Navigating the Election Cycle: A Technical Analysis Perspective
By Vaughn Woods, CFP, MBA
Fear is a common emotion leading up to presidential elections, especially in September and October. However, history shows that markets often rebound after the election uncertainty subsides. We remain vigilant in identifying opportunities to profit from such market dynamics.
As you know, we use technical analytic tools to find value during such market trends. One such tool is On-Balance-Volume (OBV), which helps us identify potential market shifts based on volume and price relationships.
Developed by Joseph Granville, OBV is rooted in the theory that the market is divided into “smart money” and the “general public.” The premise is that savvy investors, often referred to as “smart money,” accumulate stocks at lower prices and distribute them to the general public at higher prices. By analyzing the relationship between price and volume, OBV attempts to uncover these hidden accumulation and distribution patterns.
How OBV Works:
OBV calculates a cumulative volume indicator that tracks the accumulation or distribution of shares based on price changes. If the closing price is higher than the previous day’s close, the day’s volume is added to the OBV. If the closing price is lower, the day’s volume is subtracted. This is just one factor we follow on your behalf. There are many.
Key Implications of OBV:
- Divergence: When the price and OBV diverge, it can signal a potential reversal. For example, if the price is rising but OBV is falling, it may indicate a lack of buying interest and a potential sell-off.
- Confirmation: OBV can be used to confirm price trends. If the price and OBV are both moving in the same direction, it can strengthen the trend’s validity.
- Divergence Between Price and OBV: This can signal a potential reversal. For example, if the price is rising but OBV is falling, it may indicate a lack of buying interest and a potential sell-off.
- Accumulation and Distribution: OBV can help identify periods of accumulation (when smart money is buying) and distribution (when smart money is selling).
Important Considerations:
- Combination with Other Indicators: OBV is often used in conjunction with other technical indicators, such as moving averages or the relative strength index (RSI), price to earnings ratios and forward price to earnings estimates to provide a more comprehensive analysis.
- Market Conditions: The effectiveness of OBV can vary depending on market conditions. It may be more reliable in trending markets than in sideways or choppy markets.
- Individual Stocks: While OBV can be used to analyze individual stocks, it’s often more effective when applied to broader market indices or sectors. The broader market is of more importance just now as the Fed’s recent rate cut, plus the stimulus aspects of artificial intelligence technology, government spending authorized through the inflation reduction act, infrastructure spending and military spending are providing smart money opportunities which we hope to take advantage of over the course of the near term.
In summary:
On-Balance-Volume is a valuable tool for understanding the relationship between price and volume and can help identify potential market trends. However, it’s important to use it in conjunction with other technical analysis tools, which as you know, we use for you.
As always, we encourage you to reach out to us if you have any questions or would like to discuss how OBV can be incorporated into your investment strategy.
Sincerely,
Vaughn Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
858.454.6900
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter are those of Vaughn Woods and Vaughn Woods Financial Group and may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0306.