By: Bill Spencer — October 9, 2020
Here's Why THIS Chart Should Be Your Favorite
And T.G.I.F (Am I right?)
Today, we open up our bulging inbox to field another excellent question.
This one is from savvy reader Mike T., who asks...
Why do we worry so much about the NYSE BPI?
I understand there's a little bit of difference compared to S&P 500 Index.
Are they usually aligned or not? And what do we do with it?
Can you cover this in your future webinar?
We already look at Nasdaq and Russell . Why add NYSE to the mix?
Please explain it.
Hi Mike, and thanks for writing in. (As you're about to see, your timing is perfect. Because the NYSE BPI just happened to make a significant bullish move.)
You've actually got a few questions in there. Let's unpack them one at a time.
I will certainly cover the NYSE BPI on my next webinar. And know that both Chris Rowe and Costas Bocelli always talk about the NYSE BPI on their live events as well.
As for the S&P 500 and the NYSE BPI being "aligned"... I think what you're asking is: "Do movements in the NYSE BPI closely follow movements in the S&P?
The shortest and most basic answer is that sometimes they do and sometimes they don't.
The S&P 500 is a market-cap-weighted index. The 10 or 20 biggest stocks, when they make a move, can pull the entire index up or down with them.
Think about that: 480 stocks could be trading sideways... or even declining a little...
And yet the media will report that "the market" just moved higher!
The NYSE BPI does not labor under that drawback.
If you're unfamiliar with the NYSE BPI that Mike is referring to...
Let me back up a bit and give some context.
The New York Stock Exchange Bullish Percent Index (NYSE BPI) is our #1 indicator here at True Market Insiders.
It's the first thing we look at every morning. It should be the first thing you look at in the morning.
In fact, we think this indicator is so important that we maintain a free website devoted to tracking its every move.
Here is the NYSE BPI as of the close of trading on Thursday, October 8.
(Click any image to enlarge)
Here's what this chart (shown here in "point and figure" style) is telling us.
There are 2,800 stocks that trade on the New York Stock Exchange (NYSE).
At any point in time, some of them are on "Buy" signals and some are on "Sell" signals.
A Buy signal is a bullish indication. It means that the stock has broken above a key resistance level on its price chart.
A Sell signal is a bearish indication. It means that the stock has fallen below a key support level on its price chart.
For stocks to move up or down like that, large institutions would have to be buying or selling a lot of the stock.
It follows that the more stocks there are on Buy signals, the stronger the market.
Likewise, the fewer stocks on Buy signals, the weaker the market.
The NYSE BPI is an "oscillator". It moves up and down between a (theoretical) low of zero -- no stocks on Buy signals...
And a (theoretical) high of 100 -- all stocks on Buy signals.
Here's that image again...
If you look at the column on the far right (with the '10' in it), you'll see that it's filled with Xs.
That tells us that the bulls have taken control of the market in the short term.
Notice that there are three Xs in that new column. Look at the rest of that chart. Notice that you never see a column with fewer than three Xs or Os in it.
That's because this chart never switches columns -- from Os to Xs or from Xs to Os -- unless the next column can fill in a minimum of three boxes.
There are 50 boxes on the chart. I said that the chart goes from zero to 100%. So each box represents 2% of the 2,800 stocks trading on the NYSE.
For a column change to happen, a minimum of 6% of stocks (net) would have to go on Buy or Sell signals on their own price charts.
That's 168 stocks making a significant move. This is why we refer to the NYSE BPI as an "internal" market indicator. It lets us look "inside" and see what's happening.
Now, see that purple arrow in the image above? It's pointing to an important box in that X-column.
Notice how that particular box happens to be higher than the highest X in the previous X-column?
If the chart fills that box, it means that MORE stocks are participating in this current upward move than participated in the previous one. We would then say that the NYSE BPI has gone on its own Buy signal.
That would be an extremely bullish sign for the wider market. And it tells us that the market should be considered strong in the longer term as well as in the short term.
The key points here are that the NYSE BPI is designed to filter out market noise. It doesn't flip around wildly every time "the market" rises or falls.
Also (as I hope you can tell) the NYSE BPI can tell you things about the market that neither the Dow Jones... or the S&P 500... or the Nasdaq Composite... or the Russell 2000 can possibly tell you.
We refer to those as "external" indicators. They don't let us see "under the hood" of the market.
All that said, please remember that all of those indicators have their own BPI charts.
If you wanted to peer inside the small-cap universe, for example, you'd look at the Russell 2000 BPI. It tells you what percentage of small-caps stocks in that particular index are on Buy or Sell signals at any given time.
And it alerts you when a significant change in that universe of stocks has taken place.
I urge you to click over to our free BPI page, scroll around, and read the commentary that goes with previous moves in the BPI. If you do, in no time you'll have a firmer grasp of the "true" market than 90% of investors out there.
Have a great weekend!
Editor-in-Chief, True Market Insiders