The Hidden Message in the Stock Market

The Hidden Message in the Stock Market

The media pretty much report on the performance of the SP500 or The Dow Industrials. The SP500 is a capitalization weighted index which means the largest stocks affect the whole direction of the index. As a matter of fact I would estimate that say the 15 or 20 largest stocks in the index are responsible for maybe 95 per cent of it performance. This makes it an easy target for the establishment to manipulate. Think of all the institutional money that must be directed towards this index not to mention all of the closet indexers in the mutual fund industry and all the foreign money that must keep coming in. It’s hard for me to believe that the FED itself must not be involved in this and other Central backs as well.  It must be so easy to funnel money towards those big liquid SP500 stocks there by affecting the direction of the whole index. And everybody watches the index like a hawk.

I’m going to combine two of my past posts to make a point in this post. Wager Value (focusing on the part of the market that most people don’t look at, thus making the information more valuable) and the Current Market Environment (examining the breadth of the market and applying moving averages and momentum indicators to it). Remember the breadth of the market we are looking at based on the Cumulative Advance Decline Line of NYSE (based on common stocks only).

I apply a 19, 39 and 144 day moving average to the Advance Decline Line to smooth out the day to day noise of the data so I can view the longer term trends in the underlying market.

I then take 19 day ma and subtract the 39 day ma from it. This gives me an intermediate term momentum indicator.
                                                                                                                                                           I then take the 39 day ma and subtract the 144 day ma from it to give me a long term momentum indicator. I then apply an additional 35 day ma to the long term indicator that can act as a signal line.

Finally to produce a short term oscillator of the data I take the number of advances every day while subtracting the number of declines and I apply a 10 day moving average to the result. This gives me three indicators for the short, intermediate and long term momentum of the market.

Momentum is the measure of the speed of change in the market and is a leading indicator. It can show you when a market is overbought or oversold. It can also produce divergences from the data series it is based on, in this case the advance decline line of the NYSE. As market tops are different in nature to market bottoms you will have to interpret them differently. The market can stay overbought for a long time while it generally will stay oversold for relatively short periods of time. The market goes down faster and harder than it goes up because Fear is stronger then greed.

I then generate four charts every weekend.

1)      the advance decline line with the 39 and 144 day ma (only the direction is of this data set is important.)

2)      the long term momentum of the a/d line (both the direction and level of this indicator are equally important.)

3)      the intermediate term momentum of the a/d line (both the direction and level of this indicator are equally important.)

4)      the short term oscillator of the 10 day ma daily a/d differential.

That’s quite a bit for now. I will have more to say about these indicators in a later post…God help me, I love it so.