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 –12.76,
Dow -106.95 and the NASDAQ
-29.12. Breadth is very negative too, with
Declining Issues outpacing Advancing Issues by more than 2:1 on both the NYSE
(Adv-886, Dec-2339) and NASDAQ (Adv-916, Dec-2081).
Wouldn’t it be nice if we had some way of knowing today’s
selloff was coming? While the market never really shows its hand in advance, it
does offer subtle clues as to what action may be about to unfold. And when it
does offer clues, you need to be able to identify them, and then take the
correct course of action.
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 gets 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 Wednesday, February 1 the list of 9’s and 10’s was
extremely small. There were only two 10’s and four 9’s. 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 Wednesday, February 1 of all the 1’s
and 2’s:
As you can see, that’s a pretty long list! There
are 28 – 1’s and 65 – 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 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.
As ever, if you have any questions please contact
me.
Ashton Dorkins
Editor-in-Chief