Market Indicator with Perfect Record Just Signaled 'Buy'
An indicator followed by veteran technical analyst John Roque that has perfect results for almost twenty years just flashed a buy signal. The beauty of Roque's indicator, which has signaled positive returns three months out every time from its trigger point, is in its simplicity.
Roque looks at the percentage of stocks on the NYSE that are trading above their 200-day moving average to get his timing signal. In a note to clients today, Roque pointed out that the number of NYSE stocks above their 200-day average on the NYSE was a measly 19 percent, When the number of stocks that manage to stay above this moving average -- a common measure of momentum -- make a nasty two standard deviation move to the downside from the norm, it usually means an oversold market and a good time to buy.
Looking at past examples from his report, it seems when more than 80 percent of NYSE stocks fall below their 200-day average, the market is close to being oversold.
"Extreme readings in this indicator (so far) have a perfect record with respect to market rallies both two weeks and three months later," wrote WJB Capital's Roque, a respected staple of the technical analysis community, in a note. "We still think this market has issues, notably with the industrial sector, but we're putting our trust in this indicator/data near term."
The analyst cited seven other occurrences besides today since 1994 where the percentage of stocks below their respective 200-day moving averages reached such an extreme.
Two weeks and three months later, the S&P 500 has been positive every time hitting the oversold trigger, with gains averaging 5.3 percent and 15 percent respectively. The last -- and most extreme -- oversold position was on March 2, 2009, about around the start of the bull market.
Over time, strategist after strategist have tried to find the one magic indicator or mix of indicators that determine the right time to buy or sell the market. Some focus on extremes in investor sentiment, volume, crossings in moving averages… even cycles of the moon.
As is the tone in most of Roque notes, he's not proclaiming to have found the secret to the market timing question that's plagued every trader since Jesse Livermore. It's just an indicator he's kept track of over his career and so far, it has served him well for predicting short-term comebacks in the market.
Given the turnaround in stocks on Friday, Roque's streak may continue.
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