A new way to measure market strength
Last Month, I presented results from
a study I continue to make on market strength. There, I pointed out
that most traders spend the majority of their time identifying the next great
stock to trade. They’re far less concerned about the strength of the market,
even though the market in general and specific sectors in particular account for
as much as 75% of any stock’s price movement. Clearly, time spent evaluating
market and sector strengths can be time well spent.
I’ve collected data over the past year and a half for a
measure of market strength I’ll call the “amazing 200,†amazing because of the
portrait it paints of the shape of the market. Start by counting the number of
stocks priced above $10 and averaging 100,000 shares traded over the last 20
days that end the day trading below their respective 200-day moving averages
(N200dMA). As the market rises (and remember the S&P accounts for more than 80
percent of the total market’s capitalization), the N200dMA falls, reflecting the
broad strength of the rise. Conversely, a falling market exhibits the reverse
behavior, i.e., the N200dMA rises, reflecting the weakness.
Read More