Stock Market and S&P 500 Bottom Indicator Based on Extension from 52 Week Low and 52 Week High

Is there a stock market (or S&P 500) bottom indicator based on the current (S&P 500)index value in relation to the 52 week high and 52 week low?

After research, there appears to be a bottom indicator based on these values.

The Equation

The thesis we wanted to test involves this equation:

HOLU Function = (% Below 52 Week High) - (% Above 52 Week Low)

In order to find a bottom, we wish to maximize The HOLU Function (HOLU = High Overextended Low Underextended).

Theory Behind the Equation

The theory is that we want to:

1. Maximize the Percentage Below the 52 Week High:
   
   The Greater the Percentage Below the 52 week high, the more likely the market has overextended to the downside, and the bottom may be near.
   
   
2. Minimize the Percentage Above the 52 Week Low:
   
   The stock market axiom "Buy low, Sell High", appears to be true, and minimizing the percentage above the 52 Week Low is a goal.
   

So by combining both goals, we have created the HOLU Function above and we wish to maximize the value.

Method

We used data on the S&P 500 From 1950 to March 31, 2008. We looked at the HOLU Function values in relation to the forward one year return on the S&P 500. We averaged the one year forward return on the S&P 500 based on different cutoff values.

The Results



In the chart above, if we have a HOLU Value greater than 10%, the average one year forward S&P 500 return is 13.55%, many percentage points above the average one year forward S&P 500 return of 8.51% if the HOLU value is less than or equal to 10%.

When we use a larger cutoff HOLU value of 20%, we get even better results, 18.26% to 8.82%. If we have HOLU Values greater than 30%, we have the largest gain, an average one year forward S&P 500 return of 22.13% (compared to 8.97%).

So the HOLU Function/Equation above appears to generally true. With HOLU Values above 10%, 20% or 30%, we increase our chances of having a good one year forward return if we can assume that history holds. We can use a high HOLU Value above 20% or 30% as a stock market (S&P 500) bottom indicator.

Sample Bottom Days

Here is a sample of the 59 days where the HOLU Value is greater than 30%.

Date	HOLU	One Year Fwd Return	% Below 52WeekHigh	% Above 52WeekLow
10/9/2002	33.75%	33.79%	33.75%	0%
7/23/2002	34.65%	22.70%	34.65%	0%
9/21/2001	33.84%	-12.68%	33.84%	0%
12/4/1987	33.51%	22.23%	33.51%	0%
10/19/1987	33.24%	22.41%	33.24%	0%
12/6/1974	30.48%	34.75%	34.86%	4.38%
10/3/1974	44.11%	34.16%	44.11%	0%
9/13/1974	41.49%	28.51%	41.49%	0%
5/26/1970	33.03%	46.21%	33.03%	0%

Please note that October 19, 1987 is Black Monday!

Today's Value

As of March 31, 2008, the S&P 500 is 1322.70. 52 Week high is 1565.15 and 52 Week Low is 1273.37 (Closing Low).

HOLU = (% Below 52 Week High) - (% Above 52 Week Low)
= 15.49% - 3.87%
= 11.62%

While we would like HOLU values greater than 30%, 11.62% seems like a decent HOLU value if we look forward one year to the future.

Other Bottom Indicators

1. Stocks above 50 and 200 Day Moving Average
   
2. Put-Call Ratio
   
3. New High-Low Index
   
4. Ratio of Stocks Above 200 Day Moving Average to 50 Day Moving Average.
   
5. Bull Bear Ratio and Bullish Percentage
   
6. Oscillators
   

S&P 500 Still in Trading Range

The S&P 500 still appears to be in a trading range with 1270 on the S&P as support, and currently, resistance at the 50 day moving average of 1338. The S&P 500 is currently at 1315.

If the S&P 500 breaks through the 50 day moving average with volume and with good follow through days, next resistance is around 1400.

But until then, the US market is in a trading range (just right below the 50 day moving average resistance).

Today's S&P 500 Chart

Former CNBC Fast Money Panelist Eric Bolling bids for Shopping Date with Ivanka Trump

Former CNBC "Fast Money" Panelist Eric Bolling (and current Fox Business Network Financial Analyst) appeared on Donald Trump's Celebrity Apprentice Finale.

Contestants Tabloid Editor Piers Morgan and Country music superstar Trace Adkins were in charge of setting up a charity event which included an auction.

One of the auction items included a Shopping Date with Ivanka Trump, Donald Trump's Daughter. The First Bid was from Eric Bolling (Celebrity Apprentice did not mention his name) for $20k and he had a big smile on his face.

Soon, Piers Morgan made a phone call and on the other line, the voice of American Idol Judge Simon Cowell was heard and started to bid $50k. Eric Bolling countered with $60k. Simon Cowell then bid $75k. Eric Bolling raised the stakes to $85k.

Finally, Simon Cowell bids $100k and wins the Shopping Date with Ivanka Trump and Eric Bolling loses the auction item.

The Video


Ivanka Trump



Eric Bolling



Jim Cramer and Erin Burnett

Financial and Television Personality and CNBC's Mad Money Host Jim Cramer and CNBC Financial Reporter Erin Burnett also appeared on the Celebrity Apprentice.





Investment House Cantor Fitzgerald Very Generous

Investment House Cantor Fitzgerald (who lost more than 700 employees who were working in the World Trade Center on Sept. 11, 2001) donated a lot of money to help the charities on the Celebrity Apprentice. One partner paid $100k for a Tea Date with the Duchess of York, Sarah Ferguson, and $100k for time with Ozzy and Sharon Osbourne.

The company also offered to match up to $250,000 of viewers donations through cell phone texting..

How Many Blades Can Gillette and Schick Fit on a Razor? When will this growth end?

Have you ever noticed that the number of blades on a safety razor have been increasing at an exponential pace? When will this growth end? How many blades will we have on a razor in the future? When will the arms race between Gillette and Schick end?

The two main players in the Safety Razor market are Gillette (owned by Procter and Gamble (PG)) with the largest market share (70% as of 2003) of the global wet shaving market, and Schick (owned by Energizer Holdings (ENR)), a distant 2nd in market share (18% as of 2003).

In order to achieve greater growth, both companies need to innovate, create new products and provide an opportunity to sell more expensive razor blade cartridges. In the recent past, the companies have increasingly added more razors per cartridge.



In the chart above, we notice the exponential growth of the number of blades per cartridge.

Razor Blade History

1. 1895: 1 Blade: Gillette Safety Razor
   
2. 1971: 2 Blades: Gillette Trac II
   
3. 1998: 3 Blades: Gillette Mach3
   
4. 2004: 4 Blades: Schick Quattro
   
5. 2007: 5 Blades: Gillette Fusion
   

At this rate, will we appear to have infinite number of blades on a razor cartridge in the future.

But is this realistic? The exponential growth of blades in a razor cartridge will eventually end. Does the consumer really notice the difference right now between a five blade razor and an inexpensive two blade razor?

So long as the companies innovate and convince consumers to pay more for the more expensive products, Gillette and Schick will do fine. However, the two companies will need to start finding new ways to innovate without having to put more blades on a razor cartridge. I don't think consumers will really notice the difference between a ten blade razor cartridge and a four blade one.

There is no Moore's Law for Razor Blades, and Gillette and Schick better start thinking of new ways to innovate to maintain their growth.

Stock Market (S&P 500) Short Term Positive, Intermediate Term, Still Bearish

After today's S&P 500 breakout above the 50 day moving average and short term downtrend, the stock market should have some short term momentum.

The S&P 500 is currently around 1350.



Next resistance area is around 1400 on the S&P 500.

Intermediate term, the S&P 500 is still on a downtrend. The S&P 500 is still below the 200 day moving average.

But let us see how the market performs as the S&P 500 reaches initial resistance (1400).

We might be in a trading range short to medium term, but looking towards the end of the year, it is still possible that we will still break down below 1270 on the S&P 500 based on a 5 year view of the S&P 500.

Today's Chart

US Stock Market and S&P 500 near short term resistance

This blog previously posted a breakdown scenario, and pointed out potential resistance areas.

Right now, the S&P 500 has support at 1270, and resistance at around the 1330-1340 level (based on 50% retracement, as well as other resistance levels). The market, currently at 1329 on the S&P 500, is also very near the 50 day moving average, which is currently at 1345.

If the S&P 500 tests resistance and fails, we could potentially re-test 1270 on the downside, and possibly breakdown some more, as we speculated.

However, if the market can sustain some strong days and have good follow through, breaking through the 1330-1340 levels, and break through the 50 day moving average, we have a chance for a good rally.

But the trend would still be down (based on the S&P 500 remaining below the 200 day moving average) and I don't think there is enough strength to break above the 200 day moving average right now.

Here are two Previous Charts on Resistance Levels (2 weeks ago):





Today's Chart

Historical Best Day of Month To Invest or Dollar Cost Average in the S&P 500 from 1950 to 2007

Many people have adopted a Dollar Cost Averaging Strategy of regularly investing in a mutual fund, such as an S&P 500 Index Fund. Often, brokers could give the user an option when they automatically invest the money. Investors could choose which day of the month they can dollar cost average.

Will an investors choice of day to invest on a regular basis affect overall return?



In the Chart Above, we have averaged the S&P 500 Closing Average from 1950 to August 2007 given a particular day of month.

We notice that the 19th of the month has the lowest S&P 500 average, suggesting that the 19th of the month during this 1950 to 2007 period is the best day of the month to dollar cost average. The 4th and 11th are the next runners up.

The worst days to invest are the 22nd, followed by the 7th, 8th, 31st, and 20th.

More Data

Day of Month and S&P Average Close:

1. 1 =427.79
   
2. 2 =423.92
   
3. 3 =425.97
   
4. 4 =417.92
   
5. 5 =425.40
   
6. 6 =423.93
   
7. 7 =429.16
   
8. 8 =428.80
   
9. 9 =425.51
   
10. 10 =421.28
    
11. 11 =418.35
    
12. 12 =425.22
    
13. 13 =423.64
    
14. 14 =422.36
    
15. 15 =421.07
    
16. 16 =425.35
    
17. 17 =420.41
    
18. 18 =419.70
    
19. 19 =416.94
    
20. 20 =428.42
    
21. 21 =422.16
    
22. 22 =433.34
    
23. 23 =425.31
    
24. 24 =425.00
    
25. 25 =419.48
    
26. 26 =424.77
    
27. 27 =425.30
    
28. 28 =423.34
    
29. 29 =418.86
    
30. 30 =427.28
    
31. 31 =428.42
    

Data Ordered by Average S&P 500 Close

Day of Month S&P Close:

1. 19 =416.94
   
2. 4 =417.92
   
3. 11 =418.35
   
4. 29 =418.86
   
5. 25 =419.48
   
6. 18 =419.70
   
7. 17 =420.41
   
8. 15 =421.07
   
9. 10 =421.28
   
10. 21 =422.16
    
11. 14 =422.36
    
12. 28 =423.34
    
13. 13 =423.64
    
14. 2 =423.92
    
15. 6 =423.93
    
16. 26 =424.77
    
17. 24 =425.00
    
18. 12 =425.22
    
19. 27 =425.30
    
20. 23 =425.31
    
21. 16 =425.35
    
22. 5 =425.40
    
23. 9 =425.51
    
24. 3 =425.97
    
25. 30 =427.28
    
26. 1 =427.79
    
27. 20 =428.42
    
28. 31 =428.42
    
29. 8 =428.80
    
30. 7 =429.16
    
31. 22 =433.34
    

Previous Look at Return by Day of the Month

Kiplinger Article on best Day of Month to Invest

The Average Method

The Averaging Method above is only an approximation. We do realize that S&P 500 index values that have a high value overshadows the days when the S&P 500 had much lower values.

Are you a Bull or a Bear? Is this Stock Market Broken? Where's the Bottom?

The Battle Between the Bulls (those who think the stock market will go up) and the Bears (those who think the stock market will go down) continues.

Are you a Bull or a Bear?

The Bulls

On March 11, 2008, Investors Intelligence released their latest Bull Bear Ratio.

As of that date, there are 31.1% Bulls and 43.3% Bears. The Bull Percentage is very low (and even less than the Bear percentage) which suggests that we may have some sort of bottom. Many other metrics show that the stock market may be oversold.

In addition, the market as represented by the S&P 500 recently successfully re-tested the 1270 lows and may be poised for a double bottom reversal, if we breakout from current resistance.

Dean Reese, on the Trading Goddess Blog, makes an argument that the market is not broken based on rare relative strength levels (RSI) and the 38.2% Fibonacci Retracement off a five year trend.

The Bears

However, looking at the chart from many angles, the intermediate trend looks down.

The S&P 500 is still below both the 50 and 200 day moving averages.

While we appear to have a double bottom based on the bottoms on January 2008 and March 2008 at the 1270 level, we do not have a double bottom reversal just yet. We need to see strength first.

The S&P 500 also appears to be forming a possible inverted cup and handle bearish formation.

In addition, the three year (or more) uptrend appears to be over.

Looking from a non-technical perspective, there were nine recessions from 1950 to 2007, and the average length of the decline was around 10.3 months. If we use this average, and use the start of the decline as October 2007, then we estimate that the downturn will end around August 2008.

How deep will the S&P 500 fall?

Dean Reese in the same blog entry on the Trading Goddess Blog, claims we can have a tradable bounce based on the 38.2% Fibonacci Retracement Holding (S&P 500 is very near the 38.2% Fibonacci Retracement Levels based on a 5 year trend).

While 38.2% is a potential support area, the market could find support even lower.

I added more annotations and comments to Dean Reese's chart:


If we consider the 50% and 61.8% Fibonacci Retracements, they both coincide with other areas of support and appear to be valid areas of support.

In addition, if we look at the period from November 2003 to August 2006, we notice a lot of congestion (the box on the diagram). This suggest much stronger support in this area.

Investors and traders who started going long towards the end of 2006, did not have much time to get on board, and most likely have been shaken out. Those who were in the market from the end of 2003 to the end of 2006 are starting to get nervous.

But because of the congestion from November 2003 to August 2006, we can speculate that we can find a stronger bottom here, from around the 1070 level to the 1267 level. This happens to coincide with the 61.8% (1077) to 50% (1172) to 38.2% (1267) Fibonacci retracement area.

So yes, it is possible that we still have up to 17% downside on the S&P 500 (if 1070 is the estimated bottom).

Silver Lining?

But as with all recessions and bear markets, this too will end, and we could have a great investing opportunity sometime this year or next year.

Interesting Symmetry

I flipped over the annotated chart above. Compare the chart above and the chart below. Notice the amazing symmetry? And you know what happened from 2000-2002.

Are the "Higher Ups" Trying to Tell us Something About Oracle (ORCL)?

Are the "Higher Ups" Trying to Tell us Something About Oracle? (ORCL)


(Photo taken by a friend of mine. Rights Reserved)

Was that a Double Bottom on the S&P 500 or is this an Opportunity to Short?

Today, the US Stock Market had one of the best rallies in years. The Dow went up over 416 points for a 3.55% gain. The S&P 500 bounced off the previous lows of around 1272 to make a 3.71% gain to 1320.65.

Is this the double bottom we have been waiting for? This blog expected a re-test of the lows of 1270 on the S&P 500. We recently tested the bottom and successfully bounced. But does this mean that we have a solid bottom?

Not necessarily.

The intermediate trend is still down. This may be just an oversold rally with massive short covering.

If our stock market breakdown scenario holds, we could be forming some sort of handle, in preparation for the next leg down.



In the chart above, we still see the S&P 500 in a downtrend. The S&P 500 is still underneath both the 200 and 50 day moving average.

Two resistance areas are the 50 day moving average, and the 50% retracement (from the 1396 to 1270 drop) line of around 1330. This 50% retracement also happens to hit other previous levels of support and resistance.

If we draw a triangle estimating the 50 day moving average trend and the 50% retracement line, we can see a future potential area to start a new short position.

But we can afford to wait and see how this market reacts before finding a good place to short.

Today's Chart

Not Choosing Individual Stocks in This Market?

For some time now, I noticed that I haven't been blogging about individual stocks. The market has been bad, and I didn't think the time was right to start going for stock home runs.

Then yesterday, on the CNBC show Mad Money, Jim Cramer says something very similar, that he is not recommending many stocks in this market because the market is very bad.

Thank you Jim Cramer for echoing my thoughts exactly.

There is a common market saying that a rising tide lifts all boats. The same thing can be said about the opposite of that saying.

Some reminders:

1. Your 401k money is long term money (assuming you have many years or decades before you have to take money out.) If you have a diversified set of broad based ETFs or mutual funds, you can ride out this market. Continue to put money in your 401k and continue to accumulate.
   
2. In your discretionary fund, are you taking too much risk?
   
3. Do you have high interest rate consumer or credit card debt? Consider paying it off.
   
4. Do you have a 3-6 month emergency cash fund in conservative investments?
   
5. If you think there is a housing bottom within five years, and you intend to buy a house with money from your discretionary portfolio, then maybe you can take some money out and put the money in more conservative investments (high yielding online savings account, for example.)
   
6. Don't forget about controlling your losses.
   

I intend to create a new blog entry commenting on today's monster rally in the US Stock Market.

Possible Stock Market Breakdown Scenario on S&P 500

In the chart of the S&P 500, we notice that the patterns from November 2007 to December 2007 compared with the pattern from January 2008 to March 2008 are very similar. If the pattern holds, we can expect a further breakdown below 1270 on the S&P 500.

While not a guarantee, the S&P 500 could be forming a bearish formation, the inverted cup and handle pattern. The Drop to 1270 on January 2008 is the first part of the cup. The recent decline to 1282 could be part of the other side of the cup. If the pattern forms, we may see some sort of a handle, then eventually, a breakdown below 1270.

Again, this is only a potential scenario and not a guarantee that we will get a breakdown on the S&P 500.

Today's Chart with Info Above

Gold Chart Initial Price Target $1160

Inflation and Gold have been making the news. Recently, on CNBC's show Fast Money, Chartist Louise Yamada showed a chart of gold and made some analysis. Inspired by her work, we charted GLD, the Gold ETF. GLD appears to have a price 1/10 of the true price of gold. (If GLD is $98, then the price of gold is around $980 per ounce.)



In the chart above, we see a trading zone (triangle) from around $55 to $72. In the first leg, we see an increase from around $42 to $72, a gain of 71%. If we use this gain, and add it to the the trading zone base (near the end of the triangle), we get $116, or 71% above $68. This estimate matches what Louise Yamada mentioned on the air.

After this price target of $116, perhaps GLD will start consolidating, preparing itself for the next move (higher?)

Today's Chart of GLD

No More Analog Over the Air Broadcasts 2009. Get Ready for Digital TV.

According to the www.dtv2009.gov website:

"At midnight on February 17, 2009, all full-power television stations in the United States will stop broadcasting in analog and switch to 100% digital broadcasting. Digital broadcasting promises to provide a clearer picture and more programming options and will free up airwaves for use by emergency responders."

In order to help consumers, the goverment is providing a TV Convert Box Coupon Program:

"Congress created the TV Converter Box Coupon Program for households wishing to keep using their analog TV sets after February 17, 2009. The Program allows U.S. households to obtain up to two coupons, each worth $40, that can be applied toward the cost of eligible converter boxes.

A TV connected to cable, satellite or other pay TV service does not require a TV converter box from this program.

Consumers have a variety of options. Options to explore include:
1. Keep your existing analog TV and purchase a TV converter box. A converter box plugs into your TV and will keep it working after Feb. 17, 2009, or
2. Connect to cable, satellite or other pay service, or
3. Purchase a television with a digital tuner. "

More information can be found in the DTV 2009 Website.

Can We Profit from This?

I'm still looking at more ways to profit from this trend, but we do know there is a solid trend from Analog to Digital TV.

In a previous blog, we mention a few initial stock options:

1. Corning (GLW) -- Used by Optical Networking and Flat Screen and High Definition HDTVs
   
2. Cisco (CSCO) -- Networking and Set-Top Box exposure.
   
3. NDS Group (NNDS) -- End to end digital technology and services to digital pay-television operators and content providers worldwide.
   
4. Harris Group (HRS) -- Has a Digital TV division and provides emergency communication equipment, broadcast communications and wireless networking.
   

We may revisit this topic some more at a later time.

Do you have any ideas you'd like to share?

Article on: "No Profit Bonanza Likely from TV Cutoff"

Finally an Exchange Traded Fund (ETF) focusing on India

WisdomTree now has an Exchanged Traded Fund (ETF) that focuses on Indian Investments. The ticker is "EPI"

Expense Ratio is 0.88%

Top Ten Holdings include (as of March 3, 2008)

1. Reliance Industries (13.18%)
   
2. Oil and Natural Gas Corporation (6.39%)
   
3. Infosys Technologies (5.43%)
   
4. Bharti Airtel Limited (3.75%)
   
5. Housing Development Finance (3.18%)
   
6. ICICI Bank Ltd (3.14%)
   
7. SAIL (2.40%)
   
8. Sterlite Industries (2.31%)
   
9. Tata Steel Limited (2.25%)
   
10. Indian Oil Corporation (1.99%)
    

There are a total of 146 Components in the Index.

Top Sectors:

1. Energy (25.05%)
   
2. Materials (15.86%)
   
3. Software and Services (11.78%)
   
4. Banks (10.67%)
   
5. Capital Goods (7.43%)
   
6. Utilities (5.79%)
   
7. Telecom Services (5.69%)
   
8. Automobiles and Components (4.00%)
   
9. Pharma, Biotech and Life Sciences (3.74%)
   
10. Food, Beverage, and Tobacco (2.40%)
    

WisdomTree does not use market cap weighted ETFs. Instead, WisdomTree weights the index based on dividends or earnings.

If you want to invest directly in some Indian Companies in the United States, you can check these resources.