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Fosback Indicator Signals Strong Bull Market Ahead for S&P
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A little know, but historically very reliable, stock market breadth indicator has recently generated a rare bullish signal for stocks. It suggests that the months ahead could see a strong uptrend in US markets.
The ‘High Low Logic Index’ was developed in the 1970s by econometrician Norman Fosback, a former president of the Institute for Econometric Research. Using NYSE data, the Fosback is calculated as the lesser of two numbers: The number of stocks reaching new highs divided by the number of stocks traded; or The number of stocks reaching new lows divided by the number of stocks traded
The indicator is now published by Ned Davis Research (NDR) in the US and over the past 25 years there have been only four occasions when their version of the High Low Logic Index has moved from territory above 4.05% to as low as it is today, and all four came close to a major market bottom: Late 1987, late 1990, early 2003, and late 2008. Chart 1 shows the track record of the High-Low Logic Index since 1987. Extreme lows in 1987, 1990, 2003 and 2009 were all preludes to a significant stock market rally. Likewise, extreme highs, for example in 2007, led the way to the market crash.
However NDR says the problem with stock market breadth indicators, including the Fosback, is that ETFs, HFT, the no uptick rule for short sales, programs, derivatives, etc., have all increased the correlation between individual stocks. Ned Davis of NDR told us, “a normal correlation for the S&P 500 stocks has only been about 0.46 since 1972. Due to all the new market influences (and a vicious bear market that increases volatility), it is now much more a stock market than a market of stocks with correlations of around 0.86.”
Based on backtests, NDR set the “bullish” threshold for the Fosback at 2.5%. The latest value of 1.7% is therefore strongly bullish as well as being one of the lowest readings for 25 years. Whenever the indicator has fallen below this level, the S&P has gone on to rally at least 17.9% at an annualised rate.
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USD/JPY Verging on a Major 40 Year Cycle Reversal
USD/JPY is bullish over the medium to longer-term, according to Ron William, technical strategist at MIG Bank. In his latest report, William looks at USD/JPY’s fate as the rate edges closer to a 40 year long-term cyclical reversal and he thinks that key strategic upside price levels will be reached this November/December 2011. In the short-term, however, we should expect a post intervention retracement to carve out a fresh new record low. Read the full report here. Read the full report >
No end of year rally for stocks say cloud charts
Reuters analyst Richard Muller has said that Ichimoku cloud charts suggest European stock markets will meet resistance towards the end of the year. The FTSE will meet particular resistance at the 5650 level, says Muller.
Bartels Backs Down on Bearish Outlook
Bank of America Merrill Lynch technical analyst and bear market cheerleader, Mary-Ann Bartels, has put back until 2012 her forecast for new lows in the S&P500. However, she says the recent rally through the key level of 1235 was not confirmed on high volume calling into question the conviction of the upside breakout.
SocGen Indicators Say Stock Rally to End
Following the October rally in stocks, Societe Generale has identified three indicators that it says will signal when the rally will come to an end. These begin with excessive investor optimism; SocGen’s proprietary measure of investor sentiment is already at high levels (Chart 1). Second, they say, is US Treasury yields; once 10 year yield reaches 2.5-3.0%, this will be evidence the rally is over (Chart 2). Finally, a narrowing of CDS spreads on western countries (Chart 3).
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August saw the release of the sixth edition of the classic ‘Manias, Panics and Crashes’ by Charles P. Kindleberger. The latest edition has been updated to include coverage of the credit crunch and collapse of Lehman Brothers.
Hedge fund Bluecrest has reported that its BlueTrend fund is the only one of its fund strategies to yield positive returns this year. This compares to losses on its BlueCube and BlueMatrix systematic and statistical arbitrage funds.
A team from the University of Cologne has combined a technical momentum strategy with fundamental information, specifically operating cash flow, to create a trading strategy that is profitable after transaction costs. Read more >
Market cycles contribute to generating higher medium-run and lower long-run relative-strength profits, according to a US based research team. Read more >
Andrew Lo of MIT Sloan School of Management in the US discusses how the neuro sciences can explain behavioural phenomena and help us to identify drivers of financial crises and improve our models and methods for dealing with them. Read more >
New technical indicator, 'probability of rise (p-rise)', based on deviation from moving averages is described and tested. Read more >
Advanced statistical analysis borrowed from nuclear physics can detect differences between real financial time series and 'fake' time series generated by random walk models. As such, the system can provide "a kind of quantification of the non-random content of the financial markets", specifically the part of the non-random content that is trend. Read more >
Long volatility strategy based on VSTOXX futures offers better protection for European equity investors than a similar one based on VIX futures. Read more >
The behaviour of Commodity Index Traders around the monthly rollover periods systematically distorts commodities futures price curves towards a contango state, which is likely to contribute to speculative 'boom/bust' cycles. Read more >
A research team from the University of Limerick and Dublin City University has identified a series of signals for when to get out of the Chinese stock market, based on short and long interest rates, earning-price ratio, short and long spreads, and trading volume. Read more > |
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