Sunday, September 30, 2007

A Look At Technical Strength: Sector by Sector

Suppose you segment a given lookback period into a number of separate sub-periods. You can conduct a linear regression over each subperiod, set a threshold slope value, and then determine whether the stock or index was in an uptrend, downtrend, or neutral. A technically strong stock or index for the overall lookback period would be one that is uptrending over a majority of the different subperiods. A technically weak stock or index would be downtrending over the various subperiods. A neutral stock or index would be one in which there is mixed uptrending and downtrending across the subperiods.

The Technical Strength Index (TSI) that I compute thus captures the consistency of trending action over time, as well as the degree to which a variety of stocks display such trending. Thus far, my work with the Index has been limited to the S&P 500 stock universe and eight sectors within the index: Materials, Industrials, Consumer Discretionary, Consumer Staples, Energy, Health Care, Financial, and Technology.

As of Friday, here are the TSI values for the eight sectors:

* Materials: +180
* Industrials: +300
* Consumer Discretionary: -120
* Consumer Staples: +300
* Energy: +280
* Health Care: +160
* Financial: +140
* Technology: +360

We see quite a discrepancy between Consumer Staples and Consumer Discretionary issues, as housing concerns weigh on discretionary spending by consumers. Note, however, the very strong readings for Technology and Industrials. This is not a market displaying broad weakness. Even Financials, which had been at the bottom of the pack in August, now display positive strength.

Before stocks go into downtrends, they tend to first lose upside strength. By monitoring the trending behavior of a range of sectors, we can obtain early warning signals of market weakness. So far, we have backed off the very strong readings obtained shortly after the Fed announcement, but have not seen broad weakness.

Eventually, I would like to extend the TSI work to a broad universe of ETFs, which would help to uncover strength and weakness across various market themes and asset classes. A further evolution of this research would be to include volume in the measure, to capture the degree to which capital is flowing into sectors and themes. More to come!


Measuring the Market's Technical Strength

A Previous Reading of Technical Strength by Sector


shaheem said...

Very interesting analysis and perspective. I have been looking for a model to gauge the sector sentiment.
You are the best!

Keep it coming.

Federico said...


first of all, I'd like to take the opportunity to thank you for posting on a regular basis and providing all readers of your blog with great insights and useful information.

It's greatly appreciated.

I have one question with regard to your analysis of different sectors:

Have you ever tried to look for divergences within the same sector?

For instance, if XLE or XLF makes a new high/low...what about comparing the ETF to an index of the same sector and see whether both are making the same high/low?

Dave said...

Brett - excellent toolkit and approach. Thanks for developing and sharing. Hope you keep it up - in fact what're the chances of seeing a graphics version over time. That would be very revealing.

What your TSI's say about the sectors is pretty consistent with some of the stuff I've done on market trends and GDP components:
Market Sector Trends:
GDP Components:

The latter breaks out the major GDP components and looks at YoY changes and trends; it ties out very nicely to the SP sectors though mapping stock performance to sector economics is work to be done.

Brett Steenbarger, Ph.D. said...

Hi Federico,

This is an excellent idea and strikes me as promising, particularly when the sector indexes are highly cap weighted.


Brett Steenbarger, Ph.D. said...

Hi Dave,

Thanks for the links and perspective on those GDP components!