A key stock market gauge is testing a level that has proved to be important for several decades.
Technical analysts like to talk about important “levels” on the charts of various markets and indices. And while there may be many important levels on a particular index depending on one’s time frame, e.g., short-term, intermediate-term, etc., when it comes to the big picture, there are really relatively few levels of real critical consequence. One such level, in our view, is being tested presently in one of our favorite gauges in the entire U.S. equity market.
We are talking about the Value Line Geometric Composite (VLG), an index that tracks the median U.S. stock performance among a universe of roughly 1800 stocks. As we have said many times, this is one of our favorite measures of the health and direction of the overall market. We find it’s helpful to track it because research has shown that 70-80% of the determinant of the trend direction of a particular stock is based on the trend of the overall market.
So what is so significant about the current level? Let’s take a look at the VLG’s current location from a historical perspective.
In 1998, the VLG topped out at an all-time high level around 510. 9 years later, in 2007, the index again topped out ~510. Fast forward 7 years and we see the index (briefly) top out there one more time in 2014. At the market top in mid-2015, the VLG was finally able to exceed the 510 level — temporarily. After a false breakout, the VLG sold off hard in the subsequent correction. Finally, in 2017, the VLG was able to sustainably break out above the 510 level. Well, at least for a year.
During the correction last fall-winter, the index temporarily lost the 510 level again before quickly recovering it again in this year’s rally. The VLG tested the level again in May before bouncing to 540. Now, once again, amid the Trump/Tariff/Trade tantrum, we find the key VLG index testing this important multi-decade level once again.
So will this level continue to serve as support for the stock market? That remains to be seen. But, in our view, it is certainly one of THE levels to watch in the global equity world.
If you’re interested in the “all-access” version of our charts and research, we invite you to check out our site, The Lyons Share. Considering the potentially treacherous market climate, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!
Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.