Is The Top At Hand?

01/18/10 09:36:20 AM

by Alan R. Northam

Many methods can be used to determine if the stock market is still in a bull market or if a new bear market is just now getting under way. The method used here analyzes each stock within the S&P 500 and draws a conclusion as to the whole of the stock market based upon the sum of its individual parts.

Security: $SPX
Position: N/A

There are a few popular technical analysts that I keep up with on a regular basis. Of these, most believe that the stock market uptrend is still in progress and will continue to move higher, while a few of these analysts now believe that the stock market has peaked and is ready to turn down. One way to determine whether the stock market has peaked is to technically analyze a stock market index such as the Standard & Poor's 500. Another way is to technically analyze each individual stock within the S&P 500 to determine how many of these stocks are in bull market trends and how many are in bear market trends. The analysis performed here uses the second approach.

To determine which stocks within the S&P 500 are in bull market trends and how many are in bear market trends, the following filters are used to perform a scan of all 500 stocks within the index:

1. To determine which stocks are in uptrends and which are in downtrends, a 20-day exponential moving average (EMA) and a 50-day EMA are used. If the 20-day EMA is above the 50-day EMA, the stock is considered to be in an uptrend; otherwise, it is considered to be in a downtrend.

2. To determine which stocks have positive price momentum and which have negative price momentum, the moving average convergence/divergence (MACD) indicator is used. The moving averages used with the MACD are the 20-day and 50-day EMAs. If MACD is above its nine-day signal line, then price momentum is in an upward trend; if not, then it is in a downtrend.

3. To determine which stocks have positive volume momentum and which have negative volume momentum, a 20-day EMA and a 50-day EMA of the on-balance volume indicator is used. If the 20-day EMA of the OBV indicator is above the 50-day EMA of OBV, then volume is considered to be in an upward trend; otherwise, it is considered to be in a downtrend.

4. The final filter determines if each stock is outperforming or underperforming the S&P 500 to which it belongs. To perform this analysis, each stock is divided by the S&P 500. If the resulting ratio is above a 50-day EMA of the ratio, then the stock is considered to be outperforming the S&P 500.

The result of a scan using the these filters is as follows:

1. Of all stocks within the S&P 500, 87% are in uptrends based upon filter 1.
2. Of all stocks within the S&P 500, 55% have positive price momentum based upon filter 2.
3. Of all stocks within the S&P 500, 77% have positive volume momentum based upon filter 3.
4. Of all stocks outperforming the S&P 500, 55% based upon filter 4.

In conclusion, a stock is considered to be in a bull market if it is in an uptrend, if its price momentum is positive, if its volume has positive momentum, and if it is outperforming the S&P 500. It is the result of a scan performed on all 500 stocks within the S&P 500 reversals that the majority of these stocks meet these conditions to be considered in bull market trends. Based upon these results, it is concluded that the overall stock market, as measured by the individual stocks within the S&P 500, is still in a bull market trend. However, with only 55% of the stocks that make up the S&P 500 still outperforming the S&P 500 itself, it can be said that there is a high probability that the overall stock market is close to a market top.

Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.