The Chartist 90% Rule Flashes Buy Signal (Chartist Newsletter May 4, 2016)

The Chartist 90% Rule, which was one of our proprietary indicators revealed for the first time in the June 5th, 1980 edition of The Chartist, flashed a rare buy signal on April 19th.  Only ten previous buy signals have been generated since 1970 with the last one taking place on October 13th, 2010.  Thus far, all of the previous Chartist 90% buy signals have proven to be successful.

Here’s how it works. Whenever 90% or more of the stocks on the NYSE manage to rise above their respective 50-day moving averages, it is a strong indication that the market has managed to generate enough thrust to continue rising for several more months. Note: As you can see by the printout below, there have been ten previous buy signals since 1970, and they were all generated during periods when the market was overbought and appeared to be vulnerable, which was certainly the case at the time of the recent signal.

Again, in reference to the printout, all of the previous Chartist 90% buy signals resulted in gains of 8.16%, 14.58%, and 16.45% by the S&P 500 over the next three, six, and nine months.

Let’s review all of the buy signals that have transpired since 1970:

#1 09/09/70 – It will be recalled that the first half of 1970 was a disaster, with the S&P 500 losing almost 25% through late May. Nixon was in the White House and the big concern at mid-year was the fact the U.S. troops had entered Cambodia. The Dow Transports were at a ten-year low by the end of June. The rally off the May lows was impressive and by the time the buy signal was flashed, the S&P had surged 22% off of its 05/26/70 lows. The market was considered way overbought. The pundits were saying it had come too far, too fast. However, the market did not peak until 04/28/71 (thirty-five weeks later). The S&P gained 26.5% over the period. Prior to the peak there were three shallow corrections, none exceeded by 5%.

#2 01/05/72 with the percentage of stocks above their 10-week moving averages moving all the way up to 94.29% – Bullish sentiment was top-heavy at 64.1% bulls versus 17.9% bears and they were absolutely correct; the bulls were vindicated. Once again the market was considered overbought. It had already gained 14.3% in only twenty-nine trading sessions, but in actuality, the best was yet to come, and the rally carried throughout the entire year of 1972, finally topping out with the S&P 500 gaining close to 17% through 01/11/73. There were four corrections prior to the peak, consisting of 1.9%, 4.4%, 5.1% and 3.4%. Then came the devastating ’73 – ’74 bear market. The Dow lost 45% over the period.

#3 01/29/75 – The bear market was over but many investors, having been badly mauled, were extremely skittish. From the outset of the buy signal through 07/15/75, the S&P 500 surged an impressive 23.7%. There was one correction prior to the peak which saw the S&P drop 6.6% over a three-week timespan, which was not overly severe considering the magnitude of the move.

#4 01/07/76 – and the one characteristic that was prevalent that we have witnessed on all of the 90% readings was the fact the market was again considered to be extremely overbought; nevertheless, the S&P 500 tacked on another 14.8% through 09/21/76. At the outset of the signal, bulls far outnumbered bears 69.6% versus 16.1%. You had to be in early on this one because the bulk of the move was over by early February. From that point, the price action was quite choppy with no less than six corrections, but again the downside was limited with the most severe pullback entailing 4.4%.

#5 05/28/80 – The market was just coming off a sharp selloff that occurred in mid-February to late March, caused by the Hunt Brothers’ ill-fated attempt to corner the silver market. Short term interest rates were at 20%, gold had moved above 850 in January, with inflation running at an incredible 18%. Everyone and his cousin was loading up on collectibles. Over 700 families had just been evacuated from the Love Canal. From day one of the signal through the peak which occurred on 11/28/80, the S&P 500 was locked in an almost textbook-like bullish channel, surging an impressive 25.4%. There were two corrections of 5.2% and 5.5% prior to the November peak. Note: Advisory services were very skeptical at the beginning of this cycle. There were only 26.3% bears versus 43.2% bulls.

#6 09/14/82 – Once again, the market was considered to be dangerously overbought in that the S&P had gained 20.2% over the previous twenty-two trading sessions. It will be recalled that many stock market participants viewed the initial stages of the 1982 blastoff with utter disbelief, calling it an overextended rally in a bear market. The Dow was just crossing 900 at the time. The market was overbought and stayed overbought and by 06/21/83, the benchmark S&P had gained some 38%. Unlike previous cycles, the corrective activity was a bit more pronounced with pullbacks of 7%, 5.2%, and 4.6% prior to the 06/83 highs. Rally in a bear market. Advisory services reflected this sentiment – 37.4% bulls versus 35.5% bears.

#7 01/12/91 – This was, as you know, at the beginning stages of the great bull market of the ‘90s. Bulls outnumbered bears 51.3% versus 36.1%. The following is a direct quote from the 02/21/91 edition of The Chartist. “Judging by whatever occurred after the previous 90% Readings, it would appear that this market still has many weeks to go to the upside before the ultimate peak is reached. It would also appear that any corrections that do occur would be excellent buying opportunities.” Stocks recorded solid gains over the next three years through 02/02/94 with the S&P gaining 31.9%. There were several pullbacks over the period -5.4%, -4.2%, -3.4%, -4.9%, -3.9%, and -5%.

#8 06/04/03 – An emerging bull market was under way, however, the market was way overbought and considered vulnerable in that it had been in that mode for some time.  The market recorded its low of the year on March 11 and buy the time the signal was generated, just shy of three months later, all of the key indices had posted impressive gains.  The Russell 2000 was ahead 30%, Nasdaq – 28%, S&P 500 – 23% and Dow – 20%.   .  Investors having just come through a horrendous bear market were apprehensive.   On the day of the signal, the Nasdaq was 67% below its prior bull market highs, while the S&P 500 was 35% away.  The S&P 500 made very little progress over the first two months after the signal; however, corrected activity was limited and its low point the S&P 500 was only 2% below its price on the signal date of June 4.  However, the gains over the next three, six and nine months were above average.

#9 04/29/09 – One of the most devastating bear markets in a generation had just ended. At the time of the signal, the Dow was already 44% above its March 9th bear market lows, which encompassed only thirty-six trading sessions. Again, it was thought that the market had come too far and too fast over too short a time span, but the bull market was just getting started.

#10 10/13/10 – It will be recalled that the S&P 500 had been in a corrected mode, losing 16% between April 23rd and July 2nd of that year. By the time the signal was generated, the S&P 500 was 15% off of its lows of the year and within striking distance of record high territory. Six weeks later, it broke out and continued to trend higher over the next six months.


90% RULE
# DATE 3 Months 6 Months 9 Months
1 09/09/70 +8.1% +20.1% +21.1%
2 01/05/72 +5.8 +4.9 +5.6
3 01/29/75 +10.8 +14.1 +15.7
4 01/07/76 +8.8 +10.5 +10.2
5 05/28/80 +8.9 +25.4 +17.1
6 09/14/82 +11.6 +22.5 +34.5
7 02/12/91 +2.8 +6.2 +8.5
8 06/04/03 +4.2 +8.5 +17.1
9 04/29/09 +11.7 +22.0 +22.9
10 10/13/10 +8.9 +11.6 +11.8
11 04/19/16 ? ? ?
AVG +8.16 +14.58 +16.45