Since the late 1990s, we’ve been using a “point-and-figure” charting method at Balser Wealth Management, LLC with very good success. These charts are great for looking at mutual funds, stocks, bonds and even interest rates.
Using these charts one can clearly see when stocks are moving in a positive direction or a negative direction. We call these trends, and they’re pretty simple to read and understand if you’re an inexperienced investor because all you have to do is look at the pictures to determine what’s going on with any particular issue.
What’s great about point-and-figure charts is they can give us the direction of the markets as well. There are several charts that I regularly monitor just to gauge the temperature of the market. I’ve divided these charts into long-term, intermediate-term and short-term indicators.
I’d like to take a look at the long-term indicators because they provide a clear backdrop of what is going on in the markets.
What’s interesting is that when you look back at the various signals that are given on these charts, you can associate them to some pretty big turns in the markets. Here are three long-term indicators that I’ve come across that provide great signals.
The first is the “Bullish Percent for All Mutual Funds.” It seems crazy to get a long-term indicator from mutual funds, but this indicator gives us a long-view picture of money in motion.
The Bullish Percent is the percent of charts in the universe (whatever universe you may be looking at) based on buy signals. The chart displayed here is the Bullish Percent for all equity mutual funds. The number on the left is the percentage of equity mutual funds on point-and-figure buy signals.
For reference, a column of Xs means the issue is moving up, which is good. A column of Os means it’s moving down, and that's not so good.
You also need to know the buy signal or sell signal. A buy signal is where a column of Xs exceeds a previous column of Xs. A sell signal is where a column of Os exceeds a previous column of Os. It’s not necessarily important to know the patterns as it is being able to identify the column and signal.
This chart has an uncanny ability to foreshadow big losses in the markets. In July 2008, this indicator reversed into a lower column of Os from a higher top, with two sell signals. In August 2011 a reversal from a higher top occurred when the U.S. was going through a debt crisis. Then in August 2015 another column change was followed by two sell signals. We currently see this indicator moving positive, that that’s good.
This is what makes the Bullish Percent for All Mutual Funds a pretty good long-term indicator.
The second long-term indicator I monitor is the “Percent of Mutual Funds that are In a Positive Trend.” What do I mean by a positive trend?
Any chart that is trading over and above its support line is in a positive trend. It can go up and it can go down, but as long as it stays above support it signals a positive trend. (This chart doesn't speak often, but when it does you’d better be listening.)
It’s important to remember that when you’re looking at long-term charts, you need to be aware of your field position and whether you're on offense or defense. These charts help you do just that.
When they’re at washed-out levels and begin to reverse up, then you have the wind at your back and the odds of making money are pretty good. Likewise, when they reverse down from lofty levels you want to be careful with your investments.
It’s interesting to note that this chart produced a sell signal three times in 2008. One in January, another in July, then a third in September. So this indicator gave us a pretty good overview of what was happening in 2008. It also reversed to Os in August 2011 (as our other indicator did when the U.S. was struggling with its debt nonsense). Currently we’re positive, but on a sell signal.
Cash vs. Equities
Our final long-term indicator is the “Measure of Cash vs. Equities.” For cash we use the 13-week Treasury bill rate compared to the S&P 500. Like the two charts above, it’s important to determine whether you’re on offense or defense, and your field position. When this chart reversed it occurred (again) at major turns in the markets. In July 2008 it turned and in March 2009 it turned again. In November 2011 it showed a second buy signal, then in March 2012 a third buy signal.
These long-term charts clearly help me to paint a picture of whether we are on offense and in a wealth-accumulation mode, or on defense and in a wealth-preservation mode.