By: Chris Rowe — October 12, 2021
The “Barometer of Risk” That You Need Before You Place Your Next Trade
When it comes to investing, there’s the market…and then there’s the “True Market.”
Understanding the difference between the two—and knowing which one to follow—will have an immediate impact on your returns.
Heck, it may even help you sleep better at night.
So, what exactly is the difference?
To explain, it’s important to understand what most people think of as “the market.”
They’re often familiar with popular indices such as the S&P 500 Index, the New York Stock Exchange, and the Dow Jones Industrial Average.
Referred to as the external market, these are what most folks hear about when they turn on any financial news network.
But these indices aren’t reflective of what we like to call the “True Market,” because they don’t tell us what percentage of stocks actually participate in market advances or declines.
Therefore, they don’t reflect the true strength of the stock market.
You see, those popular indices—the S&P 500, Nasdaq, and NYSE—are all capitalization-weighted averages of the stock market.
That means the stock prices of larger companies are given more weight in the calculation of the index than the prices of smaller companies.
So, if even a couple large-cap companies on the S&P move higher—think Microsoft or Apple—while most of the remaining stocks move lower, the S&P might move higher anyway.
That’s why most people make the mistake of thinking that the general stock market is moving higher when a major index goes up.
In reality, it might only be one or two large-cap companies that are causing the entire index to rise.
The True Market Shows Supply in Control
Be cautious of anyone telling you to focus on external indices as an overall stock market barometer. It’s dangerous…and a good way for your portfolio to get taken to the cleaners.
Instead, we here at True Market Insiders focus on market internals, or breadth (what we call the True Market).
To get a read on what the True Market is doing, I like to look at the New York Stock Exchange Bullish Percent Index (NYSE BPI).
In a nutshell, this indicator measures the percentage of stocks listed on the NYSE that are on “buy” signals. We look at this data on a point-and-figure chart, because it smooths out the noise that you’ll see on most other charts.
When the most recent column of the chart (on the far right) is filled with Xs, it’s a bullish signal. But if that column is filled with a line of Os, it’s a bearish signal.
(Click to enlarge)
As you can see, as of yesterday, the NYSE BPI is in an O-column formation.
In other words, the chart is telling us that it’s time to be on the defensive because supply is firmly in control of the market.
After spending 29 days in a column of X's, our "granddaddy of all technical indicators" reversed into a column of O's.
This is the seventh time we've seen this indicator reverse columns in 2021. To put that into perspective, consider that in 2020, one of the most volatile years on record for the stock market, the NYSE BPI changed columns 12 times.
The average number of days the chart stayed in a given column is 39. So we could see the BPI reverse columns again two or three more times in 2021. (Of course we could see it stay in this current column for the rest of the year. Time will tell...)
The point is (as you probably know) that 2021, like 2020, has been a volatile year for the stock market. By way of contrast, in all of 2019 the BPI only changed columns five times. Likewise in 2018. In 2017 it flipped columns just twice.
In other words, now’s the time to be on the defensive.
There are 2,800 (give or take) stocks that trade on the NYSE. The NYSE BPI chart on this page is shown in 'point-and-figure' (P&F) style. The rules of the chart say that it will not flip from an X-column to and O-column (like it did on October 1st) unless 6% of NYSE stocks, net, go on Sell signals on their own price charts.
Six percent of 2,800 is 168 stocks. That's how many would have to go on Sell signals (and fall below those historical support levels) for the chart to move from X's to O's.
Which is exactly what just happened. So this is indeed a bearish indication.
But here’s the thing....
Regardless of where the market is headed next, you can still cash in if you have the right tools and the BPI is one tool you want in your arsenal, no doubt.
But if you enjoy options...I’ve got good news for you.
Because recently, I pulled back the curtain on what could be one of the most groundbreaking trading systems of all time.
And right now, you have the opportunity to access it - whenever you want from wherever you want.
Click here to learn more.
Founder, True Market Insiders
Live each day like it’s your last.