September phenomena have seen my e-mail basket fill up with question regarding this morning's 09:00 update. We can perhaps "kill several birds with one stone" here and further address how the bullish % charts may be able to help traders and investors back test against history and better understand the bullish percent charts.
Subscriber Question Jeff: I thought your morning comments were interesting regarding September's history with regard to a midterm election year. My question is how you came up with a 4% decline to 8,430 for the Dow and why you think this September will be negative and not positive like September 1998? I thought Miss Cleo wasn't taking phone calls anymore. Just wondering.
Well.... Miss Cleo is doing just fine. She's a nice lady and still honors my pre-paid annual membership of $99.99 and takes my calls (grin).
What I did is eyeball the three charts shown in the 09:00 Update, get a feel for the 50-day and 200-day MA's. Now, more importantly, I also tried to look at the Dow Industrials Bullish % ($BPINDU) from stockcharts.com, but I could only get historical data back to 1998 as it pertains to mid-term election years for September. What I was looking for from the bullish % was simply get a feel for how "overbought" or "oversold" things were in this indicator as it relates to the Dow Industrials. (If trading the S&P 500, then check the S&P 500 Bullish % ($BPSPX).
Dow Industrials Bullish % ($BPINDU) in 1998 - 2% box scale
Is it any "wonder" that September 1998 was actually an "up" month for the Dow and bucked an otherwise more historically bearish month? In mid-June (after red 6), the Dow Bullish % turned "bear confirmed" at the 58% level, reversed back up into "bear correction" status in July (red 7), then reversed back into "bear confirmed" status by early August (red 8). Remember from the 09:00 EST Update, we noted how the Dow got "crushed" just prior to early September? Early September is the "red 9" on the bullish % chart at 14%! Do you perhaps see/feel how this very narrow indicator (just 30 stocks) was very "oversold" below the 30% level in early September of 1998? While midterm election years tend to be bearish is September, 1998's Dow bullish % would have had a bearish trader quite cautious and maybe not putting his/her full faith in market history.
Sow what about today? Where is the Dow Industrials Bullish % ($BPINDU) if a bearish trader is looking at combining history, but understanding he/she must assess this market's risk levels (talking about the Dow Industrials as a market).
Dow Industrials Bullish % Chart - Current, 2% box
So.... now I look at this indicator only as it relates to the Dow Industrials and current reading is 60% bullish (meaning 18 of the 30 stocks shows a buy signal intact with each components p/f chart) and getting close to the 70% overbought level. As such, thinking here is ... higher than it was in mid-July (after red 7) of 3.33%, so "odds" of a pullback into "bull correction" a possibility, and perhaps the historical more bearish September/mid-term election is a "reason" for a pullback as bulls have a little more risk at 60% than they did at 3.33%. Bullish % doesn't tell us anything about MARKET direction, only risk and levels of risk. Current assessment would have a bearish trader establishing some bearish positions, BUT should be limited to stocks with poor relative strength! I don't want to be short/put a strong relative strength chart when I'm in a "bull confirmed" status!!!
Now.... what about my prediction for a 4% decline. From yesterday's close of 8,824, a 4% decline is to about 8,471 exactly, but remember that Dow chart I've been showing with a retracement bracket from 7,050 (an old bearish vertical count) to the March 2002 highs of 10,663 (which is tied in with the bullish % at 76%), this gives me a 61.8% retracement level on the Dow at 8,430 and a downside target that perhaps "makes sense" as a target and is within historical September declines for the Dow.
Dow Industrials Chart (INDU) - Daily Interval
The first thing a bearish trader in the Dow Industrials wanted to monitor was a break back below the 50-day MA, which we've talked about in recent weeks. Bears are getting the break today and it appears the Dow is following yesterday's NASDAQ Composite (COMPX) 1,332 -1.15% break back below its 50-day MA. It's kind of interesting that the Dow Industrials (INDU) is "outperforming" the NASDAQ Comp to the downside today.
It's also interesting to note that the Stock Traders Almanac notes that the Morgan Stanley High Tech Index (MSH.X) 299.18 - 2.21% tends to actually trade more bullish in the month of September. Other sectors that are also listed as more bullish in September are Drugs ($DRG.X) 298 -0.73%, Healthcare ($HCX.X) 316 -0.64% and Morgan Stanley Consumer Index ($CRM.X) 507 -0.89%.
Dow breadth today is rather negative with 24 components showing losses versus 6 stocks showing gains. Believe it or not, I "erased" Alcoa (NYSE:AA) $25.01 -6.32% from my list of September bearish candidates when I was writing up this morning's 09:00 update. I thought the stock might gain to the $28 level for better potential bearish entry and then target the $24 level. Shares of AA are down on news that demand for aluminum is weak.
Other Dow decliners today have Walt Disney (NYSE:DIS) $15.50 -3.12% (one of my bearish picks), Exxon Mobil (NYSE:XOM) $35.94 -2.57% and Du Pont (NYSE:DD) $40.05 -2.65% outweighing gains in shares of Philip Morris (NYSE:MO) $49.21, Eastman Kodak (NYSE:EK) $31.33 +1.06% and Boeing (NYSE:BA) $37.59 +1.48% (one of my bearish picks). Boeing is up on news that the company raised its monetary offer yesterday in a proposed three-year contract with its largest labor union, but the company refused to guarantee jobs, which clears the way for a likely strike with its machinists union.