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BPI Indicator and the Red Zone

Headline news on the U.S.-China trade talks remain one of the primary drivers for the financial markets as it continues to pit the stock market bulls against the stock market bears. With rising optimism that the phase-one trade deal will soon be resolved, US equities have responded by recording new record highs in recent days. Suddenly, everyone is bullish on stocks. Money managers, hedge funds and other professional investors appear to be clamoring to own stocks. Who can blame them for aggressively trying to catch a rising stock market that is beginning to run away from them?

Some of these investors may be lagging their respective benchmark indexes or high hurdle rates and are pressed to deploy cash into the marketplace. While others may be fully vested in the marketplace but are not positioned correctly in the right markets/sectors/stocks and must now scramble to reallocate and rebalance their portfolios to keep up with a rising stock market. Although, we recognize it is sometimes this type of a change in investment psychology that ignites a stock market rally, it is often the underpinnings (market internals) of the primary trend that confirms the sustainability of the Bull Run.

We will now review another technical indicator commonly referred to as the Bullish Percent Index (BPI) to both evaluate the internal health of the stock market in question and determine the sustainability of the rally. Bullish Percent Index (BPI) indicator is another market breadth technical indicator that depicts the number of stocks (in percentage form) that are currently trading in a Point and Figure buy signal. This indicator was developed by Abe Cohen in the mid-1950s. It was originally applied to NYSE stocks but has now broaden to include other markets, indexes, sectors, and non-NYSE securities. In fact, Cohen was the first editor of Chart Craft, which later became Investor Intelligence or the publisher of the weekly II bull/bear sentiment survey.

Using the Point & Figure charting discipline stocks are either defined as a P&F buy signal or a P&F sell signal. There is simply no room for ambiguity or for a hedged call as there is only one signal – a buy or a sell. Some believe this makes the BPI indicator one of the purest and most straight-forward technical indicator for traders and investors.

BPI tends to fluctuate between 0% to 100% for individual stocks and securities. However, it is extremely rare to witness 0% or 100% for major stock market indexes. The general interpretation is the BPI indicator favors the bulls when it is trending above 50%, and the bears when it is trending below 50%. However, overbought conditions tend to occur when BPI is trading above 70%, and oversold when BPI declines below 30%.

The overbought/oversold level is sometimes compared to a football game as it pertains to the red zone. As an offensive team enters the red zone or the last 20 yards before the end zone on a football field it makes for some of the most exciting football to play and watch. It typically brings out the best in a team at this strategic area within the football field. In the financial world, as a security or a market enters the 70% and 30% level investors and traders need to monitor these levels as they can lead to an important inflection point in the marketplace.

For your review we have enclosed 5 key US indexes and overlaid these charts with the BPI indicators over the past 1-year.

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

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