NYSE Bullish Percent Index Saying The Party's Over

Yesterday the NYSE Bullish Percent Index [$BPNYA]
fell below 70%. This is a warning that the market is on shaky ground and defensive tactics should be initiated. According to the rules, all investors should avoid new purchases, except for low-beta, defensive stocks, and short-term traders should tighten stop loss orders on existing holdings. All market participants should consider using rallies to sell portfolio laggards.

The $BPNYA is simply a measure of the percentage of NYSE stocks which exhibit bullish patterns on point-and-figure charts. This venerable indicator has an excellent track record. When after a bear market it falls below 30%, then again rises above 30%, that is the all-clear signal; and when in a bull market it rises above 70%, then again falls below 70%, that is the warning that the rally has become overextended and that a correction or bear market may be imminent. The index rose above 70% last November and that fact was pointed out in this blog at the time.

The present fall of the index below 70% is not an outright sell signal, just a warning that the party is over and the easy money has already been made. The market averages could very well correct excess bullishness through a period of sideways movement, then go on to make new highs. A good number of stocks are still doing quite well. Indeed, the NASDAQ is outperforming the NYSE right now. The point is that the rising tide is no longer lifting all boats. But as long as the index stays above 50%, the bull market is intact.

Comments

[Malkiel:]

The problem with these kind of pure chart-reading exercises is that they make no reference to real-world demographic drivers, such as, how much cash is out there in the hands of Funds needing to find a home? Pension funds, mutual funds, hedge funds, IRA's, 401k's, you name it, all payroll deduction format money must go somewhere. If the cash inflows are large, it doesn't matter what any subjective "overbought" or "oversold" indicators say. Cash investments like bank accounts and cd's are manifestly inferior in the current interest rate environment, so all new money will go in the market regardless of risk. The relevant question is, "how much money is in the pipeline"? Chartist overbought/oversold indicators are a quaintness with predictive power only for the superstitious...

2007 Jan 11 04:57 PM