How PowerRatings can help you determine market direction
At the time of writing this, today’s market action is ugly.
All the major averages are down, with the S&P500 -9.03,
Dow -87.42 and the NASDAQ
-33.12. Breadth is very negative too, with
Declining Issues outpacing Advancing Issues by more than 2:1 on both the NYSE
(Adv-872, Dec-2248) and NASDAQ (Adv-706, Dec-2118).
Wouldn’t it be nice if we had some way to help us see that
this drop was coming? While the market never clearly telegraphs what it will do
next, it does offer some very subtle hints as to how it may move in the short
term. When these hints are given, we must be able to identify them, and
then take the proper actions.
One subtle clue that we look for is contained in
TradingMarkets
PowerRatings
lists. Each day at 6:00 PM EST we publish a list of stocks with
PowerRatings
of 9’s and 10’s, and a list of 1’s and 2’s. As you become familiar with the list
you’ll notice that these lists expand and contract as the market moves up and
down. If you are unfamiliar with
PowerRatings,
or how to use them, please refer to my
previous article.
As the market moves higher and higher, the list of 9’s and
10’s becomes smaller and smaller. Meanwhile the list of 1’s and 2’s grows larger.
Conversely, when the market declines, the list of 1’s and 2’s gets smaller and
the list of 9’s and 10’s grows larger.
Why does this happen? It happens because you are statistically
more likely to be successful by buying into short-term weakness and selling into
short-term strength. All of our research indicates this, and it is one of our
10 Rules For Successful Investing.
Bearing all of this in mind, let’s take a look at yesterday’s
PowerRatings
lists.
On Monday, July 31 the list of 9’s and 10’s was
down to one selection. This is one of those
subtle clues I was talking about earlier. It’s telling you that there are very
few good buying opportunities in the market. And, if there are very few good
buying opportunities, then it’s unlikely the market is going to move higher.
Here’s a screenshot from Monday, July 31 of all the 1’s
and 2’s:
As you can see, that’s a pretty long list! There
are 11 – 1’s and 50 – 2’s. This list tells you that there are lots of good
selling opportunities in the market, or, if you don’t like to take short
positions, it’s telling you there are lots of stocks to avoid. Either way,
that’s a pretty bearish sign and no longer a subtle clue, but a pretty good
indication that in the short term the market is unlikely to move higher.
But don’t just take my word for it. Steven
Gabriel, MD. discovered this himself a few weeks ago and discussed it in January
12 blog “What
the Power Ratings are Telling me about the Markets!”
The market began its correction that day.
While this isn’t a long-term indicator,
PowerRatings
can help you determine short-term market direction. I hope this article teaches
you another useful way of using
PowerRatings.
If you have any questions or comments please feel
free to contact me.
Darren Wong
Associate Editor