Friday, April 10, 2015

Three Views of the Breadth of Stock Market Strength

Here are updated charts for what we might call the breadth of market strength and weakness.  (Raw data from the excellent Stock Charts site.)  Any individual stock can give a buy or sell signal according to rules from a technical trading system.  The top chart reflects Wilder's Parabolic Stop-and-Reverse (SAR) system; the middle chart tracks a system based on Bollinger Bands; and the bottom chart follows a system derived from Lambert's Commodity Channel Index.  The charts reflect the balance between buy signals and sell signals for all NYSE stocks on a daily basis.  They thus capture the breadth of strength and weakness for the general market.

As a whole, the signals tend to top out ahead of price during intermediate-term market cycles and bottom shortly ahead of price.  Of the three systems, the SAR tends to be the fastest moving (greatest lead times); the CCI the slowest.  When all are in sync, turning lower or turning higher, we generally find ourselves in the relatively early phase of a trending move.  I find the interplay among the signals to be helpful in identifying where we're at in those intermediate-term cycles. 

Note that SAR has recently turned negative, despite the recent price strength.  The Bollinger Band measure is coming off a high reading but remains positive.  The CCI system recently gave a high reading, which has preceded the most recent market strength.  It has fallen off that high but remains neutral.  As a whole, the signals are showing reduced breadth of market strength, but not net weakness--consistent with the waning breadth readings noted in yesterday's post.    

Further Reading:  Tracking the Breadth of Market Strength