 50 day moving average.

Why do that? Well, for one it gives me something which few look at. And for another, it easily identifies instances where although the long term market was healthy (generally trading above the 200 day moving average), there was a short term correction.

This is ultimately what we want. That the major uptrend be intact and to buy a short term correction within that uptrend.

Right now, 47.8% of stocks in the S&P 500 are trading above their 200 day moving average. While that is quite low, it did get as low as 40% in the summer of 2004. Along with 18% being above their 50 day moving average, this gives us a ratio of 2.66 (see chart).

That spike you see in the chart below, like all previous spikes, is a bullish omen:

The only negative that I can find for this type of indicator is that the other market proxies aren’t as extreme. For example, among the major indices, the Nasdaq 100 Index (NDX) is currently showing the highest percentage of stocks above 50 day moving (at 39%). The S&P 100 is at 22%. I’d prefer to see readings closer to 20% myself but we never have all the stars align perfectly.

And you can’t argue with the largest and most significant index (S&P 500) showing only 18% of its constituents trading above their 50 day moving average. This is the level at which all our inflection points have arrived at since the bull market began in 2002.

The only time things got hairy was at the bottom of the 2002 bear market when it reached the dreaded 0%. That is zero stocks trading above their 50 day moving average!

I think everyone woud agree however that we are not in the same environment (fundamentally, technically and sentiment wise) as we were back then. So I put the probability of that happening as extremely small.