Wall Street tends to inundate us with the kind of complex analyst-crafted research that makes us "simple folks" believe that investing should be left up to the "pros."
But KIS (Keep it simple) isn't dead and there's one deceptively easy-to-understand indicator that's identified the beginning of every rally leg since 2012 began.
This little-known indicator not only provides buy signals, it also - and in the current market condition, more importantly – reveals when up side momentum is broken.
A Tool for Every Job
Craftsmen have a tool for every job and market forecasters have an indicator for every environment. To pick the right tool, you need to know the job. What is "the job?"
The October 2, 2011 ETF Profit Strategy update predicted a massive 20% rally. 20% sounded ridiculous at the time, but the S&P rallied as much as 30% from the October 4 lows.
The October 11, 2011 ETF Profit Strategy update foretold that: "This rally from the 1,075 low is a miniature version of the March 2009 – May 2011 rally." Yes, "the job" was to deal with a relentless, liquidity-driven rally that would likely end with a bust.
PercentR proved to be an invaluable tool during the late 2010/early 2011 rally and I expected percentR to be play a key roll this time around. Once again, percentR has not disappointed.
Low-Risk Entry
PercentR is a momentum indicator that looks at price and volume. Momentum is displayed in readings from 0 – 100 where scores above 80 describe an overbought and score below 20 an oversold market.
A temporary momentum break (in an overbought market) that sees percentR drop below 80 is considered a bullish low-risk entry, a buy signal. A failed low-risk entry (a continued drop below 80) often foreshadows a momentum break and lower prices.
Not every momentum break results in a severe correction, but there has not been a single meltdown that wasn't preceded by a percentR momentum break. As such, percentR not only provides buy signals but also lets investors know when it's time to get out of stocks.
Current PercentR Message
I monitor percentR for all major indexes, S&P 500 (SNP:^GSPC - News), Dow Jones (DJI:^DJI - News), Nasdaq (Nasdaq:^IXIC - News), Russell 2000 (^RUT) and often leading sectors like financials (NYSEArca:XLF - News) or retail (NYSEArca:XRT - News).
I've found percentR signals for the S&P 500 to be the most predictive. The chart below shows low-risk entries triggered for the S&P 500.
In 2012, percentR triggered four low-risk entries for the S&P – 3-6-12, 3-22,12, 3-29-12, and 4-4-12. All of them have been good buying opportunities, although with Friday's futures down sharply failed low-risk entry is likely.
Upside momentum for the Nasdaq-100 has been very strong and there've only been two percentR low-risk entries. The March 6 low-risk entry worked like a chart, but prices are close to breaking below Wednesday's stop-loss.
The February 20 ETF Profit Strategy Newsletter outlined S&P 1,425 – 1,4xx (reserved for subscribers) and Nasdaq-100 2,805 as potential turning points for equities. The April 2 update warned that "April/May has always been a dangerous period for investors and I'm expected an April/May top that will lead to a summer consolidation at best and a steep decline at worst."
With stocks having reached the lower end of the target range and seasonality turning sour, it's prudent to be cautious.
The ETF Profit Strategy Newsletter monitors percentR and many other technical, sentiment and seasonal indicators to identify target levels and compose short, mid and long-term forecasts. Most importantly right now, the Newsletter identifies the support level that - once broken - will lead to (much?) lower prices.
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