I'm back after a long sabattical in the Vulcan Desert

I've been under pressure at my job, and reading a lot of books to better refine my trading strategy, which is why it has been so long since I published this web log. I'm back now, though, and planning to provide a weekly post as planned for the forseeable future. I am currently long VPHM (unrealized gain: 30%) and NDAQ (unrealized gain: 15%), and watching my other positions - IFN, EWJ, EWW, TZIX - languish at 1-3% below my purchase price. I have relatively tight stops on my positions that are 'low-conviction', which include all of the ETFs, so that if the expected September slump materializes, I will not be too adversely impacted. In reading The Stan Weinstein's book recently, I noticed two intriguing patterns that he discusses, both of which bode ill for the current market: Post-presidential election years are usually negative, and the month of September is usually negative. However, in his chapter on spotting turns in the market, the evidence is more mixed: while the DOW and NASDAQ are showing signs of topping (entering 'Stage 3' in his words), the NYSE A/D momentum reading, described below, is still positive, as are overseas markets in Japan and Europe. So, without further ado, let's introduce the NYSE A/D momentum meter, and expalin how it is used.

Follow the $NYAD - the momentum of the market

In Stan Weinstein's book, he describes a very useful indicator for measuring the momentum of the market - the NYSE advance/decline moving average. To calculate it, you simply take the 200-day moving average of the NYSE advancers - NYSE decliners. To get this information for free, go to Stockcharts.com and chart $NYAD, or click here. This indicator, as stated by Mr. Weinstein, gives late confirmation of the onset of a bull market (as it did in 2003), and, more importantly, early warning of the onset of a bear market - which it provided before the '87 crash, but it has not yet provided in this market cycle. Although this indicator is declining currently, we are still in positive territory, suggesting that while September may be bad, we are not yet facing a new bear market. I also like to chart the 50-day moving average of this indicator to see the short-term momentum of the market.

Another great indicator for assessing the internals of the market is the percentage of MYSE stocks that are above their 50-day and 150-day moving averages. Readers of Stan Weinstein recognize the 150-day moving average as another way of calculating the 30-week moving average, which is used to analyze the stage of a stock. By looking at the percentage of stocks that are above their 150-day moving average, you can see what percentage of stocks are in a 'stage 2' advance, vs. the stocks in other stages: stage 1 basing, stage 3 topping, and stage 4 declining. Note that early in this bull market cycle (March-July '03) we saw the fastest advance in the ratio of NYSE stocks above their 150-day moving averages, followed by 'topping' (July'03-March'04) and market turbulence ever since that time (March'04-present). This shows that the first advance of a bull market is the strongest and broadest, and while the bull market will continue for a while longer, it will be more turbulent and selective.

All three of these indicators provide information that is quite useful for assessing the health of the market.

• Technical Sensors: Strong



• Fundamental Sensors: Neutral



• Evaluation of Market Sensor Readings: Cautious and over 10% in Cash.

Logical Thought of the Day:"A general is not fit to lead an army unless he knows the face of the territory" - Sun Tzu

Link of the day:The Sector SPDR Scanner provides a great tool for learning about recent market sector activity. Use it to get a feel for the behavior of various market sectors by adjusting the timeframe, both in length and position, and trying the histogram and line-chart modes. Given that half of the behavior of a stock is sector-driven, rather than company-driven, it makes sense to take Sun Tzu's advice and track the direction of the market and the direction of sectors and industries in the market. This tool is just one way to do this - IBD provides another way. Relative strength screening for the top stocks by price performance in a sector is another, equally important way.