Below is an a yearly bar chart of the SP500 cash index. Included on this chart is the annual volume and several trendlines.
Below is a yearly chart of the SP500 cash index for the past 50 years showing the year to year change in price expressed as a percentage (red). Also shown is the annual volatility for each year (blue). The volatility shown was calculated by taking the annual range and dividing it by the last price of the year. This figure is displayed as a percent.
Below is a chart of the SP500 Cash index (SPX) normalized yearly ranges. The best way to explain this reason for generating this chart is to ask a question. If you would invest all of your money on Dec. 31 of each year, how many years would you be able to earn 10%?
The answer to this would be easy if you could represent the year's range relative to the previous year's closing price. So each year's high-low-close are converted into a ratios that represent the change in percent from the previous year's close, or Dec. 31. The left scale's value of 1.0 is the equivalent of 0% while 1.10 is equal to +10% and 0.90 is equal to -10%. Each bar is relative to the previous year's closing price and hence is normalized. By using ratios, it eliminates the trap of comparing the SPX's annual point range or change in points because you would find that as the index gets larger, the range gets larger. You can't compare a 50 point day when the close is 400 to a 50 point day when the closine index value is 1000. In the first case it represents a 12.5% change while in the second case it only represents a 5% change. By converting the index into percentages, this graph can easily compare ranges from 50 years with those of today's index, and you can compare the SPX's gain and losses from each year to any other year.
Each bar on the graph below converts the annual range of the SPX actual index values into a high-low-close bar that represents the percent change from the previous Dec. 31 close. So if you look at the 2002 bar, you'll notice that it has a high around 1.025 and low around 0.67 and close around 0.76. This shows that only a small portion of the year's range went above the previous year's closing price and you could of only made a maximum of approximately +2.5% if you purchased the SPX on Dec 31,2001. Whereas if you sold the SPX short you could have theoretically made +33% because the low for 2002 was 0.67. Or conversely, if you bought on Dec. 31,2001 you would have lost a theoretical maximum of -33% from the previous year's close had you paniced and sold at the low. And lastly, the closing price of 2002 was approximately 0.76 or -24% from the previous close. This means that the close on Dec. 31, 2002 was 24% lower than the close of Dec. 31, 2001. Also note that two bars above the 1.0 means that there were two consecutive years in which the SPX rose. Notice that the longest stretch of positive gains was 5 years, That occurred from 1986-90 and from 1995-99 and notice that the longest stretch that the SPX didn't earn 10% was 4 years, 1992-95 and 2000-2003.
Now to answer the question cited above, how many years would you be able to earn 10% if you invested all of your money on Dec.31. The answer is 32 outof 53 years, and only 5 out of the last 10 years not including 2003. So the odds of you earning 10% or more in any one given year is only 60% while in the last decade it was only 50%. These statistics show that investing in stocks really is a flip of a coin unless you can find some edge to help you improve your odds. In addition, it also shows you how realistic your investment goals are. If you are expecting 20% returns each year from your investments then you'd better figure out a way to beat the system, because as the graph shows nobody can sustain 20% year to year.
Another facet to this graph is that it shows you how often the SPX goes to the +30% or -30% levels. In the last 53 years, the SPX only reached the +30% level 8 times while the -30% level was reached only 2 times, 2003 being one of them. The last time the SPX reached the -30% level the following year reversed and reached the +30% level. Will history repeat itself? Only time will tell. But what this graph does tell you is that those investors that bought SPX lows did well because not once did the SPX close at the low for any given year in the last 53 years! The million dollar question is when will the low occur? Nobody knows, but as an investor you can now see that if you were to start buying when the SPX was 25% lower than is was Dec. 31 then you odds of success jump dramatically. Just look at what happened in 2001. If you bought the SPX when it was 25% lower, closed on Dec. 31 12% higher than from the low. So you would have made money while others lost money. In 2002, if you starting buying at -25% and bought some more at -30% you'd have made only 2% on the first buy but you would have earned another 7% from the second purchase by Dec. 31. So you would have been again in the plus rather than losing money. So this graph shows you that the odds are on your side if you buy the SPX below the -25% level and at every 5% below that. This strategy isn't for futures traders that need to worry about an expiration date nor options traders because this is too long term for them, but if you buy stocks or exchange traded funds such as the SPY, DIA, or QQQs then this maybe something to consider. So if your goal is to lower your risk to losses and to minimize the amount of effort needed to manage your money, then study this more carefully.
Below is a monthly bar chart of the SP500 index. Also included are the fibonacci retracement lines based on the low of 1994 to the high of 1999.
Below is a monthly chart of the SP500 cash index showing the year to year change in price expressed as a percentage (red). For example, the last price in January 2003 is compared to the last price of January 2002. These ratios are plotted for each month for the last 50 years. Also shown is the annual volatility for each year (blue). The volatility shown was calculated by taking the monthly range and dividing it by the last price of the month. This figure is displayed as a percent.
Below is a monthly bar chart of the SP500 cash index. Included on this chart is are the swing highs and lows. The significant swing points are also circled so that volume can be compared to the previous swing point. The theory of comparing price and volume at swing points was first published by Richard Wyckoff back in 1919 and his theory is still used today.
Here's a quick summary of the past year using his theory. The low of July 2002 broke the previous low set in Sep. 2001 on increased volume. Then the market reversed off of the lows to climb to 965 on 8/22/02. Then the market retested the July low in Oct. 2002 and broke the previous low. But this time is made a lower low using less volume. Signaling that interest in trading is waning at lower prices. So the market rose again to retest the Aug. 2002 highs. In Dec. 2002 the market reached 954.6 and the volume for the month dropped off dramatically. So the market tried to rise but interest in trading dropped more than it did when it punched out new lows in Oct. 2002. Next, the market retested the lows of Oct 2002 and in Mar. 2003 the market made a low but it didn't make a new low. Volume increased in Mar. 2003 but the month made a higher high and lower low simultaneously as compared to the previous month. As for volume, it increased compared to the previous month but it's strength was split between higher and lower prices. So instead of indicating lower prices or higher prices, the stagnation in price coupled with increased volume didn't create any signal. Then in April 2003 prices rose making a higher high compared to March but the volume decreased from the previous month. This showed traders a lack of interest and then in May 2003 traders were surprised with not only higher prices, but with prices that were high enough to break previous monthly highs of Dec. 2002 and July 2002 with more volume. This clearly signaled higher prices since previous swing highs were breached with more interest.
It doesn't mean that prices will not go down or can't go down. It just means that at some point the expectation is that the prices above the May high will be tested to see if there are more investors interested in stocks. If you are paying close attention to the language used, there is no reference to "buying" and "selling" by the investor. The increased volume is not considered "buying" nor is it considered "selling" because for every buyer there is a seller and for every seller there is a buyer. So volume is the fuel of the market, but buyers and sellers are equally present and the exchanges do not make any provision to track the buyers and the sellers. All the exchanges do is post a statistic called up volume and down volume, but again this doesn't truly represent buyers and sellers. It just tracks the amount of shares that were traded while the stock was up or down in price from the previous close. So why is the level of interest in stocks important? Well to be frank, investors either wish to own stock or not, and of course the investor must buy stock and then sell it. So who do investors rely on to execute these transactions? The answer is brokers, specialists, and market makers. These professionals make their living by making transactions. So they make more money when volume increases. Hence, price tells us when there are more buyers than sellers, or visa-versa, and volume shows us the level of interest by investors to commit to a tansaction which fuels the profits of Wall Street firms. And like any industry, Wall Street seeks to maximize its profits. So now you can better understand the link between volume and price. Each group is driven by a different mechanism. Investors are interested in price while the "Wall Street machinery" is interested in attracting more customers.
The unique benefit that Wall Street firms have over other industries is that they not only make money from making transactions but from buying and selling their own products - stocks! Think about this. How many businesses can earn a profit from buying their own products? Their aren't too many companies that make a product just so that they could hoard it and sell it later for a greater profit, but on Wall Street they can. They issue the stock and centralize the distribution of the stock. All buyers and sellers are brought together and they make the exchange. So they profit from making the product and then they profit from tracking the number of investors buying it and selling it, or in other words distributing it. However, in addition to to these two revenue streams they have the ability to purchase or sell stock like any other investor. They are not excluded from buying and selling and they are not restricted nor governed by the same rules that restrict corporate employees from buying and selling their interest in the company. As a matter of fact, broker dealers don't even need to own stock to short it so they are many times on the other side of your trade. Plus they benefit from knowing what is the current level of investor interest, or demand, and when it is drying up, and they know how much supply exists. So the "deck is stacked" because they have all of the information they need to decide when is the right time to buy or sell stock.
One final thought. If you believe that most investors lost money during the period of 2000 to 2002 you would eventually come around to asking who has the money to buy stocks at these lower levels to lift price back up again. And if the strength and intensity of the new wave of buyers could be quantified, then you would know the anwer to how high will prices go. The best method available is still the Wyckoff method because he tried to look at each trend defined by swing points to see if demand for stocks was increasing or decreasing and made a judgement about the probably that the trend would continue or fail.
Below is a monthly bar chart of the SP500 cash index. But, unlike the chart above in which the month is based upon the calendar month, this chart's period starts the day after option expiration and closes with the month's option expiration date. This chart does not represent SPX option pricing nor option volume. It still represents the SP500 cash index prices and daily stock volume as does the chart above, but it shifts the last day of the month to the third Friday of each month. Included on this chart are the swing highs and lows. The significant swing points are circled so that volume can be compared to the previous swing point.
Notice how evenly the volume was distributed between July 2002 and December 2002 as compared to the calendar months' volume distribution. In addition, notice that the lower low in October 2002 had been made with increased volume than that of the August 2002 bar which included the July 24, 2002 low. This important fact is opposite to the calendar month's observation. (Please note that option expiration for July 2002 was on the 19th so the July 2002 low was included in the August option month.) This implies a different scenario than does the calendar month chart above. It forecasts that the October low should be retested or revisited one more time based upon the monthly volume of this option calendar chart. On the negative side, both price an volume failed to break above December 2002's high. Second, the previous 3 month high of 906 set in the Feb 2003 bar was broken with less volume. But on a positive note, the May 2003 bar closed on its highs with increased volume than the previous month. Second, May 2003 also broke above the January 2003 high with more volume.
Below is a daily chart of the last 10 years of SP500 Cash Index Closing Prices. Notice in 2003 how 1997 prices are providing resistance.
Below is a daily chart of the SP500 Cash index (SPX) along with its quarterly rate of change for the past 5 years. In addition, price channels are plotted which show a high degree of correlation. The quarterly rate of change simply compares the closing price of today with the close of 3 months ago. The result is a ratio which can be converted into percent. For example, the value of 1.0 on the left scale on the chart represents 0% and 1.1 represents 10% while 0.90 represents -10%. So as you can see the SPX's quarterly rate of change bounces from the -15% zone to the +15% routinely. Using this information you can see that value buyers start buying when the SPX is near -15% and sell when it's near the +10 to +15% zone. This gives the investor a 25% to 30% gain. Currently, in April 2003 the SPX is in neutral territory but it has been rising from a recent low of -12%. A good place to buy.
Below is a daily candlestick chart of the SP500 Cash Index prices along with the daily volume for the past 80 days.
Below is a daily chart of the SP500 cash index along with several significant moving averages. Notice that in April 2003 the market finally punched above the 200 day moving average and it's still above it (5/13/03). This is the longest period above the 200 day moving average since 2000. Notice that in 2002, it didn't stay above this line very long. But this time there's a lot of money betting that it will go higher. (view this web page for more insight: Who's Buying ). In addition, the horizontal red line represents the neckline of the long term head shoulders pattern. This level should present strong resistance in the future and should not be crossed if the bears are in control. Also worth noting is that the intraday low of 9/21/01 @ 944.75 will be resistance for the market as it heads higher. Besides the neckline of the head and shoulders, take a look the channel lines. Notice that intermediate tops and bottoms have followed the channel. These too provide strong resistance and support for the market. So we have channel line resistance around 920 and the neckline resistance around 960. Currently, the market is testing the channel line resistance at 920. The last piece of statistical evidence lies within in the yearly highs and lows. Coincidentally, the market is attempting to cross the Jan 2003 high at 932. As the message on the chart states, if the market can push above the 920 and then reach above the 935 level then perhaps 2003 will be a seminal year. Well, on 5/6/03 the market reached 939.61. And as of 5/12/03, the SPX made it to 946.84. These higher levels translate into forecasting a probablee market turn is coming, but only if the March 2003 low is the absolute low for the year. Unfortunately, the seasonal fall low will be the final test for the bears. If the market makes a new seasonal fall low of 2003, the bears win. If the March 2003 hold as the lows of the year then the Bulls win. The upcoming fall lows must not break below the March 2003 low. If it does, the scenario changes.
There are other factors that one can read from this chart that will provide more evidence for one scenario to be more likely than the other. Look at the speed and power of the retracements made thus far. In yearly cycles, notice how fast and how high the market snapped back from the March-April 2001 low. Next, look at the speed and depth of the retracement off of the Sep 2001 low. Notice that it took longer but the amount of points was about the same. Next, look at the 2002-03 lows as a cluster. There were three lows: Jul 2002, Oct 2002, and Mar 2003. If you look at all three as a group you'll see that the market doesn't have enough gas to spring back up as it did in Mar 2001 and Sep 2001. Each time the market tries to go higher, it fails to make a higher high and this cluster is proving how weak the market is. Admittedly, a higher high was made in May 2003 but the number of points off the low was only 157 (946-789) compared to the 300 points off the lows of 2001.
In reviewing the major lows, if you drew lines from the lows to highs you would see that the line drawn is tilting farther to the right each cycle. To use an analogy, it would be the same as if you did 50 curls. You start out making complete curls but near the end, your muscles can't finish the curl. You try but your muscle can't contract any more. These three larger waves in the market are showing the same weakness.
Lastly, even the cluster of lows from July 2002 to March 2003 shows this same weakness. In August 2002, the market snapped back, but then the market made a lower low. Then the market took longer to go back up but it couldn't make a higher high. Then in March 2003 the market went down again but this time it didn't make a lower low giving hope to the bulls that it's finally over. The next sign of hope came when the 200 moving day average was crossed around 880. Then on 5/6/03 a higher high appeared for the first time in 3 years while simultaneously penetrating the 3 year downward trendline! But there's more overhead resistance that needs to be overcome. Like the intraday low of 9/21/01 @ 944.75, then the neckline at 965 followed by the 50% ficonacci retracement zone of 994. These mile markers will give us clues as to how much energy there will be by looking at the quality of the breakout if it comes and then waiting for the seasonal cycle low (fall 2003) to express itself. If these events show strength and resiliency then perhaps the optimists have the evidence needed to resume buying stocks. Currently, the evidence favors the bearish scenario. The "victory rally" of 2003 has been marred by poor employment data and heavy insider selling. The May higher high is an excellent sign but if you look at the market response to the 1998 and 2001 low you'll see that a rapid decline in prices occurred 10 months after the initial low (vew this chart: CompareLow). So a big drop in prices is historically forecasted from the July 2002 lows beginning 5/13/03. The annual cycles are losing strength and still portend lower prices as this meager rally of only 157 points shows compared to the 300 point rallies that occurred during the previous two years. Now, add in the macro economic environment; like global trade; employment; monetary and fiscal policies; energy; credit markets; politics; and demographics, and ask yourself are opportunities becoming more or less frequent. If opportunities abound then optimism will win the day, if not, then ask yourself, where will the stock market get its next jolt? For a concise recap of the last great bull market click on the following link, The "Age of Absorption"
Below is a 10 year daily chart of the SPX. It shows you the daily highs and lows along with the yearly high and low in the form of bands. These bands are called price channels. Notice that when the yearly high or low is penetrated the market continues in that direction. It's too simple isn't it. The negative is that the bands represent approximately a 300 point range. This would be the equivalent of placing a 30% stop loss order on your positions. (That's why it's hard to make money in the stock market.) This chart is another representation of the chart above which stated that the direction of the annual high / low determines the direction of the market for the subsequent year. These two charts have the same message, but show it differently.
In addition, the chart also shows you the the 10 year fibonacci retracement zones. Notice how the market reacted at each of these levels. The market reverse quickly and gave investors a 20% gain. But also notice that as the market fell to lower levels, it took longer for the market to make those gains. Currently, the market penetrated the 61.8% retracement zone which is a deep retracement. Theory has it that this is good place to be a buyer around 863, but traders would not expect the highs to be penetrated (1553!). And on a worst case basis, they would expect a return to the 38.2% retracement zone of 1126. So using this long term view, the market will attempt to get to 1126 and then believe it or not, back to the highs of 2000. And at this writing (5/13/03), the market hasn't bounced up to the 994 level or the 50% retracement zone yet. This is a big negative for the market, and as discussed elsewhere on this page, there are numerous resistance levels for the market to cross before it gets to 994. So, while the "bulls" are making a charge for higher ground, the "bears" are putting up a good fight and are winning. So the big investors were willing to jump in at these low levels based on the Fibonacci Ratios (see our Mutual Fund analysis for an explanation of money flow), but if these milestones or investment goals aren't realized, then they will quickly bailout of their positions and the market will tank very quickly to lower lows. For those of you unfamilar with fibonacci ratios, please read the following links:
http://www.tradingday.com/c/tatuto/funwithfibonacci.html
http://www.geocities.com/WallStreet/Floor/1035/fibonacci.htm
http://www.aiqsystems.com/docs/Fibonacci%20Studies.pdf
The concept for this chart arose from Steve Woods "FloatAnalysis". He first disclosed the correlation between a stock's float turnover and the stock's tops and bottoms. The premise is that when the stock has changed ownership, it is free to move to the next price level. The change in ownership is defined as the float turnover, or the number of shares available for trading. When the sum of daily volume exceeds the total number of shares available to trade then all of the stock's shares traded hands and this represents a change in ownership.
This number of shares, the float, differs from the total number of shares issued by the company. Some shares are reserved and not available for trading, so the "float" is represented by the number shares that investors can buy or sell. Steve Woods then added the daily volume of a stock until it equaled the stock's float volume (like a moving average). Then he found the high and the low for this period and created bands for this period. Note that the number of days varies because the period is defined by the volume of shares available for trading. Also note that the float changes as the company issues stock splits and offers new stock, etc. So when you use the float as the period, time varies. This is converse to moving averages in which time is constant. For example, if you were to use a 50 day moving average the volume for each 50 day period would vary, but if the float were used, the volume for each period would be the same but the number of trading days would vary.
So how many shares are available to investors in the Indices? For the 30 Dow Jones Industrials it happens to be 71.5 Billion shares (5/12/03). This equates to the last 13 months of trading in the Dow Jones Industrial Average. For the SP 500 the number of shares is 264.78 Billion (5/12/03) or 7 months. But tracking the float each day or even each month is a difficult task. That's why there are companies whose sole purpose is to manage data such as the Standard and Poor's Company. They exist to track many of the industry's indices plus many other statistics for its widely used SP500 index which is a market capitalization weighted index. So as an individual investor the easiest way to circumvent this work is to use time as a constant, which approximates the float. So although the SP500 index's float volume approximately equals the 7 months, we decided to use a period of one year. And therefore we used 260 days (52 weeks times 5 days, no holidays) as the period from which the yearly high and low would be determined.
Price channels have been used in technical analysis for decades, but Steve Woods has added new logic to an old method. So the chart below isn't a float analysis of the SPX but it is a one year price channel. As you can see below, the market has a one-track-mind. If it made a new high it tends to make new highs and visa-versa. You can see that if the market were to change direction, it will be verified by the penetration of the yearly high which currently exists at a lofty 1106.59. In addition, if you are looking for a "crystal ball" to guide you then fast forward a few months and notice how quickly the yearly high will drop. You can see that as time passes the yearly high will drop quickly as prices dropped quickly between May 2002 and July 2002. This will give us in July 2003 a yearly high of only 965. So if the market can penetrate the 965 level after mid-July 2003 then according to this chart higher prices will be in the offing.
The only problem is that the "big boys" have already committed to the buy side of the market and time is running out. Look at the last few market rallies. They stuck their neck out and bought when nobdy else wanted to and they made a quick 25% in April 2001 to June 2001, in Sep 2001 to Nov 2001, in July 2002, and Oct 2003. If the milestones already enumerated don't appear, the big boys will jump ship and the attempt to 1126 will be abandoned and new lows will unfortunately be in our future.
Below is a long term view of volatility. This daily chart shows the how far in percent prices can move from the 4 day Simple Moving Average. Also worth noting is how frequently prices are prone to large changes in prices. Lastly, note how the increase in price swings is getting larger and more frequent. This implies that you need to loosen your stops or find a calmer market to trade.
Below is a daily chart of the SP500 Cash Index Closing Prices that have been normalized and averaged. This technique attempts to find any seasonality.
Below is a daily chart of the SP500 Cash Index Closing Prices from three recent major low points. By comparing these lows, we were wondering how similar the reactions to these events might be. Note that the prices from the July 2002 lows are shifted or scaled higher than the actual prices for this comparison. The actual prices ranged from 965 to 789 from July 2002 to May 2003. Also take notice of the fact that amount of optimism in each of these reactions is less. Prices weren't able to go as high as the previous reaction. In addition, notice that 5/13/03 correlates to the peak of the 1998 retracement. So if the past is any clue to the future, the market should be going back down and in a hurry. Cyclically, the market has entered a terrible time frame. Both of the 2001 and the 1998 retracements had rapid declines to what amounts to 10 months after the initial low and it will be interesting to see if the same response will occur in 2003. Will 2003 repeat these declines of 1998 and 2001? If the weakening market reactions are any clue, we'll know by July 2003.
