The Market Navigator platform provides a comprehensive array of proprietary, bottom-up metrics generated by our sector database, used to assist in evaluating industry group sentiment.
Our top-town market-by-sector analysis tools - Sector Ranking Tables and the Visual Sector Heatmaps - are in large part based on this, providing strategic insights into market dynamics, leadership and sector rotation patterns, as well as an efficient way to screen for momentum, contrarian opportunities, etc..
In addition the internals sentiment data are provided in chart form for sectors and industry groups, as part of a tactical toolset designed to enhance performance by identifying optimal entry and exit points for position management. These tools are used by portfolio managers and traders on a standalone basis, together with our top-down tools, or as an overlay to improve performance from existing strategies that does not impinge on the existing investment discipline and processes.
The sector internals based charting tools are accessed by clicking the 'Sector Charts' button in the Market Navigator controls (see A3 in the controls overview), and selecting the desired chart period from the 'Options' drop-down menu (short term/long term).
Defined as the cumulative daily number of advancing less declining stocks, the Sector Advance Decline (A-D) Line is a key barometer of sector health.
The A-D Line is a reflection of the performance of the average sector constituent - rather than that of large cap components that can skew market cap weighted indices - highlighting whether sector sentiment/market appetite is broadly improving or deteriorating.
The A-D Line at the exchange-wide level is traditionally viewed as a measure of confirmation that should closely resemble the shape of the price index; if this is not the case - where there are 'divergences' - it raises a flag that accumulation or distribution may be occurring as a precursor to a change in trend.
However, whereas NYSE data contains a significant proportion of preference shares and structured products typically correlated with fixed income that can distort interpretation, MarketScalpel's sector breadth data reflects purely the performance of common equities; unlike NYSE data, our total US market A-D Line did not exhibit false positive divergences from early 2001 to March '03 .
The A-D Line is an indispensible indication of sector appetite, the value of which was for example demonstrated by its forecast of a deterioration in sentiment in US banks early 2007.
MarketScalpel's sector structure and analytical framework provides another effective way of determining sector sentiment; quite simply we measure whether it is increasing or decreasing by reference to the percentage of sector component stocks trading above the 10, 25, 50 and 200-day moving averages of their respective share prices.
These time series typically reveal empirical levels from where price reversals tend to occur varying by sector and industry group. In this way clients with different investment horizons have access to advance warning of optimal low risk areas to undertake position management operations.
It should nevertheless be noted that whereas lows in sector price indices are for the most part coincident with bottoms in these time series, tops typically fall with a lag due to internal sector leadership becoming increasingly narrow prior to the final exhaustion of an advance.
We divide the four time series into two broad groups:
The percentage of sector components trading at or near 52-week highs/lows is a key indicator of the availability of momentum returns (see for example Hwang & George, 2004) and may be screened for using the Market Navigator top down analysis tools.
In addition, these metrics should be watched as important indicators of trend confirmation. Since internal sector leadership typically narrows prior to a reversal of trend, the number of components at new 52-week highs/lows should ideally expand in the direction of the trend. If there is instead a loss of momentum it is a 'non-confirmation' of the price trend, which is typically a precursor to a reversal.
Volume is an important indicator that can reveal valuable insights into the level of conviction supporting price moves, and a large number of studies and techniques are devoted to its study both from the fields of quantitative as well as technical analysis. This includes our own Volume Confirmation Signals designed to identify when price changes are accompanied by statistically significant volume.
Driving this analysis is a comprehensive bottom-up breakdown generated by our sector database. This comprises a bottom up aggregation of industry group volume split up into that attributable to advancing, declining, and unchanged sector components, as well :the US $ value of shares traded, again split into that attributable to advancing and declining component stocks.