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Chart In Focus

Rising Star Program Shows Washout Bottom

 
Chart In Focus
 
June 08, 2012


This week's chart is one that gets featured in every issue of our Daily Edition.  The Rising Star Stock Program is a managed accounts program offered by Global Investment Solutions, and we have the good fortune of being able to share with our readers what its signals are each day.  Click here to see an example of how these signals are reported in our Daily Edition. 

This program currently features a mostly fixed pool of 50 stocks, each of which triggers its own buy and sell signals based on its own price action.  A directional indicator is used to detect trend changes in each stock's price.  When a new buy signal is generated, 2% of the account size is allocated to that stock within the portfolio. 

This system design has the interesting property of getting the portfolio more fully invested as an uptrend proceeds, and of getting out of the market for the most part in a protracted downtrend.  That is a nice property for a trading system, as long as one understands that the system will work best in nicely trending markets, but can do less well in a choppy environment.

Just recently, the market's decline from the top on March 19, 2012 to the bottom on June 1, 2012 has taken almost all of the stocks in this program to a sell signal.  That is reflected by the low indicator reading in this week's chart, which tracks the percentage of the stocks currently on a buy signal. 

This indicator falls into a category of technical tools known as a "diffusion index".  A diffusion index looks at the members of a group to see how many of them share a certain attribute.  Other examples of diffusion indices that technicians useb include the percentage of stocks above their 200-day moving averages, or how many stocks made a new 52-week high today. 

The current low reading conveys important information about the market's condition.  The selloff was thorough and persistent enough to push almost all of the stocks in the pool onto sell signals.  You can see that other very low readings have been reliably associated with some nice bottoms for the overall market. 

Very high readings, though, can have different meanings.  Sometimes we will see a high reading for this indicator when there is a powerful pop, and so it shows an overbought condition.  But at other times we can see a very high reading that does not result in a prompt turnaround.  In that latter case, the high indicator reading shows the strong initiation of a powerful new uptrend.  Then as the uptrend ages, it can be a warning sign to have the SP500 make higher highs while this indicator makes lower highs, which tells us that there is declining participation in the uptrend. 

The SP500 appears to have started a rebound, and so we can expect that in the days and weeks ahead we will see more stocks in this program trigger their own buy signals as they join the uptrend.  Because the signals involved are trend following signals, there is understandably a lag at important turns.  The idea is not to catch the entirety of every move, but rather to make sure to be aboard for the majority of time in every strong uptrend and to be out for most of the big downtrends. 

To see full performance information on this program, and the managed accounts associated with it, contact Global Investment Solutions at http://globalinvestsolutions.com/contact.htm, or at (949) 660-7960.

Tom McClellan
Editor, The McClellan Market Report


 
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