Why am I so concerned with the Proportion of Uptrending Stocks in a Market?

If you have been following my weekly system analysis, you will find that I am always talking about the percentage of uptrending stocks in a market. My system uses this analysis to determine (partly) the current market direction and decides how it should behave.

Take the current market rout in US as an example. When the percentage of uptrending stocks in the US market reaches around 75%, the system deems the market as overbought and has since stopped further purchases 2 weeks ago (it still continues to hold those in the portfolio but no more new purchases). This is a form of protection to the portfolio.
Check out these posts:
https://diyquantfund.blogspot.com/2018/01/diyquant-system-us-market-analysis-for_27.html
https://diyquantfund.blogspot.com/2018/01/diyquant-system-us-market-analysis-for_20.html


What is the reason behind 75%?
75% is just a fuzzy value (also need to take into consideration of other factors). This is what I believe is the reason. Referring to the Pareto principle of the 80/20 rule which is the law of the vital few, only about 20% of the companies in a stock market should be good companies. It is natural that they tend to be in uptrend given their sound financial conditions (except during really bad market). Perhaps the other way is also true. Around 20% of the businesses are really crappy.

So in good times, you can see that more and more stocks will be in uptrend, as more money is poured into the market. As the bull market continues, with the absence of a correction, like the recent one, the percentage has reached 75% where investors start buying whatever things they can find just to be in the party. I see this as impulsive buying, spurred by greed, that even lousy companies are uptrending. So it's time to scale back.

Then it reminds me of what Warren Buffett had said "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful".

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