Although I don’t use technical analysis for picking stocks, I have been using a technical indicator to help me decide how much cash I should hold in my portfolio. This indicator is the % of stocks that are trading above 200 day moving average.
To calculate this indicator, I take 100 stocks from Nifty 100 index (nifty 50 + Nifty Next 50). For each stock, I calculate 200 day moving average (DMA) and compare it with current market price. The indicator is simply the number of stocks trading above their 200 DMA.
As markets rise, more and more investors turn optimistic and they push more and more stocks above 200 DMA. At the top of the bull market, this number is around 80. As market begins to correct, more and more investors turn bearish, they push more and more stocks below their 200 DMA. At the bottom of bear market, this number is usually around 20. This indicator is at 35% now and trending down.
I created a shareable version for VP.
Link to Google Speadsheet is below.
Note: Be patient. This sheet takes few minutes to open.
There are 3 sheets for Nifty 100, Nifty Midcap 100 and Nifty Smallcap 100. Nifty 100 sheet can be used for back-testing by changing the As On date.
This sheet uses GOOGLEFINANCE formula which has its own limitations like missing data and unadjusted prices. To that extent, results will be inaccurate but overall, results are fairly good.
As the indicator moves lower towards 20, I generally begin to deploy cash and as it moves beyond 70 or 75, I generally start selling if I have any overvalued stocks in my portfolio. This is a slow moving indicator, and it generally coincides with the bull-bear markets. As with any technical indicator, this is not accurate all the time. In some cases, indicator will top out or bottom out few days before the market does (which is good as it gives you some time to act) and other times it tops out or bottoms out much before the market (which is not optimum as this can be too early). But in either case, it is a good leading indicator and will act as a early warning.
Your views are invited especially how do you decide your asset allocation (if at all you manage that actively).