Our “Off The Wall” Blog
is now Monument #Unfiltered

Subscribe below to receive our unique, straight-forward, unfiltered wealth advice delivered straight to your inbox.

4 Technical Indicators to Watch for a Market Pullback

4 Technical Indicators to Watch for a Market Pullback

With markets near highs, watch these metrics for signs of a shift.

With the Standard & Poor’s 500 index up double digits since the beginning of the year and up more than 100 percent since March of 2009, a question in nearly every investor’s mind is, “When will the good times end?” While there have been some hiccups along the way, the general trend for the stock market has been up, up, up. This has been great for investors’ portfolios, but there will come a time when this trend will reverse as the business cycle peaks and subsequently contracts. Nobody really knows exactly when this will occur, but here are four indicators that I think investors should consider monitoring when trying to determine if the market is preparing to change course. Good resources for up-to-date readings of the first two indicators can be found on Dorsey Wright & Associates’ website, and Stockcharts.com includes the status of the third and fourth.

1. Positive Trend Percentage. 

This indicator measures the percentage of stocks in an index that are trading in a positive trend. When it falls below 50 percent, the market tends to decline, and when it’s above 50 percent, it’s considered a healthy sign. To use recent history as an example, the positive trend percentage for the S&P 500 fell below 50 percent in January of 2008 and didn’t rise above the 50 percent mark until May of 2009, which was three months after the market high and two months after the low. During that time, the S&P 500 lost 30 percent. As of mid-September, the positive trend percentage for the S&P 500 was around 90 percent.

2. Offensive Assets versus Defensive Assets. 

From a relative strength perspective, when defensive asset classes start outperforming offensive asset classes the stock market may be ripe for a pullback. Defensive asset classes include money market funds, bonds and foreign currencies, and offensive asset classes are defined as U.S. stocks, non-U.S. stocks and commodities. Dividing the price of the S&P 500, which tracks large-cap stocks, by the price of the Russell 2000 index, which tracks small-cap stocks, would give you the relative strength of large-caps stocks versus small cap stocks. As this number gets larger, large caps would be outperforming small caps and, inversely, small caps would be outperforming large caps if the number gets smaller. If you calculate the relative strength numbers for those six assets classes against each other, current readings of this indicator are mixed. U.S. stocks and non-U.S. stocks are outperforming all other asset classes but commodities are underperforming.

3. Trend Lines. 

One of the fundamental pillars of technical analysis is that prices exhibit trends, and those trend lines are either viewed as a floor (or support) when prices are rising or a ceiling (or resistance) when prices fall. I won’t go into detail as to how trend lines are constructed, but if an index breaks through a ceiling or a floor, it typically means that supply has overtaken demand or vice versa and a change in trend could be imminent. The S&P 500 started a positive trend in October of 2011, briefly broke through its floor during the fiscal cliff concerns towards the end of 2012 and started a new positive trend in November of 2012. Based on where the S&P 500 is trading, the positive trend line won’t be violated until it falls approximately 10 percent to the 1,550 range. At that point, this indicator would suggest that the market is weakening.

4. Bullish Percentage. 

Another sign to watch for, to indicate a potentially deteriorating market, is if the Bullish Percentage chart is showing lower and lower tops. The Bullish Percentage indicator measures the percentage of stocks in an index that are on a buy signal using traditional point and figure analysis. When readings are above 70 percent, the index is considered overbought and when it’s below 30 percent, the index is considered oversold. However, unlike the positive trend percentage, the direction of this indicator is more important than the level. If the Bullish Percentage chart forms lower and lower highs, this is a sign that fewer buyers are participating in the market to keep it supported. The latest peak for this indicator for the S&P 500 occurred in May of 2013 at nearly 90 percent. Two months later it formed a top around 80 percent. If we see the next top only reach around 70 percent, this may be a bearish sign of things to come.

Technical analysis doesn’t give anyone a crystal ball into the future. It does give investors additional tools with which to measure the battle between buyers and sellers. I hope these four indicators help you as you monitor the markets.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance referenced is historical and is not guarantee of future results. All indices are unmanaged and may not be invested into directly.

Read this article on U.S. News & World Report >

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.

A copy of Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.

Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Get Monument #Unfiltered: Our Free Private Wealth Newsletter

Our no B.S. wealth advice delivered 2x per month, max. Tuned specifically for busy, high-net-worth business professionals and investors who want straightforward advice without the fluff.