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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: StockOperator who wrote (2883)12/26/1998 5:43:00 PM
From: James F. Hopkins  Respond to of 99985
 
S.O.: RE But in sharing those methods with others it causes all of us to take a harder look at our own work and the conclusions we
come up with. well said as that's the key, and more than once
I'v had not only to revise my out look, but the methiods I use to
come up with an outlook, my focus is the MO we use, and learn to
develope is more importent than the actual outlook we have.
Keep an one eye on
search.news.yahoo.com
it's had a lot to do with this last rally.
Jim



To: StockOperator who wrote (2883)12/26/1998 9:32:00 PM
From: Smooth Drive  Respond to of 99985
 
Hello StockOperator,

>>My prediction is January and 1999 will be the month and year of the small cap stocks. The good thing is we won't have to wait long to see if I'm right.<<

You could be right. But -- will they outperform large caps? At this moment my indicator for deciding when to delve more into small caps is still sending a strong "No". Here's how I decide.

Many year's ago the father of end of day 3-box reversal point and figure charting, A.W. Cohen, suggested a chart he called the "Index of Speculative Confidence". Although the indexes have changed, its construction is quite simple. Today's closing price of a a mid to large cap v's a small cap. Plot them on a 3-box reversal point and figure chart with each box equal in size to 1% and see who's winning the war. Large has for years, still is. I use the S&P500 and RUT. The RUT as a percentage of the S&P500. It tells me, on a relative basis, how small caps are doing compared to large caps. They can both be going up. I just want to know who's performing the best.

When the chart gives a buy signal (column of X's surpass the previous column of X's) then it's a strong signal that small caps are out performing the large caps with strength. You can also have a short term momentum type small cap rally when a column of X's turns up -- but, it's often times just a spurt. That's been the case for some time. Here's a small look going back to 11/17/97.

55%
54% X
53% X O
52% X O
51% X O
50% X O
49%   O
48%   O X
47%   O X O
46%   O X O
45%   O X O
44%   O X O
43%   O   O
42%       O
41%       O
40%       O
39%       O  
38%       O
37%       O
36%       O
35%       O X
34%       O X
33%       O X
32%       O
31%
30%
    1 2 3 4 5

First X is described as 1,50,11/17/98; It topped at 1,54,5/03/96; Reversed down 3-boxes in second column at 2,51,7/10/96; Bottomed at 2,43,4/29/97; Reversed up 3-boxes in third column at 3,46,8/27/97; and topped at 3,48,10/10/97; Reversed down 3-boxes in column 4 at 4,45,11/25/97; and bottom at 4,32,10/15/98; Reversed up at 5,35,11/04/98.

A few stats? As follows:

       11/17/95  7/10/96          7/10/96   8/27/97
S&P5   600.07    656.06   9.33%   656.06    913.7    39.27%
RUT    303.84    332.71   9.5%    332.71    420.84   26.49%
 
       8/27/97   11/25/97         11/25/97  11/4/98
S&P5   913.7     950.82   4.06%   950.82    1118.67  17.65%
RUT    420.84    426.91   1.44%   426.91     392.96  <7.95%>

       11/4/98   12/24/98
S&P5   1118.67   1224.85   9.49%
RUT     392.96    405.56   3.21%

When the chart reversed up on 11/4/98 I thought it might take off. Fact is as a percentage it has just been staying in the 33 to 35% range. The ratio today is at 33.11%. A reading of 32 or lower would reverse it back down. It needs 36% to fill in the next up box.

Bottom line: Except for a few oddities, I don't play small caps at this time. Why bother? The real money is still going to large caps and that's where I'm getting my pops. The above chart can't fib. It might not get one in at the exact bottom or top -- but it will get me in when small caps start outperforming large cap with some strength to them.

Perhaps it'll start in January as you suggested. This chart will tell me if it does or not. At this point it's a not.

Take care,

Eric



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