Based on the market health indicators I track I am NOT deploying new capital right now. I do have some trades out from late August/early September when conditions were better. But we just have too many warnings signs to be deploying new capital right now.
First, let’s look at the major indexes I track.
I look at 4 different indexes 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. We don’t have that right now.
- The Nasdaq 100 and S&P 500 were looking quite good, but turned lower this past week, espeically the S&P 500. These indexes are composed of large companies.
- The NYSE Composite is a list of all stocks on the NYSE exchange, so a wide array of stocks from different industries and different sizes. This index is struggling to break out of a multi-month sideways range. It recently tried to breakout, failed, and is currently dropping.
- The Russell 2000 index is filled with small-cap stocks. This index has been moving sideways for many months. It’s moving toward the top of the range but is still some distance from breakout levels. It has started falling again over the last few days.
With the Russell 2000 and NYSE Composite lagging, it means a wide segment of the stock population is flat and not moving higher aggressively. The S&P 500 is currently heading lower, and Nasdaq 100 has rolled over a bit too (but not much yet). This means the market isn’t as healthy as it could be.
Next, let’s look at the Market Health Indicators I track (from top to bottom).
- 49% of S&P 500 stocks are above their 50-day moving average. Only 42% 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. Current readings are a warning sign.
- Volume, not important at this time.
- The red bars are showing Upvolume divided by Totalvolume on the NYSE exchange. No important values recently. Above 0.9 or below 0.1 are values I tend to watch for.
- The 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. This indicator is quiet, confirming the uptrend in the S&P 500. Values of -2 are a warning sign anytime they occur.
- The blue line is the NYSE Advance Decline Line. It should rise as the S&P 500 rises to confirm the trend. Right now it is not doing that. When the S&P 500 moved well above its July high, the NYSE ADL remained below its. This could be resolved if the NYSE ADL keeps moving higher, but right now it is warning sign. That indicator is flat, not trending higher like the S&P 500 was.
How This Affects My Swing Trading
There is no reason to waste money and energy when conditions aren’t good. It is too easy to get chopped up. Even when using a small stop loss, when the conditions aren’t right it is easy to take a large number of losses.
Save and accumulate capital for when conditions are good. In late August and early September, I was willing to take some trades during a decent period, and those trades are paying off overall. Then, stop deploying capital when conditions turn unfavorable. Don’t waste the money you just made.
Making money is the easy part (when conditions are good); it is knowing how to hold onto it and make it grow that is difficult. Staying away during poor conditions is our main tool for achieving growth.
Cory Mitchell, CMT
The Complete Method Stock Swing Trading Course covers my swing trading approach in-depth. It also lays out exactly when to trade four different strategies (that suit different market conditions), and how and when to scale back when conditions aren’t ideal. Trading when conditions aren’t right will typically lead to giving back all the gains accumulated during the good/easy times.