Market, sector, stock, and a March 16 review
By Jeff Bailey
Jeff: It's been awhile since you've discussed some of the sector
distributions and with the major market bullish percent
indicators all at overbought levels, what sectors or stocks might
we be looking at from the short side of things?
This is a good question, and perhaps a very timely one. I don't
save all my e-mail and I'm not sure if the above e-mail is from
the same trader/investor that stimulated a prior discussion on
the point and figure methodology back in mid-March, but I agree,
it has probably been too long since we've discussed the various
sector bullish percent, that some traders have come to know and
Wow! Does time fly and can the markets move! It was back on
March 16, 2003 when we last looked at the "sector bell curve"
bullish %, with the sector bullish percent from Dorsey/Wright and
Associates, and perhaps just when that column was thought to be
"timely," this week's question from a fellow trader/investor is
perhaps a great time to review, assess, and make some plans.
Is it true that a rising tide will lift all boats, when it comes
to thinking out price action and cycles for markets, sectors and
Can it be that a MARKET simply fluctuates up and down as risk is
built in and taken out of a market, sector, or stock?
Traders may want to go back and review the March 16, 2003 Ask the
Analyst column titled "Market, sector, stock, with bullish
percent distribution," as I think both of the question just posed
may well be answered with a resounding YES!
That was then... this is now
In order to keep from having to flip back and forth between the
article you're currently reading and the March 16, 2003 column,
I'm going to take the exact same sector bell curve graph I showed
that day, with certain remarks still intact, and we'll take a
little trip to current day. As we do this, we'll follow the
sector bullish % action, and then look to see if there are some
sectors traders may be looking to trade, from the bullish and
bearish side of things.
March 16, 2003 Sector Bell Curve
I'll try and recap some of the observations made March 16, 2003
from left to right. Let's start with the observations made as it
relates to RISK with the Wall Street Bullish % (BPWALL) and Dow
Industrials Bullish % ($BPINDU). I'm going to associate the Wall
Street bullish % with the Securities Broker/Dealer Index (XBD.X)
which had closed at 360.53 on Friday, March 14th. The Dow
Industrials finished their Friday trading session at 7,859.71.
Did bears have a high degree of risk at such "oversold" levels?
The Semiconductor Bullish % (BPSEMI) had evidently just reversed
back up into "bull confirmed" status. On March 14th, the
Semiconductor Index (SOX.X) closed at 305.15 and the popular
Semiconductor HOLDRs (AMEX:SMH) closed at $23.98. Was a "bull
confirmed" status at an "oversold" level an alert that the
NASDAQ-100 Index Bullish % ($BPNDX) might be expected to reverse
and give confirmation to the semiconductors? Take note! A
sector reversing up into the MOST bullish phase "bull confirmed"
from an "oversold" level below 30%! While BULLISH traders lick
their lips for such opportunities, BEARISH traders look for "bear
phases" that develop from more "overbought" conditions after a
bull cycle move.
Now... take special note of the Internet Bullish % (BPINET) and
observations of a sector's internals "holding steady" when many
sectors were still falling or moving to the left of the bell
curve. This was DIVERGENCE as internals held STRONG despite a
MARKET that was or had been moving lower, or to the left. The
CBOE Internet Index (INX.X) closed at 94.60 on March, 14th. The
Internet HOLDRS (AMEX:HHH) closed $27.79, the Internet
Infrastructure HOLDRS (AMEX:IIH) closed $2.33, while the Internet
Architecture HOLDRS (AMEX:IAH) closed at $25.75 on March 14th.
Did the DIVERGENCE pan out for bulls?
The Saving and Loan Bullish % (BPSAVI) was correcting from a bear
confirmed status at "bear correction" and while RISKY above 70%,
was showing remarkable levels of bullishness in what had been or
was a bearish market environment. There isn't a sector that I
know of to trade, but a "popular name" in Washington Mutual
(NYSE:WM) had closed at $33.53 on March 14. I don't know if any
of the mentioned "reasons" why the sector was holding up actually
came into play, but we'll look to see if any of the observations
above panned out.
Move forward, with a shift to the right!
To better understand what has happened and how we have gotten to
where we are, I think it is helpful to try and look at things
step by step. Here a March 24, 2003 sector bullish % I put
together along with comments as it related to a comparison
against the above March 16th sector bell curve. This was posted
in the OptionInvestor.net Market Monitor on March 25, 2003 at
01:18:13. The comments were "Look for leadership groups that are
the FIRST to reverse up from oversold levels below 30%, or those
sectors turning bull confirmed. Can see how sector bell curve
begins to shift to right."
Now, when you look at the sector bell curve, take notes as to the
change in "colors" of some sectors and major index bullish %.
BEARS! Take note! Not of what happened, but what you'll want to
look for as it relates to the future!
March 24 to March 14 Sector Bell Curve Comparison -
Six trading days had passed between the above sector bell curve
comparisons! We could see a light "shift to the right" and some
removal of RED, or "bear confirmed" to either "bull alert" or
Starting from the left, you bottom feeders may have traded some
partial positions when the Broker/Dealer Index (XBD.X) was
trading at 400.00 that day.
The Semiconductor Bullish % (BPSEMI) did indeed move above the
30% level with the SOX.X trading 325.
The NASDAQ-100 Bullish % ($BPNDX) from www.stockcharts.com was
indeed showing some "internal confirmation" as it moved to the
right in the sector bull curve and status had reversed from "bear
confirmed" to "bull alert".
The Internet Bullish % (BPINET) still appeared stuck, but the
CBOE Internet Index (INX.X) itself looked to be moving higher at
Maybe the Retail Bullish % (BPRETA) caught a bull's eye and the
Retail HOLDRS (AMEX:RTH) at $72.48.
I won't go through all the sectors, but you should be getting the
idea of a "rising tide" and then monitoring for sector
leadership, from which individual stocks, with strong relative
strength can be identified.
For a discussion on RELATIVE STRENGTH, we discussed one technique
in a December 29, 2002 Ask the Analyst column titled "Relative
strength, but with X's and O's."
Onward and upward, with a slight shift to the right!
Let's fast forward some more and look at a sector bell curve
after the conclusion of trade on March 28, 2003. I posted the
following chart in the OptionInvestor.net Market Monitor on March
29, 2003 at 01:25:30.
March 28, 2003 Sector Bell Curve -
Comments from that day's Market Monitor post were... "The Sector
Bell Curve showed modest bullishness this week. Restaurant
(BPREST) and Healthcare (BPHEAL) both reversed back up into "bull
confirmed" status this week, with Protection/Safety (BPPROT)
reversing up from "bear confirmed" to "bull alert."
One stock I've discussed in the restaurant sector in recent weeks
and had mentioned as "bullish on a break higher at $26.00, on
March 28th in the OptionInvestor.net 11:00 AM EST update was Yum!
Brands (NYSE:YUM). On March 28th, the stock was trading $24.77
and a trade at $26.00 would have the stock trading a "triple-top
buy signal" and also have the stock breaking above its longer-
term 200-day SMA.
That same 11:00 Update, I made special note that I had previously
profiled a "healthcare" / "drug" related stock McKesson
(NYSE:MCK) and that it probably best for bears holding short/put,
"move to the sidelines" and close out the position as it was my
belief, based on past observation, that a rising tide in a sector
and MARKET tends to lift all boats. MCK was trading at $25.36 in
that March 28, 2003 11:00 Update.
On April 4th, the sector's weren't fooling!
Moving forward, here's what the April 4th sector bell curves were
doing. This chart was posted in the OptionInvestor.net Market
monitor on April 4, 2003 at 10:12:37 PM EST.
April 4, 2003 Sector Bell Curve -
Things were really starting to get "green" and a more pronounced
shift to the right was being seen from the sector bell curve.
The results of sector bullishness had the broader S&P 500 Bullish
% ($BPSPX) and VERY broad NASDAQ Composite Bullish % ($BPCOMPQ)
now turning "bull confirmed." The narrower NASDAQ-100 Bullish %
($BPNDX) was on the move to the right in the 52%-56% bullish.
Warp speed to today!
Traders/investors should now have a pretty good grasp of what was
taking place. Let's go warp speed and to get the full
perspective of how things have changed, let's compare how the
sector bell curve looks TODAY (May 30, 2003) and when we began
this exercise, with the March 16, 2003 bell curve.
May 30, 2003 and March 16, 2003 sector bell curve
Wow! There's a lot of "green on the screen" and a pretty good
"shift to the right" has been seen.
With the major indexes now at either relative highs dating back
to December of 2002, it continues to amaze me how/when the MARKET
suddenly, but with notice, will systematically have the sectors
and indexes shifting left to right as it relates to RISK. At
some point, but with notice, the higher levels of RISK will be
removed, in systematic fashion.
As it currently stands, I don't see any sectors/indexes at this
point that are exhibiting any weakness as it relates to their
internals as depicted by the bullish percent indicators.
Oh... there are some sectors/indexes that will be "ripe" for a
pullback, especially those that have moved from "oversold" to
"overbought." It would make sense at some point that the "smart
money" that bought the lower risk levels, will eventually find
the "smart money" selling at the higher risk levels (from bullish
But just as we've seen the sectors move from left to right,
trader/investor once again see how that sector action moves the
major market bullish % like ($BPCOMPQ, $BPNYA, $BPSPX, $BPOEX,
$BPNDX) have moved right with the SECTORS driving the
At some point, the opposite will be true and it will be the BEAR
that picks up on the weakness, will look to attack that weakness
Just as a sector drives MARKET action, it will be a weak STOCK,
in a WEAK sector that best offers a BEAR and easy meal.
Still, we should understand just how a "rising tide tends to lift
all boats and currently, a BEAR that finds a weak stock, must be
aware that there are probably more and more bulls just showing up
to the party and looking for "cheap" stocks. There's also some
BEARS that have seen enough losses mount since March, to be quick
to cover another potential loss as he/she can't afford another
hit to their account.
I ran a stock screen using Dorsey/Wright and Associates Point and
Figure charting system.
As a preliminary scan, I entered the following screen criteria,
to try and identify bearish candidates. This stock screen was
very basic, but held the MAIN indicators I look for to begin
Price between $20 and $100
Stock trades with options
Relative strength chart is sell (longer-term under performer)
Relative strength chart is O (intermediate-term under performer)
Trend is negative (stock traded below bearish resistance trend)
Sort by sector
(Note: Price, Options and All Sectors no a bearish criteria).
This basic bearish search produced 100 stocks.
BPAERO (Aerospace/Defense/Airline) : (BA, DRS, GD, HON, TGI)
BPAUTO (Automotive) : (AXL, GM, TM)
BPBANK (Banks) : (BK, CMA, FMER, MEL, STT)
BPBUIL (Building) : (MLM, TXI, YRK)
BPBUSI (Bus Pdcts) : (ADP, DNY, HEW, TXT)
BPCHEM (Chemical) : (AKZOY, BOX, CCMP, EMN, FMC, GLK, PPG, ROH)
BPCOMP (Computers) : (BBOX, CERN, DST, EDS, MRCY, NCR, NDC, SCSC)
BPDRUG (Drug) : (BMY)
BPEUTI (Elec. Util) : (AEP, POM)
BPFINA (Finance) : (IFIN)
BPFOOD (Food/Bev/Soap) : (CPB, MOND, RJR, TR)
BPFORE (Forest/Paper) : (BCC, KMB, PCH)
BPGUTI (Gas Util) : (GAS)
BPHEAL (Healthcare) : (BAX, HCA, LPNT, MEDQ, PDCO, TRI)
BPHOUS (Househld Gds) : (MYG, SNE)
BPINSU (Insurance) : (AJG, CNA, HIG, LNC, LTR, MNY, NFS, UTR)
BPLEIS (Leisure) : (EK)
BPMACH (Machinery) : (CR, DOV, HIT, PH, SPW)
BPMEDI (Media) : (SCHL)
BPOIL (Oil/Gas) : (AHC, KMG)
BPOILS (Oil Serv) : (BHI, DO, NE, RIG)
BPPROT (Protect) : (INVN)
BPREAL (Real Est) : (AIV, RA.B)
BPREST (Restaurant) : (CEC, CPKI, JBX, KKD, LNY)
BPRETA (Retail) : (ABS, CVS, KSS, MAY)
BPSEMI (Semicon) : (DPMI)
BPSOFT (Softwre) : (INTU)
BPTELE (Telephn) : (BTY, QCOM, SBC, TDS, USM)
BPTRAN (Trans) : (USFC)
BPWALL (Wall St.) : (AGE, LAB)
(Disclaimer: The following list of stocks was generated using a
general search criteria and is not meant to imply a
recommendation for or against that stock.)
Observations: Computers, Chemical and Insurance seem to have
more stocks in the list than others right now. Even under such
BULLISH market conditions.
Well.... It's late Friday evening and it has been a rather "long"
week for all of us.
I hope you found this article helpful, in perhaps understanding
how the sector and major market bullish % tend to move from
"oversold" to more "overbought" levels.
It never ceases to amaze me, how BULLISH a move can become and
continue to be, but how helpful the sector bullish % can be, in
actually seeing the market internals strengthen, and....
eventually weaken. I've also been amazed at how BEARISH a move
can become and continue to be.
I will continue to monitor the sector bullish %, and try and
alert traders to any reversals in the various sectors listed
If we as traders/investors think the above display of "sector
bell curve" movement only takes place to the upside, then revisit
the March 16, 2003 Ask the Analyst article "Market, sector,
stock, with the bullish percent distribution.
Better yet! Dorsey/Wright and Associates offers a FREE trial to
their point and figure database. I (Jeff Bailey) nor
OptionInvestor.net or PremierInvestor.net receive any fee from
any subscriptions Dorsey/Wright and Associates receives from our
Once you've signed up for your free trial, you should be able to
make some sector bell curve comparisons of your own by clicking
the "Database" tab, then in the "Database Reports" area, click
the "Sector Bell Curve" link.
You may note that Dorsey/Wright will change their horizontal
scale from time to time for their sector bell curve ranges. When
you look at their current horizontal scale, it will be different
that what I've shown in the prior sector bell curves, as I am
limited on the width I can display on the web sites. That's OK
though! The point of all this is to understand how to use the
sector bell curve to identify sector/market strength and
This column is an information service only. The information
provided herein is not to be construed as an offer to buy or
sell securities of any kind. The Ask the Analyst picks are not
to be considered a recommendation of any stock or option but an
information resource to aid the investor in making an informed
decision regarding trading in options. It is possible at this
or some subsequent date, the editor and staff of The Option
Investor Newsletter may own, buy or sell securities presented.
All investors should consult a qualified professional before
trading in any security. The information provided has been
obtained from sources deemed reliable, but is not guaranteed
as to its accuracy.