INTRODUCING THE TPA MARKETSCOPE
TPA will now provide the Marketscope every day in the World Snapshot – explanation below.
TPA MARKETSCOPE EXPLAINED
Market timing is not a complete investment strategy in and of itself, but should be utilized as a tool for successful investing. Knowing when stocks are at extremes can present investors with opportunities and help them to avoid pitfalls. The TPA Marketscope uses a set of carefully watched indicators to assess if the market is at or near extremes. When the market is oversold, risk-return favors buying and not selling and when the market is overbought, risk-return favors selling and not buying.
The seven indicators in the TPA Marketscope were developed after years of observation and the extreme limits used have historically been levels that mark short-term and medium-term inflection points. The indicators are explained below.
Short term market score – is a daily analysis of the S&P500 relative to the normal distribution using the 2 standard deviation Bollinger Band. TPA then adjusts the score by the amount of overbought or oversold as measured by RSI.
Percent stocks above or below the 2 standard deviation Bollinger Band – Bollinger Bands identify ranges using standard deviations away from a moving average. They, therefore, measure volatility (the width of the band) and extremes (using normal statistical distributions). In a normal distribution, 2 standard deviations identifies 96% of all occurrences. As a stock reaches the extreme of the 2 standard deviation Bollinger Band, it becomes more probable that the price will regress back to the mean. TPA has found that historically market reversions are very likely when 40% of stocks are above or 60% of stocks are below the 2 standard deviation Bollinger Band.
Percent stocks above the 50DMA – when a large number of stocks (85%) are trading above their 50DMA, the market is at an overbought extreme. When a small number of stocks (15%) are trading above the 50DMA, the market is oversold.
Percent stocks RSI above 70 or below 30 – RSI is a measure of the speed and size of a recent move in a stock or index; the greater the price move and the quicker that move has taken place, the higher RSI. TPA has found that historically market extremes occur when 30% of stocks are trading above RSI 70 or when 55% of stocks are trading below RSI 30.
Percent stocks 50DMA>200DMA – This is a longer-term measure of extremes. An uptrend is defined when short term prices consistently trade above longer-term prices. An example of an uptrend is Last > 20DMA > 50DMA > 200DMA. Technically, a long-term uptrend is defined by the 50DMA trading above the 200DMA. TPA has found that historic oversold extremes occur when 22% or less stocks are trading 50DMA>200DMA. The overbought extreme has become trickier since it has been declining since 2010 as a small number of TECH stocks have garnered an increasingly large percentage weighting in the S&P500. Currently, the extreme is approximately 40% to 50% of stocks trading 50DMA > 200DMA.
TPA notes that not all of these indicators are equally consistent. Clients should use the “Historical Importance” comments to determine the weight they will assign to each alert.