A new bull emerging

In order for the markets to rally in a meaningful way, it stands to reason that the Top 30 (most heavily weighted) stocks in each index must provide the upward push. That's because these stocks account for such a large percentage of each advance. Accordingly, I have constructed a NYSE Top 30, a Nasdaq Top 30, and a TSE Top 30.

As you can see on the NYSE chart, there was a huge non-confirmation by the volume line (sell signal) at the top in the first week of September 2000. On the Nasdaq chart, there was no sell signal other than the fact that the final advance was parabolic and the RSI reached the extremely over-bought level of 92%. On the TSE chart, there was also no sell signal other than the fact that the RSI had gotten as high as 88 %. We did, of course have a major warning by the Tuey Special which rose to 58.3% at the end of August 2000, well above the 30% danger level.

In his book Granville's New Strategy of Daily Stock Market Timing for Maximum Profit (published by Prentice-Hall Inc.), Joseph Granville outlined the Climax Indicator and the Net Field Indicator, both designed to identify extremes in the markets.

The Climax Indicator

He would count up the number of on-balance volume (OBV) upside breakouts for the day for the 30 Dow Industrial stocks and subtract from that total the number of downside breakouts. The net result is the Climax Indicator (or CLX). In theory, since there are 30 stocks, if all broke out on the upside, the CLX would be +30; if all broke out on the downside, the CLX would be -30. In practice, however, maximum readings rarely exceed + or 25 and anything over + or -20 is considered to be over-bought or over-sold, respectively.

Net Field Indicator

Granville would also count up the number of the 30 Dow stocks whose OBV was trending higher or rising and subtract from that total the number whose OBV was trending lower or falling. The net result of this calculation is the Net Field Indicator (or NFI). In theory, if all stocks were rising, the NFI would be +30 and if all were falling, it would be -30. In practice, however, there are always some stocks whose OBV is trending sideways and these are ignored in the calculation because their direction is doubtful. In a bull market, the NFI generally peaks anywhere from +15 to +20. In a bear market, it usually declines to the -17 to -19 area. Any reading exceeding + or - 20 is very extreme.

Beyond the Dow 30

So, why am I telling you all this? Well, it occurred to me that the same techniques could be applied to volume lines on a weekly basis. Using the volume lines of the Top 30 stocks in the NYSE, Nasdaq, and TSE, I calculated the CLX and NFI for each index. The charts of the NFIs are shown here.

NYSE. Note that the best the NYSE's NFI could achieve was +12, that number being reached but not exceeded no less than five times between January and May 2000. When the NYSE peaked in September, the NFI had slid to only +5, thus indicating a huge loss of strength and the inability of the Top 30 stocks to support the advance any further.

NASDAQ. In the case of the Nasdaq, the NFI reached a very over-bought level of +22 in the third week of January with the Top 30 index at 75.03 (Nasdaq at 4235). The final surge to 94.44 (Nasdaq at 5048) in the second week of March saw the NFI at only +20-a significant loss of strength considering the index had advanced a further 26% (Nasdaq 19%).

TSE. In the case of the TSE, the NFI peaked with the index in the week ending September 15 at +12 and, after a decline to +5 rallied to +14 in February 2001 as the index began declining and has now dropped back to +5 again. In other words, it hasn't been of much help. This is probably because of the tremendous distortion caused by the Nortel fiasco.

Currently, the NYSE's NFI declined to -14 in the third week of March 2001 while the index made a low a week later. A small non-confirmation. While the NFI has not dropped to the -17 to -19 area, it never got up into the +15 to +20 area either. It has done a round trip from +12 to -14 and, since it never became over-bought, it may not get over-sold. Furthermore, the CLX dropped into over-sold territory at -20 on March 16 with the Top 30 index at 49.08. A week later, the index slid to 48.42 (318 Dow points) and the CLX came in at only -11, a significant loss of downside strength.

The Nasdaq's NFI has declined to -16 and currently stands there, almost into the oversold -17 to -19 area. Moreover, the CLX registered -24 on March 9 with the Top 30 index at 32.71 (Nasdaq at 2053). A week later the index dropped to 31.15 (1891) and the CLX improved to -23. On April 6, the index dropped a further 5.60 (171) points to 25.55 while the CLX only managed to get down to -15. So, here again there is a fairly significant loss of downside strength.

As far as sentiment is concerned almost everyone agrees: the Consensus Index is over-sold at -16, having hit a low of 10 three weeks ago; the AAII Index Bears at 26.1% is just above its over-sold level of 25%, having made a low of 14.4% ten weeks ago; Market Vane is over-sold at 18%; the CBOE Put/Call ratio is over-sold at 0.69, after dropping to 0.84 five weeks ago; and the S & P Put/Call ratio, currently at 1.11, reached a very over-sold 1.64 three weeks ago. The only stumbling block is Investors Intelligence which this week reported the Bulls at 44.5% and Bears at 37.0%. It would be nice to see the Bulls drop below the Bears. Then all the sentiment ducks would be lined up.

The Tuey Special gave a buy signal at the end of February when it dropped to -14.2%. The rule with the Tuey is to wait two months before buying, ie. the end of April. According to Tuey, the buy signals since 1945 have been consistently profitable. By the way, at the end of March the indicator had dropped to an even-more-over-sold -19.6%. It would be reassuring to see a strong buy signal by at least one of the volume lines of the Top 30 indexes. Maybe by the end of April. I would wait for it.

And finally, if you want to feel even more comfortable about the markets bottoming, log on to www.bigcharts.com and wait until the MACD's give buy signals on the weekly charts. It looks like they may be in the process of doing so.

PATRICK TAYLOR IS AN INDEPENDENT TECHNICAL ANALYST

Copyright Canadian Shareowner Magazine Inc. May/Jun 2001
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