Not Quite Breakouts

Flipping through the charts this morning and noticing (once again) lots of "up and to the right" charts.  Example A, the S&P 500:

There are lots of charts that look fairly similar out there.  When there are lots of similar charts, I like to look for the not-so-similar charts.

I consider this a great example of the "availability heuristic" where we rely on what we have seen most recently, or what is most readily available, to come to a conclusion.  So you start flipping through the macro charts, see lots of uptrends, and assume that everything is in an uptrend.

You'll also find this with stock screening.  If you always look at the new highs list, or screen for stocks in uptrends, you will find yourself becoming bullish about the overall market.  The problem with this is that you might just be looking at a small number of stocks that are still in uptrends.  For example, consider Pepsi and other blue chips going to new highs in late 2007, while the S&P 500 (bottom panel) was already heading lower.

So how do we combat the availability heuristic?  Make sure you look at lots of different charts across lots of different markets.  Or if you're screening for stocks, make sure you always check out the stocks that *don't* fit your parameters.  So if you're checking the new highs list, then what's on the new lows list and what might that mean?

As I went through a bunch of macro charts, I found two that were notably different from the rest.

The S&P 600 (small caps) are in a sideways range and have not yet broken out (although it is interesting that the Russell 2000, a broader small cap benchmark, has already broken out):

Also China (using the iShares MSCI China ETF) is nearing a breakout but is not quite there:

These are two charts I'll be keeping an eye on.  Breakouts from charts like these could confirm an overall uptrend in the equity markets.

Disclaimer: This blog is for educational purposes only, and should not be construed as financial advice.  Please see the Disclaimer page for full details.