SPY: Waiting For The Other Shoe To Drop

Sep.24.12 | About: SPDR S&P (SPY)

It's time to take a look at the S&P 500 Bullish Percentage Index.

The index will always be a number between 0 and 100. It is simply the percent of stocks with a Point-and-Figure (P&F) buy signal divided by 500 - the number of stocks in the index.

Each of the squares represents 2%. In other words, if in a column of Xs or Os, the value of the above formulas changes by 2%, it will create a change of one square (an X if it is an increase and an O if it is a decrease).

A change in the direction, from a column of Xs to Os, or vice versa, requires a six percent change in the value to be shown on the chart.

As you can see on the current chart, we are in a column of Xs.

Click to enlarge

What I wish to point out on this chart is that in February (2) of this year the value of the bullish percentage went to 84 (first shoe). Translated: 84% of the stocks of the S&P 500 were showing P&F buy signals - and as can be seen by this 10-year chart, it has only been to levels over 80% five previous times - 2004, 2007, 2009, 2010 and 2011.

Most important, is that what followed the penetration of 80% with the column of Xs and a drop in the index to below 50% were meaningful corrections in the price of the index - and in the value of the S&P 500 SPDRs ETF - SPY.

Before looking at the current chart of SPY, it should also be noted that each time the penetration over 80% with this index took place in the last decade, the percentage, even though it dropped and went to a column of Os, the following column of Xs never reached the previously printed high point.

I'm not sure about "history repeating itself." What I am sure of is the evidence as presented by the facts of the calculation and their representation on the chart.

So, this is what the current P&F chart of SPY looks like:

Click to enlarge

Clearly, SPY has broken above previous highs and is in a column of Xs, which in P&F language is a buy signal. And, which we have discussed in previous articles, no one knows "how high is high."

That fact is also true of the Bullish Percentage Index, with the exception that this index cannot go over 100.

This index is at historically high levels and I want to make investors aware of that fact.

The Bullish Percentage Index is not a trading device, per se. It is an indication, in my view, that as an investor I need to think defensively at this time - percentage over 80. Conversely, when it is below 30 I need to think offensively.

Furthermore, historical data also suggests a correction is in the S&P 500 and SPY is coming.

We just don't know when.

What we do know is that the first shoe has dropped.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.