All of the statistical data used in this article was processed in my workbook. And, all of the price and trading volume data fed into the workbook was downloaded from Yahoo Finance. I make extensive use of index numbers in the analysis that I do. So wherever you see multiple price lines on a chart or bars where trading volume data is shown, the performance of one line or bar is statistically comparable to any other such item relating to stocks or ETFs.
In this expanded version of the "Sobon Oscillator" I added a chart showing the performance of 22 industry groups.
"Study the past, if you would divine the future." - Confucius
General Overview of the Recent Rally
The question to be answered below is as follows: where does the stock market go from where it is now? For perspective, let's look at the chart below to see what happened in the market to get it to where it is now. Later on (in the section of this article dealing specifically with the "Sobon Oscillator") I will analyze recent trends and guesstimate what they indicate for the near-term future.
The chart shows the performance of seven well-known ETFs during the last 150 trading days (about seven months). Also shown are (1) my index of 450 stocks (the blue line) and referred to in the legend as S450; and (2) my index of 44 technology stocks (the gray line) and referred to as Tech45. The S450 index is unweighted and it correlates well with the Guggenheim S&P Equal Weight ETF (NYSEARC: RSP), the black line on the chart. The other equal-weighted index, the Nasdaq 100 (NASDAQ: QQEW), is the light green line on the chart.
All of the other indexes shown are capitalization weighted; and, they are identified by their line
colors in the legend on the chart. They include the S&P Industrial Index SPY (NYSEARCA: SPY), the Nasdaq 100 (NASDAQ: QQQ), the Russel 2000 (NYSEARCA: IWM), the S&P 400 large-caps (NYSEARCA: ^OEX), and the S&P 400 mid-caps (NYSEARCA: MDY)…. The SPY is widely considered to be most important of all market barometers, so from time to time I may refer to it as the benchmark indicator for the overall market.
All of these market indexes bounced off the bottoms of their price charts in February, which was about 55 trading days ago. However, some did so more dramatically than the others and therein lays the key to understanding the rally's performance: the small- and mid-cap stocks (which are usually considered to be more "speculative" than the larger so-called "investment-grade" companies) outperformed the large-cap stocks.
The next nine charts can be identified by the ticker symbols in their legends. (1) The wavy lines are 10-, 21- and 43-day moving averages and such are referred to in the legends as S1, S2, and S3, respectively. They are used to define the price trends of the indexes (with, of course, strength being bullish and weakness being bearish).
(2) A trend reversal can be "guesstimated" by me (or anyone else unless he prefers to read tea leaves or throw darts at the financial page) when the price lines drop below the upward sloping moving average trend lines. But, a trend reversal only gets "confirmed" when the S1 line crosses the S2 and/or S3 lines.
And (3) the dotted horizontal lines identify the high and the low for the 149 days prior to the 150th day. At this time, the current highs shown for most of the charts are several percentage points below their highs for the last 12 months.
The charts show that most of these indexes performed well since the bounce. (The number of the chart being referenced will be shown in parentheses.) In comparison to its 10-, 21-, and 43d trend lines (referred to in the chart as S1, S2, and S3), the SPY (#1) was outperformed by the RSP (#4) because the mid-cap stocks such as those in the MDY (#5) outperformed the large-cap stocks like those in the ^OEX (#2). All four of these SPY related indexes showed strength on their trend lines until Thursday and Friday (April 28 and 29) and then they showed weakness as the week's trading ended.
The QQQ (#3) and the QQEW (#6) were laggards when compared to the SPY. And they showed pronounced weakness on their upward slopping trend lines when the week ended. The IWM (#7) lagged the performance of the SPY but its uptrend is still bullish.
The S450 matched the bullish performance of the RSP. However, following the lead of technology stocks like Apple, my Tech44 index showed "pronounced weakness" as some of the companies included reported poor operating results. This technology index had outperformed all of the others referred to above for almost all of the last several years.
In order for the prices lines for these nine market barometers to reverse the uptrends underway, (1) they would have to break below the uptrends shown by the moving averages in a meaningful way. And as noted above (2) trend reversals will be "confirmed" whenever their S1 lines crossed their S2 and/or S3 lines. (I will have more to write about "anticipated" and "confirmed" reversals shortly.)
To address the possibility of reversals happening, I rely upon (1) the technical situations extant as shown in these charts (and some 20 industry specific charts like them which are also appendages to the "Sobon Oscillator") and then (2) defer to feedback from the breadth indicators for 450 stocks included in the oscillator to (NYSE:A) "anticipate" what the general market trend (or reversal) will likely be for the near-term future or (NYSE:B) wait a few days (because there would be a short time lag) until I get a computer "confirmed" indication of such .
The performance of the 20 industry groups are shown in the next chart.
Among the groups that have unblemished uptrends intact at this time are the gold stocks (the bold yellow line) and also industrial metals (the white line). Both of these groups had been among the very weakest groups in the market until the February bounce. After a long period of pronounced under-performance, they showed spectacular percentage gains from very depressed price levels. Another group that showed a much-need rebound was the MLPs (the dark red line). The oil refiners (the dark grey line) prospered for quite a while as the oil producers and oil service companies floundered. But ever since the price of WTI crude oil bottomed, the table was turned and equities of the refiners have been among the poorest performers in the market.
Documentation by the "Sobon Oscillator"
I will now focus on (1) the salient features of the stock market's performance as they are documented in the next chart. And (2) guesstimate what the cutting edge of those trends signal for the near-term future. In the previous three articles that I wrote in this series, I concluded that the market "should" go higher and that is what it did until Thursday (4-28-16).
To facilitate understanding of what the oscillator does, let's quickly review what the 35 variables shown in the five panels on the chart are all about:
(1) The first (top) panel shows the daily price change from the previous day for the SPY, RSP, and the S&P 100 index (^OEX). For perspective, it also shows such data for the Nasdaq 100 index, the Russell 2000, my index of 450 stocks (which I call the S450), and my index of 44 technology stocks (which I call the Tech44).
(2) The second panel shows the volume of trading in the SPY, QQQ, and IWM ETFs as well as the S450 and Tech45 indexes. The higher are the volumes, the greater are the convictions about what investors (speculators?) think they are doing in the market.
(3) The third panel shows breadth indicators for stocks making"highs or lows" in the S450 index. The time spans for the ten series of highs or lows range from about one week to seven months, as the shorter ones (referred to as S1, S2 and S3) are lead indicators for the longer ones (the L4, L5, L6, L7, and L8). So they help lead the market to where it will evolve over the longer term as it makes "higher highs and higher lows" (with that being bullish) or, perhaps, "lower highs and lower lows (and that being bearish).
(4) The fourth panel shows breadth indicators for the"moving averages" for the 450 stocks. The time spans for the eight moving averages range from about one week to seven months. The shorter-term breadth indicators (referred to as S1, S2 and S3) are lead indicators for the longer ones (the L4, L5, L6, L7and L8) since they, too, must help to lead the market to wherever it is trending (be it up, down or sideways
And (5) the fifth (and bottom panel) has to do with the stock market's computer-generated "confirmed trend" as such relates to the trend's continuation or reversal. This subset of breadth indicators is a recent addition to the oscillator. At critical turning points, it will tend to be the most important subset of indicators in the oscillator. I will have much more to write about these indicators very shortly.
What happened to the breadth indicators during the 22 days shown on the chart can be summarized as follows:(1) the price-change data for the various indexes (top panel on the chart) averaged below their usual gains while(2) the volume of trading (second panel) was at average levels "until last Thursday" when the market action was decidedly bearish.
(3) The moving averages are shown the fourth panel. Having recovered sharply from very depressed levels in February, they improved steadily during the last 22 days and are all solidly in positive territory at this time; with the leaders (S1, S2, and S3) indicating that further improvement for the followers (L4 through L8) was probable up until Thursday.
(4) The high and low breadth indicators (the third panel) didn't have much bullish momentum during the first 20 trading days. And they also showed weakness on several days. But the RE accelerator was usually strong because of repetitive gains made by the small- and mid-cap stocks on consecutive days (showing that there were bids under the market for such stocks). The large-cap stocks were not the primary drivers for the stock market gains.
However, on Thursday and Friday the S1 and S2 lead indicators plunged deep into negative territory while the S3 dropped to near the neutral (zero) line. And the NU and RE accelerators showed that declines in the new lows in prices of many stocks were occurring on successive days.
And(5) those considerations and knowledge gleaned from all of the other charts shown above led me to the "preliminary conclusion" that what we have seen in recent months was largely a short-covering rally that had come to its end.
However, I rely upon all of the feedback that I get from the oscillator when drawing conclusions about the near-term outlook for the stock market. And I get to choose which subsets of breadth indicators I emphasize when finalizing a conclusion: (1) if I see that trend-changing developments are occurring in the top four panels on the chart, I could use that feedback to make my final decision about the market's indicated trend. Or (2) I could refer to the computer generated "confirmed trend" breadth indicators as shown in the bottom panel of the chart.
At this time I choose to emphasize the "confirmed trends" indicators shown in the bottom panel of the preceding chart. But because the 22-day period is too short for me to provide perspective for its near-term performance, I will refer to the next chart which has a history going back 150 trading days (about seven months) for the market averages and the "confirmed-trends breadth indicators" which document the performance of the trends as they evolved. The high-low and also the moving average indicators show a history of 120 days. It is important that such longer-term history be understood. Otherwise, it would be easy to be hasty and be head faked by very short-term movements in the market... It is a guessing game and one needs to make decisions based upon known historical performance.
The short, medium and long cross breadth indicators (the bottom panel) are identified by the green, red and black lines with white dots, respectively, in the chart. The pink bars show the performance of the key S3 breadth indicator for the moving averages (this is the blue line on the third panel). I will have more to write about the S3 indicator shortly.
The short and medium crossovers are lead indicators for the long crossover as each of them oscillates the way that it does. As can be seen (1) they weakened and then led the market down from its near-maximum high of 86% (with 100% being the maximum) as shown in the left half of the panel. At times when they showed strength, such was not sustainable long enough to arrest the downtrend in the long crossover.
(2) When it reached its bottom during the August 2015 decline in stock prices the long crossover showed a reading of minus 93% (which was near to its possible minimum of minus 100%). When that happened, the short and medium crossovers were already showing substantial strength.
(3) The brief rally fizzled and the stock market indexes went down to test their recent lows. Such tests were successful. But following the lead provided by the short and medium crossovers, their long counterpart held its ground and soon trended upward to reach a high of plus 94% about 30 trading days ago.
(4) Since then all three of these breadth indicators trended lower but the long crossover is still solidly in positive territory, with a reading of plus 41%. In order for it to be positioned for significant market weakness, it would have to drop below the zero line.
And in conclusion (5) the long crossover was double crossed negatively by the short cross for four days while the medium cross fell below it on Friday. But all three of them are still in positive territory above the zero (neutral) line. The S3 MA (the pink bars) is not very sensitive to stock price swings like those we saw in the market on Thursday and Friday. As the week ended, the S3 had weakened but it, too, was still in positive (bullish) territory. As a result, I think we will see some further weakness in stock prices during the days ahead. But I do not expect to see a sustainable downward reversal in the general market during the weeks ahead.
I am bearish on the long-term trend of the stock market because of (1) the inadequacies of the monetary policies being used by the central bankers which favor the business establishment at the expense of just about everybody else and (2) the political problems extant here in the United States and also abroad. But I must respect the actions of Mr. Market. There is a time to buy and hold stocks, there is a time to sell them, and sometimes one has to be cautious and trade them when suitable trading opportunities present themselves. At the present time I do not own any stocks but I did initiate a short-term trading position in an inverse ETF on Friday.
When writing an article like this, I never tell readers what they should do in the market. I write the story according to the way I understand it. I may tell readers what I am doing when I buy or sell stocks. It is up to them to make their own personal investment decisions.
This figures to be the last "follow-up" to a macro article that I write. I proved to myself that I can do what I set out to do. I recently completed writing the programming necessary for individual stock selection and I expect to spend most of my time doing that. Now that I really know how a specific stock fits in with the broader stock market trends, I can see how I can prospect for stocks more effectively among various sectors of the market. It has been fun writing these macro articles but much of the challenge and novelty has worn off. I want to thank the editors at Seeking Alpha for their assistance.
Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.