According to data from the maker, a technical signal came out for the first time in almost three years announcing previous turning points for the US stock market.
But some on Wall Street suspect it may not be as reliable as it once was.
The technical indicator, known simply as the width-thrust indicator, was activated on January 12 for the first time since June 3, 2020. The indicator was created in 1973 by retired analyst Walter Deemer when he worked at Putnam Investments. A company representative confirmed that Deemer worked there between 1970 and 1980.
Its arrival has caused quite a stir among technical analysts, according to MarketWatch interviews with several strategists.
The width-thrust indicator
The breadth-thrust indicator is based on a relatively simple formula: its main input is the ratio of shares of the New York Stock Exchange to other securities that have risen over the course of 10 trading sessions compared to those that have fallen.
When that ratio rises above 1.97, the indicator is triggered, Deemer said. This has happened only sporadically in the years since its inception, often just as a new bull market was starting.
As the breadth-thrust indicator has grown in popularity, others have created their own modified versions of it, which, like the original, are intended to give investors a more detailed view of how individual stocks affect the performance of the broader market .
Some variations focus solely on the advance-to-fall ratio of common stocks traded on the NYSE, while the original uses a broad measure that includes not only common stock, but also preferred stock, exchange-traded funds, and other products that traded on the exchange, Deemer said.
“Trust the thrust”?
Some equity analysts believe that the breadth-thrust indicator and other early-stage indicators of improving market breadth have become less useful in recent years, in part because many of them have been triggered more frequently.
Ed Clissold, chief US strategist at Ned Davis Research, said that during last year’s market turmoil, several similar indicators held by his company were triggered, raising questions about their continued usefulness.
“The Wall Street cliché used to be ‘trust the momentum,’ because it would be one of the first indicators to signal that a new bull market is underway,” Clissold said in a telephone interview.
“But because these thrust indicators are becoming more common, we now say ‘trust but verify’. And the verification comes from mid-term breadth indicators.”
Specifically, Clissold said he’d like to see a greater portion of stocks trade above their 50- and 200-day moving averages before accepting that a lasting shift in market sentiment is likely to have arrived.
According to Katie Stockton, technical analyst at Fairlead Strategies, other popular indicators based on the NYSE advance decline data seem to indicate that stocks may be a bit richly valued.
For example, the McClellan Oscillator, another popular technical analysis tool that is also based on NYSE progress data, has reached levels consistent with last year’s near-term stock market spikes, 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 straight day on Wednesday as they posted their worst daily pullback of the year so far. The S&P 500 SPX,
fell 1.6% to end the session at 3,928.86, according to FactSet data.
The Nasdaq Composite COMP,
fell 1.2% to about 10,957.01, while the Dow Jones Industrial Average DJIA,
decreased by 1.8% to 33,296.96.