Jun 23, 2011

June Market Breadth

Recent market moves have left stocks in oversold area. However markets are still under pressure – European debt, slow growth prospective. Desperate and oversold moments have always been excellent profit opportunity, if you know the right entry point, of course.
One reliable way to estimate market top-downs is using market breadth indicator percentage of stocks above 50 day moving average. This indicator is showing short term momentum of the stocks.
As seen on the chart only 24.7% (green line) of the stocks in broad S&P500 (black line) trade above their 50 day moving average. This measure is close to previous big correction seen in June – July 2010 and middle of March drop. Reading between standard deviation -1 and -2 is in oversold area and indicate buy signal.
sentiment-2011-06-23
% of S&P 500 Stocks Above 50-Day Moving Average
Chart source: stockcharts.com, Chart analysis: investink.net
Another good measure for the market sentiment is Put/Call ratio. Current levels for this indicator are extreme. The ratio is between +2 standard deviation and is close to June 2010 peak showing bullish signal.
sentiment-2011-06-23-2
Put/Call Ratio
Chart source: stockcharts.com, Chart analysis: investink.net
Put /call is also useful in detecting market tops. The red ovals indicate such points before correction. January, April 2010 and April 2011 tops pushed Put/Call ratio to below 0.85 around the –1 standard deviation.
This technique is useful in timing over or under sold markets, but if there are major fundamental news or events as happened in the beginning of 2011 where extreme low put/call ratio did not stop markets from rising. Rapid recovery expectations were so strong that this indicator simply did not work at that time. Although not so precise you can use both indicators to have perception for the market mood and what direction most likely to expect.

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