Monday, July 13, 2009

Tracking Stock Market Trending

Long time readers know that I track eight S&P 500 sectors each week, assessing their short-term trending behavior with a measure that I've called Technical Strength. The measure essentially tracks a stock's slope and goodness of fit to a trendline and then averages scores across highly weighted stocks within each sector to obtain a sector reading. The stocks that I use are the same 40 stocks (five across each of the eight sectors) in the basket that I report upon in my Twitter updates. (This post shows all the stocks and how I track them).

In this post, I average each week's Technical Strength readings across the sectors to obtain a single weekly reading for the S&P 500 Index. The idea here is that "trendiness" should lead price highs and lows, as those highs and lows typically occur during topping and bottoming processes that display reduced momentum/trending.

We can see how trending did indeed top out ahead of price during the recent market rise; we can also see how we do not as yet see any indication of bottoming from Technical Strength. Note that these are weekly readings; similar reasoning should hold for other time frames with daily or even intraday readings of trendiness, a promising research direction.