Wednesday, January 15, 2014

ABC Indicator Flashes S&P 500 ‘Buy’ Signal: Jan. 15

The ABC Indicator of movements in the S&P 500 (INDEXSP:.INX) introduced in a J.J.’s Risky Business blog post last month is flashing a Buy signal this Wednesday morning. In forecasting the short-term direction of the U.S. large-capitalization index on a closing basis since July 6, 2009, this indicator’s signals have been correct on 97 occasions, or 71.32 percent of the time, and incorrect on 39 occasions, or 28.68 percent of the time.

There have been important differences between the behaviors of the ABC Indicator’s Buy and Sell signals during the above-referenced period, as mentioned in a blog post this month. Its Buy signals have been right on 55 occasions, or 80.88 percent of the time, and wrong on 13 occasions, or 19.12 percent of the time, while its Sell signals have been right on 42 occasions, or 61.76 percent of the time, and wrong on 26 occasions, or 38.24 percent of the time.

Meanwhile, I am unhappy (although neither shocked nor surprised) to note the first public test of the ABC Indicator in forecasting the short-term direction of the S&P 500 on a closing basis is posting its initial unsuccessful result at J.J.’s Risky Business, as the latest Sell signal failed in its mission, with the index rising to 1,838.88 on Tuesday from 1,819.20 on Monday. This test will encompass 10 signals, and history suggests they will be correct between six and eight times and incorrect between two and four times. To this point in the test, they have been right three times and wrong one time, which means the indicator is performing within its historical parameters.

The first three ABC Indicator signals mentioned in the blog posts linked below were successful, as follows:
• In the case of the Buy signal on Dec. 20, the S&P 500 on a closing basis rose to as high as 1,848.36 on Dec. 31 from 1,809.60 on Dec. 19.
• In the case of the Sell signal on Jan. 3, the index on a closing basis fell to as low as 1,826.77 on Jan. 6 from 1,831.98 on Jan. 2.
• In the case of the Buy signal on Jan. 10, the index on a closing basis rose to as high as 1,842.37 on Jan. 10 from 1,838.13 on Jan. 9.

I would like to say the ABC Indicator has never, ever in its history whipsawed between Buy and Sell signals the way it has recently, with three signals being generated during a period of four trading days. Alas, I cannot say it because the same thing happened on three occasions in 2013, as noted here:
• Aug. 7, Sell; Aug. 8, Buy; and Aug. 12, Sell.
• Oct. 11, Buy; Oct. 15, Sell; and Oct. 16, Buy.
• Nov. 7, Sell; Nov. 8, Buy; and Nov. 12, Sell.

Importantly, the ABC Indicator also flashed an S&P 500 Buy signal on Nov. 14, which is extraordinarily helpful in interpreting the subsequent short-term movement of the index in each of the three cases of comparatively high equity-market volatility last year.

 photo SPX-130801-131231-580_zps18b99b96.jpg

Source: This chart is based on data at Yahoo! Finance.

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Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice.