A technical signal that has hinted at previous turning points for the US stock market has come for the first time in almost three years, according to its creator.
However, some on Wall Street suspect it may not be as reliable as it used to be.
The technical indicator, known simply as the breadth push indicator, was triggered on January 12 for the first time since June 3, 2020. The indicator was created by retired analyst Walter Deemer in 1973 while he worked at Putnam Investments. A company representative confirmed that Deemer worked there between 1970 and 1980.
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Its arrival has caused a stir among technical analysts, according to MarketWatch interviews with several strategists.
The breadth thrust indicator
The Beam Shift indicator is based on a relatively simple formula: the main input is the ratio of stocks and other securities on the New York Stock Exchange that have risen versus those that have fallen over the course of 10 trading sessions.
If the ratio rises above 1.97, the indicator will be triggered, Deemer said. This has rarely happened in the years since its inception, and often it has happened when a new bull market began.
As the breadth push indicator has grown in popularity, others have created their own modified versions of it which, like the original, aim to give investors a more detailed view of how individual stocks are affecting the performance of the broader market.
Some variations focus solely on the advance-decline ratio of NYSE-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, Deemer said.
‘Trust the boost’?
Some equity analysts believe that the breadth push indicator and other early-stage indicators of improving market breadth have become less helpful in recent years, in part because many of them have been triggered more frequently.
Ed Clissold, US chief strategist at Ned Davis Research, said several similar indicators maintained by his firm were triggered during last year’s market turmoil, raising questions about their continued usefulness.
“The Wall Street cliche used to be ‘trust the boost,’ because they’re among the first indicators to signal that a new bull market is underway,” Clissold said in a phone interview.
“But because these push indicators are becoming more common, we’re now saying, ‘Trust, but make sure.’ And the review is carried out using medium-term broad indicators.”
Specifically, Clissold said he’d like to see a larger proportion of stocks trading above their 50- and 200-day moving averages before accepting that a permanent shift in market sentiment is likely to have occurred.
mixed signals
According to Katie Stockton, technical analyst at Fairlead Strategies, other popular indicators based on NYSE forward decline data seem to suggest stocks may be slightly overvalued.
For example, the McClellan oscillator, another popular technical analysis tool also based on NYSE pre-decline data, has reached levels consistent with last year’s short-term stock market highs, Stockton said in a note on Wednesday Customers. This indicates that the S&P 500 has become “overbought”.
US stocks fell for the second straight day on Wednesday as they posted their worst single-day decline of the year. The S&P 500 SPX, -1.56%, fell 1.6% to end the session at 3,928.86, according to FactSet data.
The Nasdaq Composite COMP, -1.24%, is down 1.2% to about 10,957.01, while the Dow Jones Industrial Average DJIA, -1.81%, is down 1.8% to 33,296.96.