How does Bullish Percent Measure Risk in the Market?

by | May 20, 2007 | Asset Management

A “buy signal” occurs when there is demand for a stock.

You know from Economics 101, anything in demand will see its’ price rise.

The “Bullish Percent” is a way to count all of the buy signals.

That tells us the *percentage* of stocks that are currently on buy signals.

This is really important, because most people never know when the “party” is starting to end. If the market has had a pretty good run, and the percentage of stocks on “buy signals” starts to fall, we know that money is starting to leave.

Are you with me so far?

The bullish percent chart for all the stocks on the New York Stock Exchange is the primary indicator I use to measure the amount of RISK in the market.

It’s just a percentage, like a test score.

OK, when we see a bullish percent reading of 30%, that means only 30% of all stocks are on buy signals. That’s usually a *great* time to buy stocks, as the risk of losing money (in general) is pretty low.

And when the BP chart moves up, beyond 70%, it’s typically known as the “high risk” neighborhood. It doesn’t mean things are terrible. But, historically, a move down from these levels really hurts.

Put another way, if 70% of all stocks are already on a buy signal, what stocks are left to propel the market much higher?

OK. So where are we today?

The bullish percent chart for all the stocks on the New York Stock Exchange stands in the high risk neighborhood, at 74%.

Let’s be careful.


Thomas Mullooly
Mullooly Asset Management LLC
Our Only Business Is Fee-Only Investment Advice

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