Skip to main content

Viewing Strength and Weakness as Different Dimensions of the Market

When assessing the market, I find it helpful to treat strength and weakness as independent variables.  In other words, we can have markets in which many stocks are strong and few weak; many weak and few strong; few strong and few weak; and many strong and many weak.  The latter is possible when correlations among sectors and stocks are relatively low.

Let's take the Parabolic SAR indicator system developed by Wilder.  One way I track market strength and weakness is to take a cumulative running total of Parabolic SAR buy signals minus sell signals for all NYSE issues (red line, above).  This has been helpful in capturing cyclical behavior in SPY (blue line). (Raw data from StockCharts.com).  

But we can also consider the buy signals from the system separately from the sell signals as proxies for market strength and weakness.  For example, since mid-2014, when I first began collecting these data, when we divide the sample into quartiles, we find that, after a single day of many new buy signals (top quartile), the next 10 days in SPY have averaged a loss of -.23%.  After a single day of few buy signals (bottom quartile), the next 10 days in SPY have averaged a gain of +.80%.

When we've had very few sell signals (bottom quartile), the next 3 days in SPY have averaged a gain of +.26%, compared with a -.01% loss for the remainder of the sample.  Over a next 10-day period, however, when we've had many sell signals (top quartile), the next 10 days in SPY have averaged a gain of +.52%, compared with an average gain of +.09% for the remainder of the sample.

Overall, the percentage of variance in daily sell signals accounted for by buy signals is only about 10%.  They indeed are more independent than one might expect.  It is in the interplay of waxing/waning buying and selling that we can sensitively track cycle dynamics.

Combined perspectives can have their use, as well.  Suppose we look at the total number of buy *and* sell signals each day.  Interestingly, when we have many buys and sells (top quartile), the next 10 days in SPY have averaged a gain of +.33%.  When we've had very few buys and sells (bottom quartile), the next 10 days in SPY have averaged a gain of +.59%.  All middle occasions have averaged a loss of -.06%.

Think about how momentum and value operate, and then think what it means to have many versus few trading signals.  Think about cycle structure and when you'd expect to have many and few trading signals.  We can learn a lot once we tease apart strength and weakness and view markets multidimensionally.

Further Reading:  The Dynamics of Stock Market Cycles
.

Comments

Popular posts from this blog

Austerity-A Fancy Word for Destitute.

The reason for this post is not for the folks who have been caught in the first wave of personal economic hard reality, but the next wave. Regardless of the optimism espoused by grinning leaders and sycophant press, we are entering the final stage of global economic collapse. It began in 2008 and was forestalled for five years with fudge putty, but the weight of global indebtedness cannot be propped any longer and the final crunch is imminent. Austerity measures herald the final throes.  Indications of coming austerity.   Austerity measures are the final last ditch effort, futile or not! Back in the day many of us old-timers went through periods of "hard-times". In retrospect I realize there is no comparison to yesteryear hard times and today's version. Back then, expectations were never very high for the working class, there were no sophisticated systems or conveniences anyway. In fact the difference between being "set" or not was about having treats or not. Si...

Terrifying Arctic methane levels

A peak methane level of 3026 ppb was recorded by the MetOp-B satellite at 469 mb on December 11, 2021 am. This follows a peak methane level of  3644 ppb  recorded by the MetOp-B satellite at 367 mb on November 21, 2021, pm. A peak methane level of 2716 ppb was recorded by the MetOp-B satellite at 586 mb on December 11, 2021, pm, as above image shows. This image is possibly even more terrifying than the image at the top, as above image shows that at 586 mb, i.e. much closer to sea level, almost all methane shows up over sea, rather than over land, supporting the possibility of large methane eruptions from the seafloor, especially in the Arctic.  Also, the image was recorded later than the image at the top with the 3026 ppb peak, indicating that even more methane may be on the way. This appears to be confirmed by the Copernicus forecast for December 12, 2021, 03 UTC, as illustrated by the image below, which shows methane at 500 hPa (equivalent to 500 mb). Furthermore, ...

Women and children overboard

It's the  Catch-22  of clinical trials: to protect pregnant women and children from the risks of untested drugs....we don't test drugs adequately for them. In the last few decades , we've been more concerned about the harms of research than of inadequately tested treatments for everyone, in fact. But for "vulnerable populations,"  like pregnant women and children, the default was to exclude them. And just in case any women might be, or might become, pregnant, it was often easier just to exclude us all from trials. It got so bad, that by the late 1990s, the FDA realized regulations and more for pregnant women - and women generally - had to change. The NIH (National Institutes of Health) took action too. And so few drugs had enough safety and efficacy information for children that, even in official circles, children were being called "therapeutic orphans."  Action began on that, too. There is still a long way to go. But this month there was a sign that ...