Overview

Of all my indicators, trend is the most important. I cannot have a buy signal triggered in a downtrend or a sell signal triggered in an uptrend. However, trend alone is not enough to flip the indicators. But when trend aligns with at least two of the other indicators it is likely to trigger a signal.

To calculate trend I use a simple 4% week-over-week calculation of the Value Line Geometric Index (VALUG). The VALUG is an equal-weighted index of the prices of around 1,700 companies. You can think of it as taking a cross-section of the market with every stock given equal significance regardless of price or market cap. This is most useful because the relative weightings of individual companies in indexes like the S&P 500 change day-to-day and at the time of this writing the S&P 500 is dominated by the top 100 stocks. Therefore I do not believe it gives as reliable of a reading about the breadth of the trend. If just a handful of stocks with massive weighting are doing poorly it could cause one to assess the trend as down while most of the market is flat or up.

This doesn’t often happen but it can from time-to-time. The VALUG gives a very broad, consistent overview of the market trend.

We got to the current state of the market with mega cap stocks dominating the indexes by those stocks vastly outperforming the rest of the market. It’s certainly possible that those stocks begin to underperform relative to the rest of the market so looking at an equal-weighted index is a safer approach in my opinion.

I also believe that spacing the calculation out by a week is vital to this indicator. You can have massive fluctuations or false moves that reverse themselves intraday or intraweek. By spacing the readings a week apart you reduce a lot of the noise that can occur in a highly volatile market while not sitting on the sidelines or in the market too long when the trend reverses.

Marty Zweig suggested that one could use just the 4% indicator on an equal-weighted index like the VALUG as the only signal to get in our out of the market and beat the market by a wide margin over a long time frame. I use all of the indicators together, but it shows you how important this indicator is.

How it’s calculated

To make this calculation, you simply take the closing price of the VALUG every week. When it moves 4% above a prior low since the last “sell” signal a “buy” is triggered. When it moves 4% lower than a prior high since the last “buy” signal, a “sell” is triggered. For example, if the prior low is 100, any close above 104 triggers a buy. If the prior low is taken out before a buy is triggered, that becomes the new low.

The 4% number is somewhat arbitrary but historically has done a good job of striking a balance between keeping you in an upward trending market without sitting out too long or jumping in too early. As I write this in September of 2022, however, we have seen seven different signals in just the past six months, a very large number. This is indicative of a market that has seen a massive amount of volatility and false starts. So perhaps moving this up to 5 or 6% would be prudent, but you wouldn’t have lost a large amount of money jumping in and out either, and still would have caught the bulk of a major rally we had from June to August.