This Is How to Get an Edge on the Pack…

Why did the markets crash in 2008?

If you think it had something to do with US house prices, you’re close.

I believe many everyday people could have a decent go at this. That’s the thing about hindsight…even the biggest surprises seem rather obvious when we look back.

But it’s never this easy in real time. That’s one of reasons why trading is so hard. The undeniable truth is that most people are looking the other way at key times.

In a moment, I’ll continue where I left off yesterday. I have two more indicators for you. I believe these will focus your attention in the right direction.

Before I do that, there’s a short excerpt I want you to read. It’s by experienced commentator Philip Baker. This is how I believe many people are currently viewing the markets…

With interest rates rising in the US and at best staying where they are now here in Australia, it will be up to earnings to propel stocks higher. With the economy just chugging along at an annual growth rate of around 2 per cent, it’s too hard to see how profits can keep pace with the recent gains in shares.

The Australian Financial Review, 3 January 2017

I know Phil. He was a talented bond trader at Bankers Trust during the 1990s. While I always respect his view, I believe, on this occasion, Phil’s looking the wrong way.

You may recall last Thursday’s excerpt from Maximilian Walsh in Money Morning. A renowned economic and political commentator, Walsh had a similar downbeat tone about the market in 1994. This was just days before a huge multi-year surge in equities.

As I said earlier, most people don’t see the big momentum shifts coming.

Let me show you why…

A quick recap

Yesterday you saw the first of three key indicators — a graph detailing the cash levels of the big global fund managers. It shows large sums of money flowing back into the market.

You can see the chart below…

Source: Bloomberg
Click to open new window

I believe this is the start of a big portfolio adjustment. Further cash reductions would likely be a tailwind for stocks, as money leaves the sidelines and re-enters the market.

Look closely at the cash levels. You’ll see they often move in trends. A new downward trend in cash could potentially drive stocks much higher in 2017.

This is a highly-significant chart. Yet I believe most retail traders are unaware it exits. You can read more about this chart here.

‘We have lift-off’

The next indicator is one you may not have seen before. Few people know about it — I developed this indicator myself. I use it to help pinpoint key turning points in stocks.

Here’s how it works…

The indicator calculates the number of top 300 companies in a bullish trend. The stocks change over time, but the number remains fixed at 300.

Two tests determine the trend — a 100-day moving average (MA) and a 40-day breakout. A stock is bullish if prices break above both. The trend stays in place while the shares are above the MA.

If you don’t know, an MA is simply the average stock price over a set period (in this case, 100 days). A rising MA is typically a bullish sign. The 40-day breakout occurs when a stock hits a 40-day high.

OK, have a look at this…

Source: Quant Trader
Click to open new window

You’re looking at my proprietary indicator — the ‘Quant 300’. It shows the number of top 300 stocks that are bullish at any one time.

The indicator mostly ranges between 25 and 225; a low number indicates stocks have been weak, while high numbers occur after strong uptrends.

So, how does this help forecast where stocks are going?

Have a look below…

Source: BigCharts
Click to open new window

This time, I’m pairing the Quant 300 with a chart of the All Ordinaries. The charts cover the period between 1 January 2009 and 30 January 2017 — just over eight years.

The key to this graphic is the red lines. These mark major lows for the Quant 300. They highlight times when few stocks were in a bullish trend.

Now, this is where you need to study the chart closely.

Follow each line down to the All Ordinaries chart. A reading below 50 typically leads to a multi- month rally. Some have been major turning points; others were strong bull market extensions.

Look at the Quant 300 now. It shows a reading near 80, after falling below 50 in November. This is a bullish signal. It indicates an increasing number of stocks are in upward trends.

The Quant 300 typically peaks above 150. This gives the All Ordinaries plenty of scope to rally.

I’ve got another chart for you. This one shows the Quant 300 over the past 24 years.

Check this out…

Source: BigCharts
Click to open new window

As before, the red lines indicate the Quant 300 turning higher from below 50 — just like it did last November. Most of these turning points saw stocks surge.

Take some time to study this chart. I believe it offers the key to 2017.

Biggest surge EVER

I have one final indicator to show you. Chances are you’ve never seen this one. It’s about the most obscure indicator I know. You’re not likely to see it in the weekend newspapers.

And that’s a good thing…

You see, indicators are often most useful when few people are watching. This is when they can be at their predictive best. But little-known indicators are few and far between.

OK, here it is…

Click to open new window

This chart tracks the optimism of the US small-business sector. It comes from the always-interesting The National Federation of Independent Businesses supplies the data.

You probably won’t see the significance of this graph straight away. Don’t worry — that’s what I do. I’m always looking for patterns in data. This often gives me an edge.

Have a look at this…

Click to open new window

OK, let me tell you what’s going on.

The top chart is the Dow Jones Industrial Average. It shows the market’s movement for the past 30 years — from 1987 to 2017. Below this is the Optimism Index over the same date range.

Now, have a look at the four circles on the lower chart. This is important. They mark the biggest upwards shifts after a significant low point. There are only five super-reversals in three decades.

The final step is to align the spikes in optimism with the Dow. Take a moment to study this graphic closely. You’ll see the surges in optimism coincide with huge rallies in stocks.

And this makes sense…small-business optimism typically leads to job creation and investment. These are two of the biggest drivers of economic growth.

This is one of the most impressive indicators I know. It pre-empted trend accelerations in 1991 and 1993. It then gave buy signals near the major lows of 2003 and 2009.

The latest spike in optimism is the largest on record. I believe this sets the scene for a big rally in stocks — one that will likely take most people by surprise.

There are still lots of analysts worrying about the economy, company profits, interest rates and political uncertainty. I believe they are looking the wrong way.

Trend-following strategies do best when stocks are rising. I believe buying into strength and using a trailing stop-loss is the smart way to play this opportunity — that’s what I’ll be doing.


Jason McIntosh,
Editor, Quant Trader

From the Port Phillip Publishing Library

Special Report:Marijuana Mania’ is calling it Australia’s ‘next billion-dollar industry’. Our investigator calls it the biggest ‘legal drug deal’ in history… Don’t miss a cent of it.

This ground-breaking medical mega-trend has already spawned levels of wealth we haven’t seen since the tech boom of the early 2000s. Jaw-dropping stock gains like 1,380%, 1,102% and 13,627%! If you’ve got the guts — and a few coins in your pocket to play with — this mega-trend has the power to potentially nab you a ‘high-bagger’ gain of 1,233% by this time next year. But only if you act NOW… [More]


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia