It is critical to have a feel for the general direction of the market and the strength of its current move. I work off the premise that due to the influences of mutual funds, hedge funds, indexing, program trading, etc. that 50% of a stock’s move is related to the market, 25% related to the sector / industry and 25% related to company specific events and performance. Consequently, I obsess over the market and whether it is with me or against me.

Chasing returns is an unfortunate but common phenomenon for investors and typically correlates pretty strongly with the top of individual stock moves as well as tops in the overall market. For years, I spent a tremendous amount of time researching and following a bunch of market indicators to get a feel for when it was too late to get in and equally important, when to get out while the getting was still good. Although I still look at existing market indicators on a monthly basis, I found that the amount of analysis I did was not worth the results. There was too much conflicting data and it was clear that I needed to create something that was fast, simple to use and easy to understand.

Since the Hedgefolios universe of almost 4000 stocks covers over 99% of the total market capitalization and I give “UP” or “DOWN” signals on all of them each week, I knew I had the raw data. It was easy to create a bullish / bearish percent indicator and that is what you find with the second chart on the ANALYZE MARKET STATISTICS section called the “Hedgefolios Signal Indicator.” However, this indicator and bullish percent market indicators in general have some inherent flaws in my opinion given that they are contrary indicators at extremes and they don’t do a good job factoring in the element of time.

As a result, I set out to build an algorithm that fine tuned the rougher Hedgefolios Signal Indicator to exhibit market strength as well as an estimate of the time remaining in the move. Without disclosing the actual formulas, the Hedgefolios Timing Indicator measures the strength of Up signals (HF Bullish) versus the strength of Down signals (HF Bearish) by applying a time factor to each signal and creating a composite score for both sides of the market. Like many of my methodologies, the time factors are standardized and change flexibly with changes in the market over time. If the current reading for the HF Bullish is higher than HF Bearish, the indicator is predicting that the market has an upward bias and vice versa. A crossover of the HF Bullish and HF Bearish lines implies that the market has changed direction. As you can see from looking at the chart, extreme levels are at .1000 on the bottom and .5000 at the top and typically, when either the HF Bullish or HF Bearish readings hit these levels a reversal is not far behind. It is also helpful to evaluate the slope of the lines as they indicate the rate of acceleration in the relative moves as well as perceptions of the buying power and selling pressure.