The Next Big Thing

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The "next big thing" indicator was developed to help identify those assets that are most likely to undergo a secular trend change from bear to bull. The indicator looks at those technical characteristics that are mostly frequently found at market bottoms prior to the change in trend. The indicator is unique in that it just doesn't rely upon the "oversoldness" of an issue (i.e., the y axis) but it also tries to assess how long (i.e., the x axis) the current down trend has gone on. The indicator also incorporates such things as counting the number of positive divergence bars over the prior year as positive divergences between oscillators (i.e., stochastics, MACD) that measure price and price itself tend to show up as markets bottom. The indicator also makes an assessment of how many consecutive years that an asset makes a negative return. This is a mean reverting feature as most assets rarely make more than two years of negative returns. In essence, the indicator tries to assess not only the extent to which prices are off their prior bull market highs, but also how beaten down investors have become as the downtrend (prior to a bottom and trend change) has gone on for such a long time.

A lot has gone into this indicator, and on a historical basis the indicator has a very good track record of calling major turns in not only equities but also in every major asset class out there. However, like any good indicator it is not perfect. There are false positives (i.e., bad signals) and the occasional missed signal. In addition, price confirmation is always important as the indicator only tells you that there is the potential for a secular trend change.

The major drawback to the indicator is that it is only applicable on monthly charts. This proved somewhat problematic at the March lows. For the S&P500, the indicator didn't actually get into position until the end on June when the the S&P500 closed at 919.32. It was the nature of the sell off and subsequent bounce that proved to be the problem. The sell off was steep enough (i.e., y axis) but it didn't prove to be long enough (i.e., x axis) in time. Furthermore, the absence of positive divergence bars owing to the "V" shaped bounce caused the indicator to lag.

But all wasn't bad for the "next big thing" indicator. Back on March 20, 2009, I wrote "Semiconductor Sector: Potential For Secular Run" and this was based upon the "next big thing" indicator. On April 16, 2009, I highlighted the retail, airline and housing sectors using the my "next big thing" indicator as the basis for my analysis. Since March 20, 2009, the semiconductor sector is up about 65%. Since April 16, 2009, the airline sector is up 83%; housing is up 23% and retail is up 52%.

So where am I going with this commentary? I believe that the "next big thing" indicator remains a useful tool. The indicator has limitations, but its usefulness appears to be in identifying those assets that have the potential for a market bottom and trend change from down to up. As you think where you want to put your money over the next 12 months, this information may help you formulate that plan. Once again, I would always use price confirmation (i.e., moving average crossover) to determine that the trend has truly changed.

With this in mind, I will present some charts of assets that I follow; the "next big thing" indicator is in the lower panel. I have put comments on the price charts.

Figure 1. $TNX.X/ monthly

Figure 2. $DXY/ monthly

Figure 3. Crude Oil/ monthly

Figure 4. Natural Gas/ monthly

Figure 5. S$P500/ monthly

Figure 6. Gold/ monthly