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It Feels Like the Bullish Percent Should Be at 10 Percent!

The pain imposed from technology stocks� performance during 2000 was unprecedented for many investors. The Nasdaq Composite was down more than 50 percent from its March 2000 highs. Stocks like Redhat (RHAT) had fallen over 90 percent that year. That�s right, over 90 percent! In fact, during 2000 16.5 percent of the stocks on the Nasdaq were down 20 percent or more.

With returns like that, one might expect that the NYSE or at least the OTC Bullish Percent would be down at 2 percent! There are in fact many times when one might expect the bullish percent to be extremely low, but it is not. Why might that be? The answer, simply, is sector rotation. The markets of 1994 and 2000 had a lot of similarities. Let�s look at some aspects of those markets that will likely happen again.

One Stock, One Vote

If you recall, a bullish percent is calculated by dividing the number of stocks on a point and figure buy signal by the total number of stocks in the universe. Essentially there are two piles of stocks: a buy signal pile and a sell signal pile. Once the stock is in the sell signal pile, it remains there until a buy signal is given. The stock can continue to give multiple sell signals, but once its vote has been counted, then multiple sell signals don�t count.

This is different from a price-weighted or capitalization-weighted index. In a price-weighted index, the higher the price, the more votes the stock gets. In a capitalization-weighted index, the bigger the stocks� market capitalization, the more votes it receives. The same goes with numerous other stocks. For instance, in 2000, Copper Mountain Networks (CMTN) moved from a buy signal to a sell signal at $42.

This is when the sell signal vote for CMTN counted in the OTC Bullish Percent. Since that sell signal, the stock has given several more and fallen to $6.25. During that drop, CMTN gave six different sell signals, although only that first sell signal at 42 counted in the calculation of the bullish percent. If the weak get weaker and the strong get stronger, the Bullish Percent reading can remain the same. That is the design of the indicator. It is created to measure supply and demand changes in the marketplace. In the case of CMTN there has been no change in the supply and demand picture. Supply has remained in control.

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