Wednesday, May 28, 2008

The CBI Wakes Up

The CBI has begun to wake up this past week. For those new to the blog CBI stands for Capitulative Breadth Indicator. An introduction to it is here. A list of posts here. Completely dormant since dropping to “0” on March 24th, it has perked up in the last week and reached “5” today. “5” is the first level where I normally begin to pay attention. First I’ll show some raw numbers and then I’ll offer a few thoughts.
Generally the higher the CBI the higher the percentage of qualifying large-cap stocks that are undergoing extreme selling and likely to bounce. When you get a broad group of stocks primed to bounce, it usually hints at a market that is likely to bounce as well. A CBI trade normally consists of entering an index position when the CBI hits a certain threshold (5, 7, and 10 are the ones I typically look at) and exiting when it returns to a neutral state, normally defined as a reading of 3 or lower.

Below is a performance report showing what would have occurred had you bought the S&P 500 whenever the CBI hit 5 and then sold when it returned to 3 or lower. It goes from January 1995 to present and does not include dividends, commissions, or slippage. All trades were executed at the 4pm close and assume $100,000 per trade.

As you can see, even a CBI of 5 can provide the tools for a pretty robust system. I don’t typically use a 5 as a reason to go long, though. I do use it as a reason to avoid entering new short positions and tightening stops on old ones. I prefer to save most of my ammo for more significant cluster sizes like 7 or 10 depending on my overall market outlook.

Recent action for a 5 reading has been sub-par. Four of the last five occurrences, dating back to July 2007, have been losers. Prior to that, from April of 2005 through June of 2007, there were 11 trades – 10 of which were winners. A possible reason for this is that the recent period has seen much more severe selloffs. The mid-2005 through mid-2007 period saw mostly shallow pullbacks.

My current market analysis suggests patience. I’d rather wait for a higher reading before becoming too aggressive. On the other hand, the moves up can be quick and powerful so I wouldn’t want to be caught short right now either. This particular indicator does indicate a short-term upside edge.


Anonymous said...

we had the same old trader axiom buys as last thursday open, TRIN close >1.49, equity p/c close >1.04, QQQQ rsi5 hugging 30, and we added VIX >10% above 10dma...perhaps the cbi could get to 7 as yest. rally had no volume, but expect the usual june rally: the almanac states: "June is even stronger in election years moving into third on NASDAQ and number one for the S&P 500 since the Depression. June’s first trading day has been strong with Dow up nine of the last ten years."
...moore research has a seasonal buy for DJ 6/5-25

Anonymous said...

Another excellent analytical posting, Rob.

Experience has taught me that sometimes a persistent failure of generally "reliable" algorhythms or indicators (such as “a CBI of 5”, or seasonality-based factors, or classic OB/OS metrics of imbalance, etc.) may in and of itself be a harbinger of a deep change in the key underlying variables.

This is how a major Trend-shift-- or even more importantly, a secular "sea change"-- will sometimes manifest.

I've seen it with P/E ratio systems, stock dividend-yield systems, A/D ratios, and so on. Perhaps a return to the former ‘rule’ of “CBI = 5 is a profitable trigger-factor threshold” will ITSELF serve as an early alert to a new Bull Trend of major proportion.

At which time the new cautionary practice of prudently "waiting" for lower clusters will frequently leave one "prudently" stranded at the bus stop, with no further buses coming along... as was the case in the prior period.


Rob Hanna said...

Thanks for sharing once again. Keen observations.

Very well put.


Anonymous said...


is 100k per trade 100k in spy ?