In our prior post (Bear Market Watch 2015-09-20), we presented a monthly indicator that has done a pretty good job of identifying top of market exit points and post-bottom re-entry points for the S&P 500.
It combines 4 technical indicators into a single indicator that rates an index from zero (exit) to 100 (enter) in 25 unit stages. It rates the S&P 500 at 25 as of the end of August — more about how it works in that prior post.
The 25 unit stage could be used to monitor the development of the situation toward an exit or entry; or possibly to guide a staged entry or exit.
Something that is at least interesting, and possibly helpful to some investors, is the time series aspect of plotting the rating system. We present the time series in this blog from 2008.
The 4 indicators that are inside this indicator take these factors into consideration:
- price position relative to moving average
- direction of leading edge or moving average
- time limits for price to make significant up or down movement
- trading volume weighted tendency for closing price to be in the upper or lower part of daily price range
Important Note: This indicator is technical only. It does not include any fundamental factors. It is backward looking in that it records what has happened to the security, and is only updated monthly. It is forward looking to the extent that the price and volume action is the result of the forward looking opinions of investors in the aggregate.
Let’s see how sector and industry ETFs are rated using the same method. As you view the rating timeline, take note of how steady the ratings tend to be, how long they have been up, when they began a decline, and whether the decline is steep or gradual.
S&P 500 (SPDR S&P 500 (NYSE:SPY)) rated 25
S&P 500 Basic Materials (Materials Select Sector SPDR (NYSE:XLB)) rated 0
S&P 500 Energy (Energy Select Sector SPDR (NYSE:XLE)) rated 0
S&P 500 Financials (Financial Select Sector SPDR (NYSE:XLF)) rated 25
S&P 500 Industrials (Industrial Select Sector SPDR (NYSE:XLI)) rated 0
S&P 500 Tech & Telecom (Technology Select Sector SPDR (NYSE:XLK)) rated 25
S&P 500 Consumer Staples (Consumer Staples Select Sector SPDR (NYSE:XLP)) rated 25
S&P 500 Utilities (Utilities Select Sector SPDR (NYSE:XLU)) rated 25
S&P 500 Healthcare (Health Care Select Sector SPDR (NYSE:XLV)) rated 50
S&P 500 Consumer Cyclical (Consumer Discretionary Select Sector SPDR (NYSE:XLY)) rated 50
MSCI USA Technology (Vanguard Information Technology (NYSE:VGT)) rated 25
NASDAQ Biotech (iShares Nasdaq Biotechnology (NASDAQ:IBB)) rated 50
Dow Jones Aerospace & Defense (iShares US Aerospace & Defense (NYSE:ITA)) rated 25
S&P Homebuilders (SPDR S&P Homebuilders (NYSE:XHB)) rated 75
S&P Oil & Gas Exploration & Production (SPDR S&P Oil & Gas Exploration & Production (NYSE:XOP)) rated 0
MSCI Equity REITs (Vanguard REIT (NYSE:VNQ)) rated 0
KBW Regional Banks (SPDR S&P Regional Banking (NYSE:KRE)) rated 50
S&P 100 Mega-Cap (iShares S&P 100 (NYSE:OEF)) rated 0
S&P 400 Mid-Cap (SPDR S&P MidCap 400 (NYSE:MDY)) rated 0
S&P 600 Small-Cap iShares Core S&P Small-Cap (NYSE:IJR)) rated 25
Russell 2000 Small-Cap (iShares Russell 2000 (NYSE:IWM)) rated 25
We have large cash allocations at this time (generally 50% or more) in most accounts (depending on client goals, preferences, retirement status and other circumstances), and are in a strong defensive position. We began increasing cash several months ago.
Among our long equity positions we have some SPY, KRE and VGT, but all positions are less than full allocations.