Donald W. Dony, FCSI, MFTA          
Don’t miss Donald at this year’s Las Vegas seminar click here

Following the August 18 Market Minute titled “S&P participation remains weak”, underlying support for the S&P 500 has deteriorated during the last few days. On August 18, the percentage number of advancing stocks within the broad-based index had fallen to 50%. In contrast, at the peak of the bull advance in April, that percentage number was over 75%.

Market conditions have continued to change to the negative side. Currently, only 34% of the stocks in the index are trading over their 200-day moving average. This means that 66% are trending down (Chart 1). When the majority of an index’s securities are declining, a downward trend develops. Similar conditions occurred in late 2007 and throughout 2008.

Bottom line: Market support has shifted faster than expected to the negative side. Advancing markets require a clear majority (60%-90%) of their underlying stocks to move higher if an index is going to trend up. When the percentage falls below 50%, markets start to decline.

Investment approach: Models indicate that most indexes trade on an approximate 4-month cycle. As the last trough was in late May to early June, the next probable low can be anticipated in late September to mid-October. With the underlying support for both the S&P 500 and TSX quickly eroding, increasing downward pressure can be expected over the next 4-6 weeks.

Investors may wish to take a very defensive stance this month by increasing cash percentages and raising stops. Good value opportunities are anticipated after this correction in Q4.

In the age of the internet, there are lots of sites that give you free stock  charts. For many people, a chart is all they need for their trading. Obviously AIQ offers much more than charting, but even if all you need are charts then you’ll love AIQ’s list feature.

This feature allows users to very quickly browse through the stock charts that they are interested in. Every AIQ power user heavily relies on the list feature. Knowing how to create and manage lists allows users to focus on the stocks they want to purchase, to more easily manage a large database, to effortlessly chart their favorite stocks, etc.

TradingExpert Pro comes with the S&P 500 and the AIQALL list. Many other AIQ list files can be downloaded from AIQ’s web page. The web page includes lists of the S&P 1500, Russell 1000, Russell 2000, Nasdaq 100, optionable stocks, etc. The web site is
http:// www.aiqsystems.com/lists.htm

After downloading one of these list files, you can very quickly and easily scroll through charts of the stocks. In AIQ Charts, use the dropdown arrow on the tool bar to highlight a list name. For this example, we’ll choose a list of the Nasdaq 100 stocks. By hitting the Enter key, the Control Panel is replaced by the list of Nasdaq 100 ticker symbols. By clicking on the Explore Right icon on the toolbar (or clicking on the individual ticker symbols), you’ll get a chart of each stock in the list. There is no need to type in the individual ticker symbols. Simply keep clicking the Explore Right icon and you can see every Nasdaq 100 chart in a matter of minutes.

While AIQ places many lists on its web site, some users may have a particular list of stocks that they want to closely track. This might include recommendations from Value Line or a favorite investment newsletter. In this case, users can create their own individual lists. Creating a list is a simple process.

 – In Data Manager, click List on the menu bar and then New.
 – Enter a name for the list you want to create.
 – The list will appear on the left section of the Data Manager window.
 – With your list name highlighted, click List again and Insert Tickers. To save time, enter a list of
tickers separated by semicolons.
 – Click OK and the list will be created.

If you have a list of ticker symbols in a spreadsheet, TradingExpert Pro can import that list. That means if you subscribe to Investor’s Business Daily’s online service then you can download its top recommendations into a spreadsheet and then import the list into AIQ. To do this, first
save the list to a CSV format. Then go to the Data Manager and create the new list name using the process just described.

 – With the list name created, select List and then Import.
 – Highlight the CSV file and click OK.

AIQ allows users to merge two lists as well. Some people like to track a list that combines two list files, such as the SP 500 and Nasdaq 100. AIQ’s Advanced List Edit function allows you to merge two lists. You simply open both lists and then drag one list into the other. Be sure to save the new combined list to a new name.

So far we’ve discussed how list files help save time in charting. They are also helpful when you run Reports. When you run reports on your individual list file, only stocks that you are interested in will appear. The noise from other stocks that you’d never buy is eliminated. For instance, you can check for a breakout on AIQ’s Point & Figure Breakout report using your particular list of stocks. There is no need to filter through a bunch of stock symbols looking for the ones of interest to you. To accomplish this, go to Reports

 –  right-click on Stock Reports. The Global Properties box will appear
 – Use the dropdown arrow next to Stock to select the name of the list you want to run and click OK.

We’ll choose to run reports on the Nasdaq 100 stocks. Some reports, however, show many stock choices. To quickly scroll through the list of stocks on a report, you can click the Build Report List icon on the toolbar. This will create a list of the stocks on a report. After naming the list, the first stock on the report will automatically be charted. Click the Explore Right icon to see the other stocks.

Similar to Reports, Expert Design Studio (EDS) scans can be run on individual lists.

 – In EDS click the Properties icon and select the appropriate list.
 – After the scan is complete, you can chart the stocks by clicking the Chart List icon.

The ability to create and use lists is a basic function of TradingExpert Pro. Although basic, this function is very powerful. It allows you to quickly scroll through charts and enables you to focus on the stocks you are most interested in.

Traditionally, equities have commanded a 5% premium over the bond yield, largely due to bonds remaining the asset class that is routinely ignored, and investors preferring stocks and currencies for reasons yet to enjoy proper justification. Not only has this become entrenched in the psyche of investors everywhere, but significantly, the fundamentalist revolution will tolerate it no more.

As history shows us, other stock markets around the world have suffered a number of catastrophic events, to provide the investor with as much as two opportunities to lose 100% of their investment in the past century. The United States however, remains the exception. It is extraordinary that it has not come to the same grim end as the Japanese or European stock markets, and in that respect ought to be treated discriminately.

Simply, the 5% premium in favor of equities is concomitant to the risk that stocks pose vis a vis bonds. If the risk is not reflective of a 5% premium it cannot be justified. Economic growth is achieved through innovation. If there is no innovation to speak of, there will be no economic growth and neither in this situation can a 5% premium be argued. The premium that equity enjoys over bond yields is dependent on inflation; if inflation is rising, bond prices will be under pressure. Due to the fact that equities are a good hedge against inflation, the premium in this scenario however, may well merit some consideration. The incontrovertible truth however, is that fundamental analysis of the real interest rate achieved is mandatory in the counter-revolution that will emerge.

Currently, inflation is targeted by the Federal Reserve to be 1.8% over the next 10 years. The inflationary component priced into the 5-year bond is 1.8% and that priced into the 10-year bond is 2.1%. In the fullness of time, as the economy builds momentum, the target will appear to be more and more inappropriate. See now, when inflation is at 5% it will still receive the familiar rhetoric of a central bank who will insist that their target is 1.8%, in an effort to coerce the market. On this occasion however, the power of suggestion as fortified by efficient markets theory, will prove ineffective. Regardless, the global economy including Europe will set a course along the path of inflation.

Further, there is ambiguity in the real rate of inflation. Hedonic adjustments have been rife, and while it may assist a Central Bank in the discharging of its duties, the real rate of inflation will be considerably magnified. It is intangible anomalies such as these that efficient markets theory fails to consider, and it is precisely what will be required of sound investments in the coming new environment – fundamental analysis. Again, traditionalists have held the view that stocks will outperform bonds however, in the past 10 years bonds have triumphed, with considerable economic growth resulting despite a return being postponed by equities. Growth stock investors have disregarded the importance of dividends in the past, but now alternatives will be available. The divide between fixed interest markets and equity will be a practice of the past. Comparisons will be made between the yield offered by bonds and the dividend yield on stocks.

Simple moving averages are not rocket science. They provide a benchmark from which any given days price can be measured for it’s degree of deviation from the average. Crossovers of moving averages by price action whether to the upside or downside are not so much buy or sell points as warning signs. Of course it depends on your moving average. Historically a 200-day arithmetic for the NASDAQ has provided a pretty good indication of the long trend. Dramatic breaks through this average often spell a trend change. Now add in a shorter moving average like the 50-day and a little more clarity appears.

Take a look at the NASDAQ going back to early 2006 in the chart below. When the 50-day is above the 200-day and both are rising, this is the time when bulls hold the court. 

Conversely when the 50-day is blow the 200-day and both are falling, this is the time when bears reign.

This is not a timing mechanism for entering or exiting, merely a confirmation of which direction the market is going when these averages display this pattern.

In other market conditions these moving averages will be trending differently from each other and the picture is mixed.

So to the last few days July 13 – 15, 2010. We are at a confluence of the 50-day moving average and the 200-day moving average. The 50-day is in a down trend and now just crossing the 200-day. Yet the 200-day is barely turning down, and has been moving back up in the last 2 days. Until there is a clear down trend in the 200-day, with the 50-day still below and also down trending the sweet spot for shorts is still not in place.

One interesting point to note. The price is also very close to the moving average confluence. The last time this setup occurred was back in May 2005. Check out the chart below. Notice the similarities between May 9, 2005 and  July 15, 2010?

Back in 2005 the confluence resolved to the upside, with the market rebounding more than 10% in 2 1/2 months, eventually meeting resistance at the prior high. July 2010 more time is required for the averages to play out before we have an idea where the market is headed. 

The recent OIC implementation of its new option symbology in February of 2010 finally gave AIQ the opportunity to fully chart options symbols. There are two methods of charting. In AIQ Charts, you can now enter an option symbol and receive a real-time chart (not end of day). In AIQ RTalerts you can add any number of option symbols and see both real-time and end of day charts.

AIQ opted for what we considered the easist to use implementation of the OIC recommendations. For example the SPY July 2010 106 calls can be charted by entering the ticker

SPY JUL10 106 C

Note there is a single space between the underlying ticker, the month/year, the strike price and the call(C) or put (P).

Try it for yourself. We recommend using RTalerts for tracking multiple options, as the capability to see end of day and real-time price charts is limited to real-time only in AIQ Charts. Further developments to accommodate the weekly and quarterly options are being investigated.