First, let me give you a quick introduction** to The NYSE Composite Index [PDF] $NYA [Chart]. This index is designed to measure the performance of the world's most liquid and prominent companies of all common stocks listed on the New York Stock Exchange (NYX) including ADRs, REITs, tracking stocks and listings of foreign companies. It consists of more than 1,900 companies including more than 1,500 U.S. companies and over 330 non-U.S. companies. The U.S. companies listed on the NYSE represent over 81% of the market capitalization of the entire U.S. market and 87% of revenues for all U.S. companies. The index is the basis of the “iShares NYSE Composite Index” ETF (NYC).
It was originally given a value of 50 points, based on the market closing on December 31, 1965, and is weighted by the number of shares listed for each issue. It was re-introduced in January 2003 with a value of 5,000 points under a new rule-based methodology where all closed-end funds, ETFs, limited partnerships and derivatives are excluded from the index. The Index includes free-float market cap weighting and is calculated on both a price return and total return basis. It is a measure of the changes in aggregate market value of all NYSE-listed common stocks, adjusted to eliminate the effects of capitalization changes, new listings and delistings. It is continuously computed, and printed on ticker tape every half hour, with point changes in the index converted to dollar amounts.
Knowing how important this index to the US and global markets, many follow it very carefully. A reliable measure of the market's strength or weakness as well market participation can be found in the % of NYSE stocks trading above their simple moving averages. The 200-day averages [Chart] are used to measure and capture the strength of a market's long-term trend while a 50-day [Chart] measures short- and intermediate- market trends. They are market breadth indicators. Because the number of stocks in the composite can vary from day to day, the actual value of these indicators is less important than the shape of their charts.
The 200-day moving average is a long-term smoothing of price movement that takes a lot of the short-term fluctuations out of it. A stock's price in relation to it is a good indication of its long-term trend. For example, an index that is trading above its 200DMA is said to be in a long-term uptrend and is being accumulated; one below it is in a downtrend and is being distributed.
There are no automatic assumptions that can be made about this indicator. For example, just because 80% of stocks are above their 200-day moving average in an index, there is no guarantee that a downside reversal can't happen. In fact, once the index has moved to an extreme end of its range, it's a good idea to be alert for a change in direction. High readings reveal that traders are far “too optimistic”. When this occurs, fresh new buyers are often few and far between. Meanwhile, very low readings signify the reverse; the bears are in the ascendancy and a bottom is near.
Common techniques for using these indicators include:
1. Locating overbought/oversold levels:
There are two important parts to this indicator: absolute level and direction. To interpret this indicator, four parameters are key: 10 and 40 on the low side and 60 and 90 on the high side.
Drops below 40% signal that market breadth is weak, the bull market is in danger and a warning of an incoming bear market is at hand. Historically, the 40% level has rarely provided a platform from which the market has managed to mount a bullish reversal. That said, throughout the last 30 years, readings around 20% and below has consistently marked “key reversal” areas. The 20% levels marked October 2001, July 2002 and October 2002 minor bottoms. When the percentage of stocks above their 200-day moving average hits 20%, the subsequent rally is often capped at the 40% level. This level provided resistance in August 2002 and January 2003 and associated with “bear market rally” tops
When the real bull market began in March 2003, the number of stocks above the 200-day moving average decisively broke out above the 40% and then 60% level. A reading above 60% is normally needed to signal a new bull market because the market can't be expected to rise much when the overwhelming majority of its stocks are still in major downtrends. From there, it trended higher ultimately reaching a peak 91.60% in April 2004 where a “bull market correction” started for the following six months.
During bull market corrections, the indicator will often pullback into the 40-50% regions and hold, which, represent excellent buying opportunities. For instance, the April 2006 bull market correction bounced from the 40% to 60% levels that supported the bull instead of resisting it in the bear market. This level held the market in a continuous uptrend all they way until we topped in October 2007.
The sharp drop and failed attempt to recover the 60% level in October 2007 was one of the bearish signs that warned of the incoming bear market. As I said above, bear market bounces can rise into the 40-60% region. The April/July 2008 bounce rose to 53% before turning back down again. The August 2008 bounce failed at 40%.
To pick oversold or overbought market conditions you must pay attention that as 200 days covers a little more than nine months of trading, large swings in the data have a tendency to significantly lag the market. So, interpreting this indicator’s chart should focus on swings of at least 30% that move the aggregate percentages above the 60 levels or below the 40 levels, that is above 90% for overbought and below 10% for oversold condition.
Since March 2009 extreme all-time oversold condition of less than 4% above their 200DMA, the indicator is rising aggressively. There have been pullbacks along the way, but the overall trend is up. This indicator moved above the critical 50% threshold at the end of May. There was some market weakness in late June and early July, but the moving average percents held and established support above 55%.
Since Mid July until today, this indicator moved at a breakneck speed not only to capture the magic 60% bull zone decisively but also to reach extreme overbought conditions on Friday standing at 89.88% less than 2% below all-time high. At these levels, there’s no guarantee for an immediate plunge or even a pullback but chances are high for the first “substantial correction” to the March rally to occur very soon. I’ve been bullish since Mid-July and still have a case for more gains for the bulls but what they must understand here is that this level is not sustainable without a serious pullback or prolonged consolidation.
When a reading peaks above 85% as in our case here, 70% becomes an important support level. A break of 70% after the percentage figure has hit the high-80s or low-90s is a warning that, at the very least, an important correction is unfolding. In judging which way the overall market will move next from there, we have a variety of Technical indicators at our disposal to measure the market underlying strength and momentum.
There’s is little doubt that we are in the bull’s playground and based on previous history, any pullbacks to this indicator 50% levels represent valuable buying opportunity especially if the bulls hold it together. This looks like an important support level for this indicator. The bulls are in control as long as this uptrend holds above 55%. A move below this support would argue for a prolonged correction or consolidation period in the market. It will not put the last nail in the bulls’ coffin, as some will like you to believe but will weaken their case for speedy recovery, more gains, and expose them to a double dip correction.
The most important aspect of this indicator is the trend. When the market is trending upward this index should also be trending up. A “trend divergence” indicates that fewer and fewer stocks are in sync with the price trend and that a price reversal is likely.. Standard peak and trough trend line analysis can be useful.
3. Standard peak and trough trend line analysis can be useful.
We can also examine the % above 200 using trendline analysis (green dotted line on the chart above). The most effective way to do this is to draw trendlines on both the underlying NYSE (New York Stock Exchange) chart and the % above 200 chart. A break in the % above 200 trendline will provide you with confirmation of the message given off by the underlying price chart.
As of today and from the chart above we can see that:1. Market is in complete bullish territory.
2. Market and indicator are both in sync with no divergence.
3. Market at extreme overbought condition and overdue for a pullback.
4. A pullback, if history to repeat itself should be bought at support levels.
Until next article and as always, I hope this find you and yours well.
PS. Please rate this article at the top of the page. Thanks!
GoodVibeFootnotes:
* Introduction about Moving Averages - Click here
** Additional information about NYSE Composite Index:
In addition to serving as a broad-based benchmark, NYSE Composite Index establishes a universe from which other NYSE-branded indexes are derived. Three NYSE Sector Indexes introduced in January 2004 to provide investors and issuers with a more defined snapshot of key segments of the NYSE marketplace. The three new NYSE subsets sector Indexes are the NYSE Energy Index [Chart], NYSE Financial Index ($NYK) [Chart] and NYSE Health Care Index ($NYP) [Chart]. Components in these NYSE Indexes include NYSE-listed common stocks that are classified into their respective Sectors according to the Industry Classification Benchmark where they represent a significant portion of the total market capitalization of these Sectors in the US and globally. They are broad-based benchmarks that are diversified across large-cap, mid-cap and small-cap stocks, and provide exposure to companies around the world.
The NYSE U.S. 100 Index ($NY) [Chart] tracks top 100 US companies trading on the NYSE. It covers U.S. stocks across 10 industry sectors (as defined by Dow Jones). The companies represented have a market capitalization, which covers 47% of the entire market capitalization of U.S. companies and over 62% of U.S. companies listed on the NYSE. Additionally, these companies are major market participants, most of which are well-known household names. This fact, along with the NYSE's significant U.S. market penetration, ensures that this index closely track the entire U.S. market.
The NYSE World Leaders Index ($NYL) [Chart] serves as a benchmark to track, as a single asset class, the performance of 200 world leaders across 10 industry sectors (as defined by Dow Jones) and all regions of the world (currently represents 19 countries, including the US). The index is constructed by combining the NYSE U.S. 100 and NYSE International 100 Indexes. It reflects substantial listing requirements. The components of the NYSE World Leaders Index cover 36.7% of world markets’ capitalization. All of the components of the NYSE World Leaders Index are priced on the NYSE during U.S. trading hours. With its limited number of components and intraday pricing, the NYSE World Leaders Index is much more suitable for tracking the non-U.S. market.
The NYSE Arca Tech 100 Index ($PSE) [Chart] is a price-weighted index comprised of common stocks and ADRs of technology-related companies listed on US exchanges. Modeled as a multi-industry technology index with objective to provide a benchmark for measuring the performance of companies using technology innovation across a broad spectrum of industries. It takes a broad view of technology while at the same time ensuring that only companies where technological innovation is at the core of their business are in the index. To that end, the index selects leading companies from several industries, including computer hardware, software, semiconductors, telecommunications, electronics, aerospace & defense, health care equipment, and biotechnology.
The NYSE TMT Index ($NYY) [Chart] tracks 100 technology, media and telecommunications (TMT) stocks listed on the NYSE. The TMT sector represents 19% (by market cap) of the investable universe globally. The companies represented cover 45.7% of the entire market capitalization of TMT companies globally, and are approximately the same size as the nearly 4,000 companies in the NASDAQ Composite Index. The index provides a tool to track the global TMT market with all components priced on the NYSE during U.S. trading hours.
A variety of NYSE Arca indices are published on the NYSE Amex Platform. These indices employ various methodologies while covering sectors as diverse as Aerospace, Healthcare, Energy and more. For a complete list, click here
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