As many of you already know, I do a lot of work on stock markets all over the world. It’s part of my weight-of-the-evidence approach, but it also gives me the opportunity to learn from investors and traders who come from completely different cultures and bring a unique perspective. How else can we learn if not by exposing ourselves to new things?
Recently I was going through my India Nifty workbook where I keep all of my notes on the India Indexes like the NIFTY50, NIFTY500, NIFTY100, NIFTY Mid-caps, etc. It’s a very similar workbook to the one I keep for the United States where I include the S&P500, DJIA, Russell2000, etc. I consider all of this to be the “top” of my top/down approach to equities. We start with the indexes, work our way down to the sectors and industry groups and ultimately to the individual stock level.
The NSE, or National Stocks Exchange of India, has this Index that they call the NIFTY NEXT 50. This index represents the next 50 companies that are not part of the NIFTY50, but still within the NIFTY100. What I noticed last week was that the NIFTY50 was hitting our upside objectives, while the NIFTY NEXT 50 was already in the process of exceeding our targets and beginning a new leg higher. I was getting signals from the NIFTY NEXT 50 that I wasn’t getting from the original NIFTY50.
While I wasn’t really that amazed at how helpful this was for me, because this is why we look at all the indexes, I was a little disappointed that we don’t have something similar in the United States. We have the Dow Jones Industrial Average with 30 stocks and we have the 20 stocks in the Dow Jones Transportation Average, but we don’t have what would theoretically be the next 30 (or 50 total) in line in an organized format.
With the beauty of a little math and some great technology, I just built my own. And it’s already becoming a helpful tool. In fact, I find it so helpful that I will be adding it to our group of Indexes this month. I will also be adding 2 additional workbooks to my Chartbook which include the Dow Industrials Next 30 stocks and the Dow Transports Next 20 stocks, giving us our very own USA Next 50 Index.
Here is what that USA Next 50 Index looks like today. I see it hitting a key Fibonacci extension target in July, retesting that successfully in early November, and now breaking out to new all-time highs. The target I see for this index is still another 15-17% higher. That’s not nothing:
How does this help us? Well, one of the most valuable parts of my process includes going through all 30 stocks in the Dow Jones Industrial Average on both weekly and daily timeframes to get a longer-term view of the 30 names as well as a more short-term outlook for what are theoretically the most important 30 companies in America. (You can read more about that process here) I also perform the same exercise on a weekly basis for the 20 stocks in the Dow Jones Transportation Average.
So now that we have the USA Next 50 Index, we have another 30 stocks to look at for the Industrials and another 20 in the Transports. We have more evidence to weigh and more data points to help us formulate a thesis. I took the largest 30 stocks by market capitalization that are not part of the DJIA and did the same for the largest 20 Transportation stocks not in the DJTA. Here is my list:
This serves two purposes – first we have additional data points in our weight-of-the-evidence approach. And we also have 3 more indexes to review throughout our process: The Next 30 Industrials, the Next 20 Transports, and the Next 50 Total Index, as seen above. Note – these indexes are equally-weighted, as opposed to the price-weighted format for the traditional Dow Jones Averages. So if you don’t agree with one or two of my components, the difference in the performance of these indexes is minimal.
I’m not sure why no one else has thought about this. I’m already finding it helpful. From a risk management standpoint, as long as the USA Next 50 Index is above the July highs, I think we need to continue to err on the very aggressively bullish side of the US equities market.
Members of Allstarcharts will have access to all 3 of these indexes on multiple timeframes as well as the 50 new components annotated with comments updated on a weekly basis.
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