Leavitt Brothers: Forget the Fundamentals

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Bullish Percent Index

The Bullish Percent Index (BPI) is a popular market “breadth” indicator used to gauge the internal strength/weakness of the market. It is the number of stocks in an index (or sector) that have point & figure buy signals relative to the total number of stocks that comprise the index (or sector). So essentially it is the percentage of stocks that have buy signals. Generally speaking, values over 70% indicate an overbought situation whereas values under 30% indicate an oversold environment

Like many of the market internal indicators, it is used both to confirm a move in the market and as a non-confirmation and therefore divergence indication.

If the market is strong and moving up, the BPI should also be moving up as more and more stocks make the “buy list.” When the market moves down, one expects the BPI to also move down to confirm the market's weakness.

However, if the market moves up while the BPI starts to head down, the market more likely than not will pull back. This scenario unfolds when the big-caps are strong (they are causing the indexes to move up because the indexes are weighted to favor them) but the small- and mid-caps are starting to weaken (hence the BPI is moving down).

On the other side, when the market moves down while the BPI starts to head up, a short-term bottom and reversal are not too far off.

Here is what a typical Bullish Percent Index chart looks like. Since the BPI is the percentage of stocks given a buy signal by their point & figure charts, mathematically the value must stay between 0 and 100.

Looking at the above Bullish Percent chart of the NASDAQ, you can see the indicator being pretty good at picking a short term bottom when the BPI drops to around 30 or lower and then moves up. Also note the confirmation of the March to November uptrend by the steadily rising BPI. But don't read too much into the failure of the indicator to make higher highs above 70 when the market continues up - after all there is a ceiling at 100, and realistically it will never get close to that number.

TWR had traded sideways for many months when it formed this 4-month symmetrical triangle. Notice the volume surge on the breakout as the stock rallied over 40% in under one week.

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