Another Buy Signal From the Chartist

06/25/2009 11:30 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says another reliable indicator triggered a Buy signal recently, pointing towards higher stock prices in the coming months.

On Monday, June 1st, we advised [long-term investors to move] into a 100% invested position. With the market in an overbought mode, many analysts are looking for a correction, considering the magnitude of the rally off the March lows. But we’re betting that any corrective activity at this point is going to be limited. We say this because two of our favorite thrust indicators have flashed buy signals along with our long-term models.

On March 23rd, the ten-day Advance/Decline (A/D) ratio moved above two to one, flashing a rare Buy signal. After previous A/D ratio buy signals, the Dow Jones Industrial Average gained +7.92% over the next three months, 14.91% after six months, and 18.55% a year later. On seven out of the 12 buy signals, the Dow did not trade lower during the first three months.

The second thrust indicator to turn positive was the Chartist’s 90% Rule, which flashed a Buy signal on April 29th. The Chartist’s 90% Rule was one of our proprietary indicators that we revealed for the first time in June 1980. Here’s how it works: Whenever 90% or more of the stocks on the New York Stock Exchange manage to rise above their respective ten-week moving averages, it is a strong indication that the market [can] continue rising for several more months.

There have been nine previous Buy signals since 1970, and they were all generated during periods in which the market was overbought and appeared vulnerable, which is certainly the case [now]. The last one taking place back on June 4, 2003. Thus far, all of the previous signals have proven to be successful: All of the previous 90% Buy signals resulted in gains by the Standard & Poor’s 500 index over the next 25, 50, 75, 100, 125, and 150 trading sessions. That’s not a bad record.

On six out of the nine signals, the S&P had posted double-digit gains after nine months, with the average gain working out to 15.3%. Historically the S&P has posted a gain of approximately 6.7% over a given nine-month period. So, the performance nine months after a 90% signal has been well above average.

There is no such thing as a perfect indicator, but based on the previous eight signals, the odds appear to be weighted in favor of higher stock prices over the next three, six, and nine months and possibly beyond with corrective activity being limited in scope. The recent signal confirms a couple of our proprietary indicators that turned bullish in early April. It goes without saying there are no guarantees, and as far as the stock market indicators go, there is no Holy Grail.

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