The primary market trend—investing with confidence in 2017

As we enter 2017, perhaps it makes sense to take a step back to gain better perspective on the longer-term, primary trend of the stock market. The primary market trend is simply the main direction in which the market is moving over the longer term (generally up to two years). This sounds like quite an elementary thing to discern. It’s a phrase that Lowry Research and other classic technical analysis research houses and technicians refer to often.

The reason we all like to remind ourselves of it is because it’s incredibly easy to get lost in short-term market gyrations. Such loss of perspective often leads to costly, ill-timed mistakes and overtrading. However, the primary market trend is not always particularly easy to decipher. This is why it’s important to employ an objective, rules-based methodology in order to properly identify the primary trend. When investors are near certain of the primary trend, they are able to possess the conviction necessary to buy when others are selling (during bull trends) and to sell when others are eagerly buying (during bear trends).

In terms of Lowry’s proprietary measures, there are several we refer to when assessing the primary market trend—all of which are in current agreement. We will only cover two here. The first is the spread between our Buying Power and Selling Pressure Indexes. The Buying Power and Selling Pressure Indexes are Lowry’s primary measures of the forces of supply and demand for stocks on an intermediate to longer-term basis. The spread between them, and more importantly the trend of that spread line, provides an insight into whether the buyers or sellers have the upper hand. In mid-November a downtrend of the Buying Power/Selling Pressure spread was broken, and in the ensuing weeks, the spread broke above its 40-week moving average and has continued to improve since. Importantly, the last similar such breakout after a long decline occurred in the second half of 2012 (and in late 2009 before that).

The next major corroborative signal in confirming and monitoring the health of the primary trend is Lowry’s Operating Companies Only (OCO) Segmented Advance/Decline Lines as shown in the following figure. Lowry’s OCO stocks are exactly what they sound like, just the operating companies/common stocks—not the preferred stocks, not closed-end bond funds, and not ADRs. The concept is to isolate the stocks in the given index for a more accurate view of the traditional all-issues Advance/Decline Line. Taken a step further, the segmented portion refers to breaking out the OCO index by market capitalization. This again helps us to understand more about market internals and what is driving the market. As seen in the chart below, Lowry’s OCO Segmented Advance/Decline Lines are at or near new all-time highs for all three market cap segments. This action lends further credence to the advance with the knowledge that breadth is exceptionally healthy. By contrast, in an unhealthy market, near a major market top, these Advance/Decline Lines typically diverge from price index gains for 4 to 6 months on average (but as long as two years) before an eventual major market decline begins—1929, 1972, and 2000, for example.

FIGURE 1: NYSE—OCO SEGMENTED ADV-DEC LINES

While Lowry provides short-/intermediate-term signals and guidance for clients, knowledge of the market’s primary trend based on objective measures of supply and demand remains of paramount importance for the conviction of investors and traders alike. Lowry’s analysis of OCO Segmented Advance/Decline Lines is also a valuable component of our overall approach to evaluating the primary market trend.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.

Vincent Randazzo, CMT, is a portfolio manager at Tamarisk Capital Management and the founder of ViewRight Advisors. He began his career at Morgan Stanley and has previously served as head of technical research at CFRA and Lowry Research. He holds a B.A. in economics from Drew University.

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