S&P 500, Bull Or Bear?

03/03/10 08:39:59 AM

by Alan R. Northam

Many methods are used to determine if the stock market is in a major upward trend or a major downward trend. One method compares price to its 200-day moving average. The method used here analyzes each stock within the S&P 500 to make this determination.

Security: $SPX
Position: N/A

To determine how many stocks within the Standard & Poor's 500 are in bull market trend and how many are in a bear market trend, the following filters are used to perform a scan of all 500 stocks within the index:

1. To determine which stocks are in an upward trend and which are in a downward trend, a 20-day exponential moving average (EMA) is compared to a 50-day EMA. 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, it is in a downward trend.

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 (OBV) 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 these filters is as follows:

1. Of all stocks within the S&P 500, 54% are in uptrends based upon filter 1.
2. Of all stocks within the S&P 500, 65% have positive price momentum based upon filter 2.
3. Of all stocks within the S&P 500, 51% have positive volume momentum based upon filter 3.
4. Of all stocks outperforming the S&P 500, 57% are based upon filter 4.

In a previous article entitled "Is The Top At Hand?" published on January 18, 2010, a similar analysis was performed with the following results:

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% are based upon filter 4.

In conclusion, the S&P 500 is considered to be in a bull market if the majority of individual stocks within it are in uptrends, if the majority of stocks have positive price momentum, if the majority of stocks have positive volume momentum, and if the majority of stocks within the S&P 500 are outperforming the S&P 500 itself. It is the result of a scan performed on all 500 stocks within the S&P 500 that reverses the majority of the stocks that meet these conditions. Based upon these results, it is concluded that the major trend of the overall stock market, as measured by the S&P 500, is still in an uptrend. However, when compared to a similar study done over a month ago, it can be seen that the major uptrend is weakening and is close to turning down.

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.