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Weekly Economic and Stock Market Commentary – October 26, 2020


As for the stock market specifically:

Last week provided results that went contrary to the way markets have acted for a number of years. The US market averages fell, while the international markets rose. I am not going to read anything into that at this point, but simply mention it. Time will tell if a new trend begins, until then, status quo relative to international markets.

What follows for the next few paragraphs is stock text that I present occasionally.

stock market

The bullish percent is the number of stocks that have bullish patterns, nothing more, nothing less. It is calculated by counting the bullish charts, and dividing that number by the number of stocks in a sector/market. Then multiply by 100 to get the percentage. A key item to remember is that all stocks that have traded for some time will be either bullish or bearish, not both.

stock market

About once a quarter I explain the difference between a market capitalization weighted index, such as the S&P 500, and the “one-stock, one-vote” weighting of the bullish percents. Today is that day.

Bullish Percents

The discussion comes down to a variation of this: “Why are the bullish percents increasing, but the numbers I see on TV are a little up, flat, or a little down?” Since this is election season, think of the difference in terms of the composition of Congress.

There are two basic answers. One potential answer comes from the nature of the bullish percent. It is based on the notion that a stock as large as General Electric counts as much as a stock of the size of the smallest stock on the NYSE. Think of the bullish percent like the US Senate – California counts as much as South Dakota.

The other potential answer stems from the composition of the index, such as the Dow Jones Industrial Average, S & P 500, or Nasdaq. The S & P 500 and the Nasdaq are known as capitalization weighted. That means the largest companies in the respective index holds greater influence than the smaller companies. The metaphor here is to the US House of Representatives. There, California has approximately 52 representatives, while South Dakota has 1.

The risk assessment bullish percent indicators fell last week, but are not close to reversing to defense at this time. Given the polarity around the election, it may be difficult, but we continue in WEALTH ACCUMULATION MODE at this time.

Remember, Xs mean OFFENSE or wealth accumulation, while Os mean DEFENSE, or wealth preservation.

Below is where our indicators stand as of October 23, 2020 (Courtesy Dorsey, Wright, and Associates).

stock market

On a general note: 

The Department of Commerce provided the single economic report of substance last week. They announced September housing starts came in at a seasonally adjusted annualized rate of 1.42 million. This was close the 1.45 million units anticipated by economists. That was a gain of 1.9% compared to August. Single-family homes provided nearly all the gains, while much of the new construction came in the northeast.

The “drop-dead” negotiation limit for the stimulus package came last Monday, and, as is common, the deadline was ignored by the parties to the negotiation. There has not been a deal yet, but both sides continue to blather about an “imminent agreement.”

We shall see.