Stock Market Health Update - Week Of March 21

The major stock market indices have recovered in a dramatic fashion. As the market health indicators improve, I’m willing to allocate more capital to long swing trades. Here are the details, along with my most recent stock watchlist near the bottom.

How the Market Indexes Are Doing

I look at 4 different US indices because they each tell a different story about overall stock market health. The stock market is healthiest, and swing trading stocks on the long side is most profitable, when all these indexes are in uptrends. Here is what each of the 4 indices represents:

• Nasdaq 100 – Tech stocks.
• S&P 500 – Large US companies.
• NYSE Composite – A wide array of stocks, all varying in size and industry.
• Russell 2000 – Smaller companies.

I have also started including 2 Canadian stock indexes for those in Canada. The Composite tracks larger companies, while the Venture tracks very small companies.

Charts are provided by TradingView – these are charts I personally use.

• The Nasdaq 100 has rallied back to the prior swing high. This is the first of two parts of an uptrend (high highs, high lows).
• The S&P 500, NYSE Composite, and Russell 2000 all made a higher swing low last week and surged to a new swing high on Friday. That doesn’t mean a downtrend couldn’t develop, but right now the market is exhibiting uptrend qualities (higher swing high, higher swing low). The Russell 2000 has been moving sideways since late January, yet it’s positive to see strong movement to the upside with the other indices.
• The TSX Composite (Canadian) remains strong. It is right near its all-time highs as its a commodity-stock heavy index, and commodities have done well. The Venture (Candian) is leveling off and nearing recent swing highs.

State of the Market Health Indicators

The following chart shows the market health indicators I track. They tell me the condition of the stock market overall, and whether it’s a good time to be swing trading individual stocks.

All combined, these indicators are improving, and that means I’m willing to deploy capital to long swing trades. I’m willing to deploy about 40% to 50% of capital at this stage - that is, if I can find some quality trades I like the look of. If all the indicators continue to improve, and I start seeing lots of quality trade setups, I could be 100% invested within a week or two. This is still a big "if," though.

• There was an upside follow-through day (FTD) on March 16. That was day 7 of an attempted rally that started on March 8. FTDs are often one of the signals of a possible turn higher. As the other indicators improve, more confirmation is provided.
• 55% of S&P 500 stocks are above their 50-day moving average. 54% of all US stocks are above their 50-day moving average. It is generally much easier to swing trade profitably (on the long side) when more stocks are above their 50-day average. When this indicator is below 50%, it tends mean sideways movement or downtrends for most stocks/indexes. We are now above 50%.
• Volume is not important at this exact moment.
• The dark blue bars are the daily percentage movement of the S&P 500. Big moves are associated with downtrends and turning points. Small values are associated with an uptrend. Values of -2 are a warning sign anytime they occur. We’ve had many big intraday swings in price. That is representative of downtrending/choppy behavior, but there have been no -2% drops since March 7.
• The blue line is the cumulative NYSE Advance Decline Line. It has moved up and made a higher swing high, but it is lagging a bit. The S&P 500 has moved above its highs in that early March area; the AD line is right at its swing high from that time.
• The columns of blue are NYSE up volume divided by NYSE total volume. It is an indicator of buying and selling enthusiasm. Levels below 10% and above 90% are important (or back to back above 80%). Though, there is nothing important to see here at the moment. The old way of creating this indicator no longer seem accurate. I created an indicator called UpVol/TVol NYSE Lowry Upside Days.
• There is one problem, there are not a lot of trade setups out there right now. Here is the most recent stock watchlist, and you may notice there are only a few names on it. Ultimately, the number of setups controls how aggressive I am. The more great setups, the more capital I’m deploying. With few setups, I end up deploying none or only a small amount of capital.

What I’m Doing Right Now

The recent stock watchlist didn’t have much on it. So I will be scanning again soon. That watchlist is primarily looking for contraction patterns in stocks that are near their highs. Early in the week, I’ll post another watchlist.

I will also likely create a new scan that seeks out some stocks that were beaten down a while ago but are acting very strong now. We want to consider the market conditions. We know that a lot of tech stocks got absolutely hammered. But if they are acting strongly now, they may set up some good cup-and-handle patterns as the prices rise again.