According to data released by its creator, a technical indicator that has previously predicted turning moments in the US stock market has arrived for the first time in nearly three years.
However, some on Wall Street believe it is no longer as reliable as it once was.
The technical indicator, known simply as the breadth-thrust indicator, was activated for the first time since June 3, 2020 on Jan. 12. Walter Deemer, a retired analyst from Putnam Investments, invented the indicator in 1973. A company official acknowledged that Deemer worked there between 1970 and 1980.
According to MarketWatch conversations with numerous strategists, its debut has generated quite a stir among technical analysts.
The Indicator of Breadth and Propulsion
The breadth-thrust indicator is based on a simple formula: the main input is the ratio of New York Stock Exchange stocks and other securities that rose versus those that sank over the course of 10 trading sessions.
According to Deemer, the indicator is triggered when the ratio rises above 1.97. This has happened only a few times in the years since its inception, and it usually happens just as a new bull market begins.
As the breadth-thrust indicator has gained popularity, others have produced their own modified versions of it, which, like the original, claim to provide investors with a more detailed perspective of how individual stocks influence the performance of the larger market.
Some modifications focus primarily on the advance-decline ratio of NYSE common stocks, whereas the original utilizes a comprehensive measure that includes not only common stocks but also preferred shares, exchange-traded funds, and other products traded on the exchange, according to Deemer.
‘Believe the Thrust’
Some equities analysts believe the breadth-thrust indicator and other early-stage signs of growing market width have become less useful in recent years, owing in part to the increased frequency with which many of them have been triggered.
Several such indicators maintained by Ned Davis Research, according to Ed Clissold, chief U.S. analyst, were activated during last year’s market turmoil, raising concerns about their continued validity.
“The Wall Street adage used to be ‘trust the thrust,’ because they were among the first indicators to indicate a new bull market was underway,” Clissold explained over the phone.
“However, because these thrust indicators are becoming increasingly common, we now advise ‘trust but verify.’ And intermediate-term breadth measures provide confirmation.”
Clissold, in particular, stated that he would like to see a greater proportion of stocks trading above their 50- and 200-day moving averages before agreeing that a long-term shift in the market’s mood has most certainly occurred.
Mixed Messages
According to Katie Stockton, technical analyst at Fairlead Strategies, other prominent indicators based on NYSE advance-decline data appear to signal that equities may be overvalued.
For example, Stockton stated in a letter to clients on Wednesday that the McClellan Oscillator, another famous technical analysis tool based on NYSE advance-decline data, has reached levels consistent with last year’s near-term stock-market peaks. This means that the S&P 500 is “overbought.”
On Wednesday, US equities plummeted for the second day in a row, recording their worst daily drop of the year thus far. According to FactSet data, the S&P 500 fell 1.6% to finish the session at 3,928.86.
The Nasdaq Composite dropped 1.2% to approximately 10,957.01, while the Dow Jones Industrial Average sank 1.8% to 33,296.96.
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