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15 May 2006

Updated daily for  subscribers, the Investors Intelligence breadth indicators measure the degree of participation within an index move and are an important tool for identifying both the strength of a move and potential turning points. We originally developed their Bullish Percentage tool in the 1950's as a breadth indicator for the US market. It was based on point and figure charting, and is calculated by measuring the number of stocks displaying an uptrend. For example, if 700 stocks (out of 1000) were displaying uptrends, the bullish% indicator would be 70%.  A bull market will typically exhibit either rising or strong breadth statistics, while extreme readings for this indicator suggest overbought/oversold (and thus potentially unsustainable) conditions.  

This indicator for the FTSE100 has been displaying a bearish divergence from the index since the start of the year (see chart, right). The indicator moved to “Bear Alert” status towards the end of April, giving investors plenty of time to formulate a defensive stance ahead of Fridays sell-off.
Given that the most likely scenario is for the market to reassert the primary 3-year bull market trend, the next question is; when to invest? The bullish% indicator for the FTSE100 has consistently shown support around 40% since the spring 2003 turnaround, and it is this level that we expect to provide our re-entry point.
Also worth monitoring is an alternative breadth indicator, the %10-week MA. This monitors the number of stocks holding above their own 10-week MA, and is a faster moving oscillator. Historical support lies around 20%, and we are fast approaching this level. An ideal scenario will see the %10wk MA pause and recover from the 20% level, followed by confirmation from the bullish% finding support around 40%.
At this point, we will look to add further long positions to our model portfolios. 
Mark Glowrey, senior analyst
Investors Intelligence UK

US Sentiment holds the key
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