Cyclical Technical Analysis Indicators

One stock market cycle, normally four to five years

Cash and cash flow indicators work particularly well on a cyclical basis. During this most recent cycle, the most important indicator has been cash flow from the public indirectly buying equities through mutual funds.

You see, there are two conditions necessary for a bull market to end:

1) The public stops buying; and

2) fund managers decide not to invest the cash coming in from investors.

In the past, the market has gone up because the public has bought mutual funds and fund managers have immediately put that money into equities.

Each month, the Investment Company Institute (ICI) reports the net fund sales to the public, the cash positions of mutual funds, transactions by portfolio managers, and switches between fixed-income and equity funds by the public.

Watching these figures over a number of months would enable a technical analyst to spot a major trend reversal.

Mutual fund cash under 5% is considered low or bullish and above 12% high or bearish.

Cash flows give you a picture of the demand for equities. New equity financing gives you a picture of supply.

Initial public offerings and secondary offerings, less corporate share repurchases, are referred to as net equity financing. The figure is reported in the Federal Reserve Flow of Funds numbers. A contracting supply is bullish, and a growing supply is bearish.

Foreign buying and selling of U.S. stocks and U.S. buying and selling of foreign stocks is another cyclical supply/demand indicator. The technical analyst is interested in whether U.S. investors are spending more money abroad than foreigners are spending here. If they are, it would be negative for the U.S. market. This information is available from the Securities Industry Association.

Key Cyclical Technical Analysis Indicators

Mutual fund cash positions reported by ICI.

Under 5% is low (bearish), above 12% high (bullish).

 

Net equity financing reported in Flow of Funds.

Contracting supply is bullish, and expanding supply is bearish.

 

SIA data on foreign buying of U.S. stocks and U.S. buying of foreign stocks.

When U.S. investors spend more abroad than foreigners are spending here, it is negative, and vice versa.