A technical signal that foreshadowed previous turning points for the US stock market arrived for the first time in nearly three years, according to data provided by its creator.
But some on Wall Street suspect it may not be as reliable as it once was.
The technical indicator, which is known simply as the Thrust Width Indicator, was launched on January 12 for the first time since June 3, 2020. The indicator was created by retired analyst Walter Deemer in 1973 while working at Putnam Investments. A company representative confirmed that Diemer worked there between 1970 and 1980.
His arrival caused quite a stir among technical analysts, according to MarketWatch interviews with several strategists.
Thrust width indicator
The breadth indicator is based on a relatively simple formula: the main input is the ratio of New York Stocks and other securities that advanced over 10 trading sessions compared to those that declined.
When said ratio rises above 1.97, the indicator is activated, Deemer said. This has happened rarely in the years since its creation, often arriving just as a new bull market has begun.
As the breadth indicator has grown in popularity, others have created their own modified versions, which, like the original, aim to offer investors a more detailed view of how individual stocks affect the performance of the broader market.
Some variations focus solely on the forward-to-decline ratio of NISE-traded common stocks, while the original uses a broad measure that includes not only common stocks but also preferred stocks, exchange-traded funds and other exchange-traded products, he said. is Deemer.
‘Believe in thrust’?
Some equity analysts believe that the breadth indicator and other early-stage indicators of the market’s breadth improvement have become less useful in recent years, in part because many of them have moved more frequently.
Ed Clissold, chief U.S. strategist at Ned Davis Research, said several similar indicators maintained by his firm were triggered during last year’s market turmoil, leading to questions about their continued usefulness.
“The Wall Street cliché used to be ‘trust the move’ because they would be among the first indicators to signal that a new bull market was underway,” Clissold said in a phone interview.
“But as these push indicators become more common, we now say ‘trust but verify.’ And verification comes from medium-term breadth indicators.”
Specifically, Clissold said he would like to see more shares trade above their 50- and 200-day moving averages before accepting that a permanent shift in market sentiment is likely.
Other popular indicators based on the falling NISE data seem to suggest that stocks could be a little more richly valued, says Katie Stockton, technical analyst at Fairlead Strategies.
For example, the McClellan Oscillator, another popular technical analysis tool that is also based on NISE decline data, has reached levels consistent with last year’s short-term tops in the stock market, Stockton said in a note to clients on Wednesday. This suggests that the S&P 500 has become “overbought”.
US stocks fell for a second day in a row on Wednesday, posting their worst daily decline of the year so far. S&P 500 SPX,
fell 1.6% to end the session at 3,928.86, according to FactSet data.
Nasdaq Composite COMP,
fell 1.2% to about 10,957.01, while the Dow Jones Industrial Average DJIA,
it fell by 1.8% to 33,296.96.