Gerald Appel - Opportunity Investing. Time Cycles, Market Breadth, And Bottom-Finding Strategies

8/18/2019 Gerald Appel - Opportunity Investing. Time Cycles, Market Breadth, And Bottom-Finding Strategies

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Opportunity Investing: How to Profit WhenStocks Advance, Stocks Decline, Inflation unsa!pant, Prices "all, Oil Prices Hit the oof, #and $very %i!e in &etween'y (erald Appel

Pu'lisher: "% Press

Release Date: September 2006

%opic:

• Finance & Economics

Chapter 8. Time Cycles, MarketBreadth, and Bottom-FindingStrategies

We discussed in Chapter 7, “A Three-Pronged Approach to Timing the Markets,”

certain ways to determine whether stocks in general appear undamentally

under!alued, airly !alued, or o!er!alued and how your stock portolios might "e

modiied to remain in tune with stock market proit potentials indicated "y

whether stocks are cheap or e#pensi!e$

%n this chapter, we e#plore certain market indicators that relect the “true

strength” o “market "readth,” which is oten more signiicant as a measure o the

strength o the stock market than many o the more popularly ollowed stockmarket indices such as the &tandard ' Poor(s )** %nde# and the +ow %ndustrial

A!erage$

eore we mo!e along into these market-"readth indicators, we e#amine the

tendency o stocks to rise and all in certain rhythms that appear to "e related to

time, how you might identiy the most signiicant rhythms, and how you can

proita"ly take ad!antage o the patterns in!ol!ed$

Market Cycles

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or whate!er the reason.possi"le e#planations range rom the inluence o

political e!ents such as the /-year cycle o presidential elections in the 0nited

&tates to possi"le inluences resulting rom interplanetary mo!ements.the stock

market does appear to rise and to all with certain cyclical regularities, a

phenomenon that occurs throughout nature in many !arieties and orms$ Cyclicalphenomena include, o course, seasons, tides, phases o the moon, numerous

changes in the human "ody, and more$

Again, or whate!er the reason, stock prices appear to trace out patterns that

demonstrate "oth short-term and longer-term regularity in their periodicity.not

a regularity that can "e counted on to the day, "ut deinitely 1at least in my

opinion2 a regularity that may "e used to reinorce 3udgments made on the "asis

o !arious stock market indicators, such as the ones descri"ed in this chapter$

We will "ypass shorter-term market cycles.the tendency o the stock market to

ind low points at /- to )-day inter!als, 4- to 7-week inter!als, and 5*- to 55-week

inter!als, among other operati!e time cycles, and concentrate on the most

signiicant o market cycles, the /-year cycle, which has had a ine history oidentiying ma3or turning points in the price mo!ements o the stock market$

Time cycles are measured from low point to low point in the stock

market(s peram"ulations, the time period that elapses "etween a key cyclical low

point through the su"se6uent rise and then to the ne#t su"se6uent signiicant

cyclical low point$ % general trends are "ullish, stocks may spend more time

rising during cyclical periods than declining$ +uring neutral market periods, the

periods o market ad!ance tend to "e a"out e6ual to the periods o market

decline$ +uring "earish periods, stocks spend more time in decline than

ad!ancing$ %n all cases, the lengths of cycles are measured from low point

to low point$

igure -8 shows the pattern o price mo!ement associated with a typical stock

market cycle$ igures -5 and -9 show the concepts in!ol!ed with real-time

histories o stock market price mo!ements$

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This chart shows the o!r phases o a typical stock market cycle, the nominal length o

which is the period "etween the low points. #!ring "!llish market periods, stocks may

spend more time ad$ancing than declining, act!ally a airly normal relationship. #!ring

ne!tral market periods, cycles tend to appear "alanced, the rising and alling periods

more or less e%!al. #!ring "earish market periods, the alling area o the cycle may "e

lengthier than the rising period.

Figure 8-1. The typical stock market cycle


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n this chart, cycle low areas are de'ned "y the $ertical lines. The (-year cycle does not

"ottom precisely at (8-month inter$als. Sometimes cycles r!n a little short, sometimes a

"it longer than sched!led. )owe$er, de$iations rom the ideali*ed (-year period "etween

ma+or low points ha$e not "een greater than a ew months, at most.

Figure 8-2. The 4-year cycle of the NASDAQ omposite a!" the Sta!"ar" #

$oor%s &'' (!"e)* 1+,1++'

n this chart, the (-year cycle marks "ear market lows. s yo! can see, act!al lows

coincided with the cycle %!ite well. The net (-year cyclical low was d!e to de$elop d!ring

the second hal o //0.

Figure 8-. The 4-year cycle of the NASDAQ omposite a!" the Sta!"ar" #

$oor%s &'' (!"e)* 1++'2''/

There are numerous sources o inormation regarding time cycles and their

application to stock market in!esting$ :ou may want to consult one o my other

"ooks, such as Technical Analysis—Power Tools for the Active

Investor 1Prentice-;all, 5**)2, or urther discussion$


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su"3ect is somewhat contro!ersial.many analysts tend to discredit the general

concept o time cycles."ut is ascinating, and % do ad!ise shorter-term traders

and longer-term in!estors alike to pursue the su"3ect$

The 1randdaddy o ll 2ey StockMarket Cycles3 The Fo!r-4ear56residential7 Stock Market Cycle

What, or stock market purposes, is the common attri"ute o the years 8>45,

8>44, 8>7*, 8>7/, 8>7, 8>5, 8>4, 8>>*, 8>>/, 8>>, and 5**5?

Answer@ These were all years, spaced at regular /-year inter!als, in which the

stock market either completed a serious ma3or decline prior to em"arking on a

new "ull market or, at the least, completed clearly recognia"le lat to declining

intermediate- to long-term ormations prior to resuming long-term uptrends$

%n this case, pictures are worth a thousand words$ igures -5 and -9 illustrate

the signiicant market turning points that took place "etween 8>7/ and 5**) at

regular and consistent /-year inter!als$ Bot shown are the "ear market low points

that took place in 8>45, 8>44, and 8>7*.!ery much in conormity with the /-year

low-to-low market cycle illustrated in these charts$ The ne#t cyclical low is

scheduled or 5**4$ uture readers will "e a"le to 3udge the accuracy o this

pro3ection$


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Check o!t con'rming indicators9stock $al!ations, stock-"ond comparisons,

and "readth indicators that disc!ss in this "ook. t is likely that these will all "e

in a a$ora"le position shortly "eore, or at the time, that the (-year stock

market cycle is sched!led to reach a signi'cant low point.

These are the "est times to "uy stocks

As you can see on these charts o stock market history, i you had made stock

purchases in the areas o the /-year lows, you would ha!e "een a"le to en3oy at

least 8 year o sharply rising stock prices, with a strong likelihood o a second ine

year to ollow$ rom that point on, as the cycle rolls o!er, the third and ourth

years o the /-year cycle tend to show less-predicta"le perormance, re6uiringincreased care on the part o in!estors$ % you had entered the markets properly,

howe!er, you would ha!e already secured more than your air share o stock

market return$

Con'rming the Fo!r-4ear Cycle with 4o!r6rice:Earnings ;atio ndicator

This might "e a good time to ret!rn to Fig!re hat can we see? >e can see that at almost all o the (-year inter$al

cyclical "ottom areas cited a"o$e, o!r $ario!s price:earnings, and

@"ond yieldAstock yield indicators stood in a$ora"le or $ery a$ora"le

position and in no case no worse than in solidly ne!tral positions

6rice:earnings ratios were a$erage at the lows o =0D "etter than

a$erage in =00 and =


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price:earnings ratio indicator, was in $ery a$ora"le position at the lows

o =/, =(, =8, and // 5as well as in =87.

)a$e cyclical price-mo$ement, !ndamental indicator relationships

"een perectly aligned? o. >o!ld cycles ha$e "een o help in more

closely identiying the "est times to enter the stock market? think so.

#o yo! agree?

The ink Between the Fo!r-4earMarket Cycle and the 6residential

Election Cycle Whether "y accident or "y some orm o political design 1as many suspect2, there

ha!e "een close correlations "etween the /-year stock market cycle and the

presidential election cycle$

asically, the stock market tends to initiate "ull markets as the second hal o the

presidential term 1or e#ample, 8>44, 8>7*, 8>7/, 8>7, 8>52 gets under way,

rises strongly during its irst year, continues to ad!ance 1al"eit at a slower pace2

during its second year 1election year2, shows much more moderate gains the third

year o the /-year cycle 1irst year o presidential terms2, and tends to decline

during the inal year o the /-year cycle, the second year o presidential terms$

Political cynics 1realists?2 tend to "elie!e that stocks are relecting !arious and

sundry administrati!e tactics to make the economy look good in the months prior

to reelection time, and that "ad news that might ad!ersely aect stock prices is

sa!ed or the second years o presidencies, at which times election stakes are

relati!ely low$

This may, indeed, "e the case, "ut may also not "e the case$ % ha!e ound that

many oreign markets 1or e#ample, Bew Dealand2 appear to luctuate closely incon3unction with the /-year market cycle o the 0$&$ stock market$ Correlations

ha!e "een close, indeed$ Could it "e that markets e!en as ar away as Bew


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Dealand operate to the "eat o the Wall &treet drummer? Er could it "e that there

are cyclical orces at play here across the glo"e that we simply do not understand?

% lea!e that to your con3ecture, which is pro"a"ly in this regard as good as my

own$

>inning with n$estments Based on the6residential Election Cycle

!mero!s articles and st!dies ha$e "een p!"lished detailing possi"le

strategies or taking ad$antage o the presidential election cycle. The

Stock Trader’s Almanac, p!"lished ann!ally, edited "y 4ale and GeHrey

)irsch 5>iley & Co.7, has "een a pioneer or decades in st!dies o

political and other in$estment cycles and tracks the presidential

election cycle on a close "asis with ann!al !pdates.

n interesting s!ggestion appears on the >e" at

http3::pepperdine.ed!:/(I:stocks.html3 @6residential Elections and

Stock Market Cycles, "y Marshall #. ickles, Ed. #, on the site o the

1ra*adio B!siness ;eport, Jol.


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The theoretical res!lts o the comparison9di$idends and interest

ecl!ded9are shown in the ollowing ta"le.

Strategy = was pro'ta"le d!ring e$ery period, t!rning a N=,/// original

in$estment into N


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Presidential Election Investing, 1952–2004Starting Capital, $1,000[*

!ear o" Election Strateg# 1 Strateg# 2

Strateg# 1C%lative&eslts

Strateg# 2C%lative&eslts

)*+ esults are hypothetical

;es!lts are hypothetical and cannot "e ass!med to "e representati$e

o !t!re res!lts o this strategy.

tr!st that the a"o$e st!dy ill!strates the power o the (-year market

cycle, co!pled with the presidential cycle, which may inP!ence or "e

the ca!se o the (-year cycle or which may "e the coincidental res!lt o

the (-year cycle. >e do not necessarily ha$e to know what dri$es this

signi'cant cycle to "ene't rom recogni*ing its sched!led t!rning

points and operating rom the opport!nities it presents.

;emem"er that risks in recent decades ha$e "een low d!ring the 'rst

years o the (-year cycle, high d!ring the last = months and

partic!larly the 'nal = months, gi$e or take, o the (-year cycle. s a

general r!le, yo! want to "ias yo!r thinking toward stock acc!m!lation

early in the (-year cycle and also $ery late in the cycle as the stock

market mo$es toward its 'nal cyclical lows.

Market Breadth Well, we ha!e seen earnings, we ha!e seen interest rates, we ha!e seen market

cycles.the time has come or e!eryone to hold their "readth $$$ $

:es, % did say “"readth,” not “"reath$”

And what do we mean "y the term breadth in relation to the stock market?

Market Breadth and Ma+or Market ndices

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Most in$estors are at least generally amiliar with the pop!lar market

indices !sed to de'ne the composition and strength o the stock

market. The Standard & 6oorKs L// nde, or eample, is one s!ch

inde. The S#Q Composite nde and the ew 4ork Stock Echange

nde are others. ll o these are @capitali*ation weighted a$erages othe stocks represented "y these indices9L// or the Standard and

6oorKs nde, approimately I,0// or "oth the S#Q Composite

nde and the ew 4ork Stock Echange nde.

Capitali*ation >eighted

ne might think that daily readings o a pop!lar indicator s!ch as the

Standard & 6oorKs L// nde might "e sec!red "y simply adding !p the

closing share prices o the L// domestic and oreign iss!es that

comprise this inde to sec!re the le$el o that inde each day.

This, howe$er, is not the case. The ongoing calc!lations o the le$els o

the Standard & 6oorKs L// nde are act!ally %!ite complicated and

reer to data rom "ase periods or the Standard & 6oorKs L// that date

"ack to as long ago as =(= to =(I.

!ller disc!ssion o the calc!lation processes in$ol$ed is "eyond the

scope o this "ook. Sho!ld yo! "e interested in more inormation,

howe$er, yo! can check

o!twww.ctech.com:BrainBank:FCE:Sand6ndeCalc.html . t this>e" site, yo! can 'nd 5as o Gan!ary //07 a lengthy and inormati$e

disc!ssion o the maintenance o the Standard & 6oorKs L// nde and

re%!irements or company listings.

The main point that want to make and that yo! sho!ld !nderstand is

that all stocks are not e%!al in the ongoing calc!lations o le$els o the

Standard & 6oorKs L// nde. The inde is @weighted "y capitali*ation

so that the prices o the larger companies are gi$en more weight in the

calc!lation o the inde than are the prices o small companies

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incl!ded in that inde. The weighting is proportional to the total market

capitali*ation o companies listed, which is the price o each share

m!ltiplied "y the n!m"er o shares o!tstanding o each listed

company.

This means that if only a relatively small number of the largest

companies advance on a given day, the Standard & Poor’s Index might

be up for that day, even though most companies listed on that

exchange sho a decline! "onversely, if only a relatively small number

of the largest companies decline on a given day, the Standard & Poor’s

#$$ Index might decline, even though most companies represented in

that index advance on a given day .

There may "e many +!sti'cations or the weighting o the Standard &

6oorKs L// nde in this manner. ter all, the weighting does ser$e to

emphasi*e the direction o price mo$ement o the largest "locks o

capital in the stock market, the capital that Pows into and o!t o the

largest, most li%!id corporations. The Standard & 6oorKs L// nde isthe inde primarily !sed "y large pension !nds and other instit!tions

as their "enchmark o perormance. S!ch instit!tions are almost orced

to in$est in large, li%!id, and well-esta"lished corporations that eert

the greatest inP!ence on the perormance o the Standard & 6oorKs L//

nde.

That said, the weighting inherent in the Standard & 6oorKs L// nde,

and in the more "roadly "ased ew 4ork Stock Echange nde 5which

incl!des all I,L//R stocks on the ew 4ork Stock Echange7 and in the

S#Q Composite nde 5which consists o more than I,L// iss!es

"!t whose inde le$el has "een largely determined "y as ew as / to

(/ stocks at times7 oten res!lts in erroneo!s perceptions "y the p!"lic

regarding what is act!ally taking place in the stock market.


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For eample, most in$estors date the start o the ///A// "ear

market to the late winter o ///, when "oth the S#Q Composite

and the Standard & 6oorKs L// indices reached their all-time highs

"eore the ma+or decline that ollowed.

)owe$er, ma!y* ma!y stocks had already "eg!n ma+or declines within

their own "ear markets, declines that had started d!ring = and

e$en as early as =8 The stock market as a whole did not ad$ance

into March /// when the nominal "!ll market peak occ!rred. G!st

a"o!t as many stocks had already allen to new L-week lows in price

at the time that the most pop!lar market indices were reaching their

all-time highs as were rising to new peaks. The ma%or market indices,

hich seemed so strong moving into this period, ere actually being

carried by small numbers of very visible, largercapitali'ation,

technologyoriented companies hile the typical stock languished.

This was not an !n!s!al occ!rrence. similar pattern took place d!ring

=


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#ow nd!strials, the Standard & 6oorKs L// nde, and the S#Q

Composite nde when assessing the ma+or trends o @the stock

market. 5ncidentally, the ew 4ork Stock Echange nde, which,

again, incl!des all I,L//R iss!es on the ew 4ork Stock Echange, "!t

weighted "y capitali*ation, is the inde that seems the most to rePectgains and losses o the typical, "roadly "ased m!t!al !nd.7

Con'rming 6rice ction o Ma+or and ess-Ma+or Market ndices with @Breadthndicators

Breadth indicators are indicators that rePect the percentages o stocks

act!ally participating in market ad$ances or act!ally inc!rring losses

d!ring market declines.

mong the meas!res o market "readth are the @ad$ance-decline

relationships in the stock market on any gi$en day. d$ancing iss!es

are stocks that rise each day in price. #eclining iss!es are stocks that

all in price. nchanged iss!es are stocks that do not change in price.

These ratios are oten more signi'cant than widely ollowed ma+or

market indices s!ch as the Standard & 6oorKs L// nde. For eample,

s!ppose that the Standard & 6oorKs L// nde ad$ances "y one hal o

=O on a gi$en day. =,8// iss!es ad$ance on the ew 4ork Stock

Echange that day, perhaps =,IL/ declining, the pl!rality, ad$ancing

min!s declining iss!es, wo!ld "e R(L/ 5=,8// =,IL/7, indicating that

most stocks did ad$ance in conormity with the Standard & 6oorKs L//

nde, a good "readth con'rmation o the rise in that inde. t might "e

said that day that there was @"road stock participation in the ad$ance

9a a$ora"le sign or the stock market.

Con$ersely, s!ppose that, altho!gh the Standard & 6oorKs L// nde

gained one hal o =O on a gi$en day, only =,(// iss!es ad$anced in


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price, whereas =,


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s!ch as the ew 4ork Stock Echange and the S#Q Composite

nde, incl!ding iss!es that trade within each market.

To maintain yo!r own ad$ance-decline line, start with any ar"itrary

n!m"er, say =/,///. , on the 'rst day, there are =,L// iss!es

ad$ancing on the ew 4ork Stock Echange and =,// declining, the

day wo!ld show an ad$ance-decline pl!rality o RI//. 4o! add that I//

to yo!r starting le$el, =/,///, creating a new ad$ance-decline line le$el

o R=/,I//. the net day shows L// more iss!es ad$ancing than

declining, the ad$ance-decline line rises to R=/,8// 5=/,I// R L//7.

there are // more declining iss!es than ad$ancing iss!es on the day

ater 5ad$ances min!s declines U //7, the net reading o the

ad$ance-decline line is R=/,0// 5=/,8// //7.

A Quick a!" Dirty Approach to 0!"ersta!"i!g A"a!ce-Decli!e Data

s a general r!le, it is "!llish when

•ew peaks in the ma+or market indices are con'rmed "y conc!rrent or

near-conc!rrent new peaks in the c!m!lati$e ad$ance-decline line.

• The percentage o iss!es ad$ancing in price o$er a =/-day period is more

than 0/O o the total n!m"er o iss!es either ad$ancing or declining. The

ratio, 5ad$ances:5ad$ances R declines7 is greater than 0/O, i =/-day

totals o "oth ad$ances and declines are !sed. S!ch a$ora"le market-

"readth ratios do not occ!r all that re%!ently and !s!ally carry "!llish

implications when they do occ!r.

• Market "readth remains positi$e or at least more or less ne!tral e$en i

market indices do show some decline.

s a general r!le, it is "earish when

• ew peaks in the ma+or market indices are not con'rmed "y new peaks in

the ad$ance-decline line or se$eral months. B!ll markets generally


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"ecome grad!ally more selecti$e as time passes, incl!ding ewer stocks.

Breadth sotening does not generally res!lt in "roadly "ased "ear markets

immediately "!t i "readth weakens or se$eral months, "earish

implications increase.

• There are patterns o contin!ing weakness in market "readth e$en as the

price le$els o ma+or market indices maintain their ad$ance.

lmost all newspapers with reasona"ly good co$erage o the 'nancial

markets report daily ad$ance-decline diHerentials or the ma+or stock

echanges at the end o each day. (arron’s )inancial *eekly also

pro$ides weekly data. #!ring the day, MS and other >e" sites reportstock market data, incl!ding "readth inormation, on a streaming "asis.

The ew )igh9ew ow Breadth ndicator9ncl!ding the Ma+or B!ll Market Con'rming8O B!y Signal

nother gro!p o "readth indicators are, in their own way, as eHecti$e

as ad$ance-decline "readth indicators and can prod!ce signi'cant

market signals. These are "readth indicators designed aro!nd @new

high9new low readings related to ma+or areas in which stocks trade.

Stocks that @make new highs are stocks that ha$e risen to their

highest price o the past L weeks. Their price is at the highest le$el

seen at any time o$er the past L weeks. Stocks that @all to new lows

are stocks that ha$e allen to their lowest price o the most recent L

weeks. Their price le$el is at the lowest le$el seen at any time o$er the

past L weeks.

BS) # BE;S) #CTS

The n!m"ers o stocks that all each day or week into these categories

represent a "readth meas!rement in the way that ad$ance-decline


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'g!res represent a "readth meas!rement. weighted stock market

indices are reaching new peaks, it is nat!rally a positi$e sign i "road

sectors o the stock market participate in the ad$ance, rePected in

greater percentages o iss!es making new highs and in the presence o

more iss!es making new highs than alling to new lows. The greaterthe positi$e disparity, new highs min!s new lows, the "etter the stock

market "readth, and the more "!llish the implications.

Se$ere stock market declines are generally characteri*ed "y negati$e

new high9new low "readth readings9more iss!es all to new lows

than rise to new highs. ten, there are contractions in the n!m"ers o

stocks alling to new lows e$en as market indices are declining to new

low areas. This pattern is an early indication o an incipient !pside

re$ersal, telling !s that e$en i stock market indices seem to "e

weakening, more and more stocks are 'nding s!pport and are no

longer declining. The n!m"er o iss!es alling to new lows declined

d!ring //, or eample, e$en as ma+or market indices contin!ed to

decline, s!ggesting a near end to the "ear market.

ew high9new lows data is not generally maintained as a c!m!lati$e

line in the way that the ad$ance-decline line is maintained. )owe$er,

=/-day ratios o new highs min!s new lows, or new highs di$ided "y

new lows, or new highs di$ided "y the total o new highs pl!s new

lows, can "e !se!lly maintained.

A Quick arket-3rea"th 3ullish (!"icator

The =/-day ratio o the n!m"er o iss!es making new highs di$ided "y the s!m

o the n!m"er o iss!es making new highs and the n!m"er making new lows

5):5) R 7 oten pro$ides ecellent "!llish indications when the ollowing

takes place.

The =/-day a$erage o daily ratios o iss!es making new highs to the total

n!m"er o iss!es making either new highs or new lows clim"s to a"o$e /O.


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there are =L/ new highs and I/ new lows on the ew 4ork Stock Echange,

the daily ratio9):5) R79wo!ld "e 8I.IO 5=L/ new highs R I/ new lows

U =8/ ) R , so =L/:=8/ U .8II or 8I.IO7.

For eample, the =/-day a$erage o daily ratios o new highs to the s!m o new

highs R new lows clim"s rom 88O to =O, a"o$e the /O le$el. 5$erage the

daily ratios o the most recent =/ days, not the =/-day totals o new highs and

new lows.7

>hen this happens, it is !s!ally sae to remain in$ested !ntil the =/-

day a$erage o daily ratios, ):5) R 7, declines to "elow 8/O or, i

yo! want to gi$e the markets the "ene't o the do!"t, to "elow


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o$ersold le$els ha$e "een reached and when daily ratios start to

indicate impro$ing new high9new low relationships. t is "est to try to

con'rm this indicator with other market indicators, s!ch as those

related to cycles and price:earnings ratios pre$io!sly disc!ssed.

Signi'cant B!ying 6attern

The stock market preers !nanimity in market "readth readings.

Stock trends tend to "e $ery positi$e when large percentages o iss!es

are ad$ancing compared to declining or when the n!m"ers o stocks

rising to new highs clearly s!rpass the n!m"ers alling to new lows.

S!rprisingly, or may"e not so s!rprisingly, periods d!ring which

"readth im"alances appear etremely negati$e9negati$e "!t still

more or less !nanimo!s, periods o general p!"lic and media panic9

oten t!rn o!t, in the end, to represent ecellent @"ottom-'shing

"!ying opport!nities, partic!larly, again, i they conorm well to the (-

year cycle. ook or o$ersold conditions, accompanied "y sharply rising

trading $ol!me, s!dden market re$ersal rom decline to ad$ance, and

s!dden highly positi$e ad$ance-decline pl!ralities. This orm o highly

emotional, high-$ol!me, and sharp market re$ersal is reerred to as a

@selli!g clima). Many "ear markets and se$ere intermediate

declines end with this orm o stock market re$ersal.

Ca!tionary Conditions ndicated "y ew )igh9ew ow #ata

mentioned a ew paragraphs ago that the stock market preers

!nanimity in "readth readings. it is rising, it wants to see all ships

rising with the tide. it is alling, it may want to see climactic declines

to indicate that the waterall is approaching its "ottom.


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=hat the stock market "oes !ot like to see are climates i!

5hich large !umers of stocks are risi!g a!" large !umers of

stocks are "ecli!i!g. S!ch periods indicate @split stock markets,

reasona"ly large n!m"ers o iss!es carrying market indices !pward

while also reasona"ly large n!m"ers o stocks are declining to newlows !nder co$er o ad$ancing market indices, propelled !pward "y

+!st a portion rather than "y large percentages o stocks.

autio!ary sig!als take place 5he!* o! a 5eekly asis "ata i!

3arro!%s; the lesser of 5eekly !e5 highs or 5eekly !e5 lo5s is

greater tha! ,ork Stock ?)cha!ge.

For eample, s!ppose that in a gi$en week, I,L// iss!es trade on the

ew 4ork Stock Echange and that 8/ iss!es ad$ance in price that

week and =8/ decline.

Those 8/ new highs represents 8O o I,L// iss!es, so that criteria is

met. )owe$er, =8/ new lows represent only L.=O o I,L// iss!es,

higher than we might like, "!t not yet s!Vcient to Pash ormal warning

signals.

n another week, 8/ o I,L// iss!es traded 58O7 reach new highs,

"!t the n!m"er o iss!es alling to new lows is 0L, or


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Split market arning signals should probably not be taken as sell

signals in and of themselves, but they are good indications of potential

danger and serve ell as yello lights on the stock market roaday!

The 28< a@or-Term Ne5 6ighs 3uySig!al

These do not occ!r oten, "!t they ha$e "een =.


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Percents 'e( )igs

+ee Ending S -P 500 Inde. Isses /raded 'e( )igs o" Isses/raded

5/23/2003 933.22 3538 661 18.7%

5/30/2003 963.59 3543 797 22.5%

6/06/2003 987.763 546 1097 30.9% Buy!

#!ring the week ending G!ne 0, //I, I,L(0 iss!es traded on the ew

4ork Stock Echange, o which =,/< 5I/.O7 o I,L(0 made new highs,

prod!cing a ma+or-term "!y signal. 5>eekly data re%!ired may "e

o!nd in BarronKs, among other so!rces.7

)ere are the hypothetical perormance res!lts o this model, going

"ack to =(I.

Per"or%ance &eslts, 2 'e( )igs /i%ing 3odel, 194–2004 ased onStandard - Poor6s 500 Inde.

2 #7ate

#8evel

52 +ees8ater

52 +ees8ater Price

PriceCange

$10,000eco%es

1/30/1943 10.47 1/29/1944 11.81 12.80% $11,279.85

4/24/1948 15.76 4/23/1949 14.74 −6.47 10,549.81

7/30/1954 30.88 7/29/1955 43.52 40.93 14,868.12

7/25/1958 46.97 7/24/1959 59.65 27.00 18,881.91

5/5/1967 94.44 5/3/1968 98.66 4.47 19,725.64

6/7/1968 101.25 6/6/1969 102.12 0.84 19,891.21

1/22/1971 94.88 1/21/1972 103.65 9.24 21,729.80

3/14/1975 84.76 3/12/1976 100.86 18.99 25,857,33

10/8/1982 131.05 10/7/1983 170.80 30.33 33,700.36


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Per"or%ance &eslts, 2 'e( )igs /i%ing 3odel, 194–2004 ased onStandard - Poor6s 500 Inde.

2 #7ate

#8evel

52 +ees8ater

52 +ees8ater Price

PriceCange

$10,000eco%es

5/24/1985 188.29 5/23/1986 241.35 28.18 43,197.10

7/11/1997 916.68 7/10/1998 1164.33 27.02 54,867.22

6/6/2003 987.76 6/4/2004 1122.51 13.64 62,352.30

The res!lts are as ollows3

• Ele$en o = signals 5=.


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We ha!e e#amined, in the last two chapters, the ollowing@

• Some ways to determine whether stocks are relati$ely cheap or

relati$ely epensi$e, "ased on historical parameters o le$els o

earnings and o the relationship o stock earnings to the income

a$aila"le rom "onds and other income in$estments.

• Some ways to !se stock market cycles to anticipate:recogni*e

likely signi'cant t!rning points or stocks "ased on certain reg!lar

long-term political and calendar cycles. Familiarity with cyclical

patterns allows yo! to predict when market t!rns are likely to take

place, and to prepare or portolio read+!stments "ased onchanging patterns o stock $al!ation.

• 4o! ha$e "een introd!ced to certain market-"readth indicators

that allow yo! to con'rm, rom the action o the stock market

itsel, whether the most likely co!rse or the stock market is

ongoing strength or weakness, or a transition rom the one to the

other.

%n other words, we ha!e discussed the “why(s o stocks rising or alling,” the

“when(s o when ma3or stock market re!ersals are most likely to take place” and

the “what” o what stock market indicators conirm that the internal strength or

weakness o the stock market is relecting other market indicators$

% "elie!e that !alue, time, and "readth measurements represent a ine trio in your

in!estment arsenal$ %t is up to you now to make use o them

Gerald Appel - Opportunity Investing. Time Cycles, Market Breadth, And Bottom-Finding Strategies

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Transcript of Gerald Appel - Opportunity Investing. Time Cycles, Market Breadth, And Bottom-Finding Strategies