Breadth indicators seem to be at odds here. Is it bad, good, or so good it’s bad? Here are some notes to help confuse you:
Leadership Breadth
Investors Business Daily in their Big Picture column on Friday noted that “There are virtually no stocks close to proper buying positions right now.” This is a measure of breadth and potential leadership. The basic idea is that the market will struggle to rally strongly without leadership.
90% Days and Herding
A few weeks ago it was pointed out to me that from July 2007 until now there has been a higher concentration of 90% volume days on the NYSE than at any time since the 1940’s. (A “90% volume day” is a day where either up volume or down volume swamps the other by at least 9 to 1.) Lowry’s created the 90% day concept and has used them to identify market bottoms in the past. Detailed information can be found in their recently updated 2001 study. So far while this market rally has produced some strong up days with both price and volume it has yet to produce a 90% upside volume day. This would seem especially concerning to me given the fact that they have become more frequent recently.
Brett Steenbarger has also done some great work with the concept of breadth volume. He refers to it as “herding”. Here is an introductory discussion of it from his blog. For more discussion you could simply search on “herding” in his search box on the top left hand corner of his page. I'm curious to see if Dr. Steenbarger has anything to say about this in the near future.
A Rare Breadth Thrust Signal
In Gerald Appel's book "Technical Analysis - Power Tools for Active Investors" he publishes a system called the "Daily Breadth Impulse Signal" (chapter 6, page 142). Essentially it looks to enter the market when the 10-day exponential average of advancers/decliners hits an extreme. The trade closes when the same measure eventually declines to a certain number. The published results were fairly impressive. Since 1970, there were 26 trades with 22 winners and four losers. Avg winner: 5.24%. Avg loser: 2.37%.I recreated his indicator some time ago. Using my data, results were slightly different, but similar.The last signal given before publication was 05/2004.
According to my data, in November of 2004 another signal triggered. This one lasted for close to a month and was good for about a 1.3% gain.
March 21, 2007 was the next trigger I could find. Unfortunately, the signal was cancelled 5 days later on a shakeout, causing a whipsaw loss for the system as it was unable to benefit from the uptrend that followed.
According to my data, Friday 2/1/2008 gave the first buy signal since 3/21/07.
The McClellan Oscillator
A few people have pointed out to me the overbought nature of the McClellan Oscillator. I’ve yet to complete my study of the current situation in regards to the oscillator, but I did find the following quote from a 2004 paper by Tom McClellan very interesting:
“First of all, deeply negative readings tend to indicate conclusion of a down move, whereas extremely high readings tend to show initiation of a new up move…The postings above +200 in September 1998 were a sign that the bulls were going to be coming rushing back in, and they had a lot of money in their pockets to push prices higher for a sustained period of time…So when one sees a very high reading, it may be a sign that a brief pullback is needed, but it is also a sign that higher prices should be expected following that pullback.”
The entire paper may be found here. The quote was taken from pages 24 and 25.
Summary thoughts
Breadth has been extremely strong, but we’ve yet to see a real rush that would look like a “herding” day. The strongest areas in the last week and a half have been those that were beaten down the hardest. Contrary to what some would have you believe, this is NOT unusual at market bottoms. (I’ll review results from my previous post on this later.) I’m continuing to take it day by day. Since exiting my long positions based off my bottom indicators I’ve yet to reallocate heavily either long or short and am waiting for a better edge.
Leadership Breadth
Investors Business Daily in their Big Picture column on Friday noted that “There are virtually no stocks close to proper buying positions right now.” This is a measure of breadth and potential leadership. The basic idea is that the market will struggle to rally strongly without leadership.
90% Days and Herding
A few weeks ago it was pointed out to me that from July 2007 until now there has been a higher concentration of 90% volume days on the NYSE than at any time since the 1940’s. (A “90% volume day” is a day where either up volume or down volume swamps the other by at least 9 to 1.) Lowry’s created the 90% day concept and has used them to identify market bottoms in the past. Detailed information can be found in their recently updated 2001 study. So far while this market rally has produced some strong up days with both price and volume it has yet to produce a 90% upside volume day. This would seem especially concerning to me given the fact that they have become more frequent recently.
Brett Steenbarger has also done some great work with the concept of breadth volume. He refers to it as “herding”. Here is an introductory discussion of it from his blog. For more discussion you could simply search on “herding” in his search box on the top left hand corner of his page. I'm curious to see if Dr. Steenbarger has anything to say about this in the near future.
A Rare Breadth Thrust Signal
In Gerald Appel's book "Technical Analysis - Power Tools for Active Investors" he publishes a system called the "Daily Breadth Impulse Signal" (chapter 6, page 142). Essentially it looks to enter the market when the 10-day exponential average of advancers/decliners hits an extreme. The trade closes when the same measure eventually declines to a certain number. The published results were fairly impressive. Since 1970, there were 26 trades with 22 winners and four losers. Avg winner: 5.24%. Avg loser: 2.37%.I recreated his indicator some time ago. Using my data, results were slightly different, but similar.The last signal given before publication was 05/2004.
According to my data, in November of 2004 another signal triggered. This one lasted for close to a month and was good for about a 1.3% gain.
March 21, 2007 was the next trigger I could find. Unfortunately, the signal was cancelled 5 days later on a shakeout, causing a whipsaw loss for the system as it was unable to benefit from the uptrend that followed.
According to my data, Friday 2/1/2008 gave the first buy signal since 3/21/07.
The McClellan Oscillator
A few people have pointed out to me the overbought nature of the McClellan Oscillator. I’ve yet to complete my study of the current situation in regards to the oscillator, but I did find the following quote from a 2004 paper by Tom McClellan very interesting:
“First of all, deeply negative readings tend to indicate conclusion of a down move, whereas extremely high readings tend to show initiation of a new up move…The postings above +200 in September 1998 were a sign that the bulls were going to be coming rushing back in, and they had a lot of money in their pockets to push prices higher for a sustained period of time…So when one sees a very high reading, it may be a sign that a brief pullback is needed, but it is also a sign that higher prices should be expected following that pullback.”
The entire paper may be found here. The quote was taken from pages 24 and 25.
Summary thoughts
Breadth has been extremely strong, but we’ve yet to see a real rush that would look like a “herding” day. The strongest areas in the last week and a half have been those that were beaten down the hardest. Contrary to what some would have you believe, this is NOT unusual at market bottoms. (I’ll review results from my previous post on this later.) I’m continuing to take it day by day. Since exiting my long positions based off my bottom indicators I’ve yet to reallocate heavily either long or short and am waiting for a better edge.
Hi,
ReplyDeleteRegarding the Breadth Thrust, I get entirely different results (using TradeStation). Here's how I constructed the BT:
EMA = AverageX (Adv/(Adv+Decline), 10); then if Lowest (EMA, 10) < 0.4 and Highest (EMA, 10) > 0.615
I thought this was the definition of the BT and with this formulation, the last thrust was in May 2004. I am just wondering why the vastly different results.
Thanks!
Tar,
ReplyDeleteI believe you may have not have interpretted part of the criteria correctly. You may email me at RobHanna@comcast.net and I will be glad to help. I am not comfortable discussing the details of someone else's system on the blog beyond what I've already said.
Regards,
Rob