Breadth Chart Specific to the Components of the Philadelphia Bank Index (BKX)

Last week's program trading report reveals that only 28.7% of total program
volume was executed as principal, for member firms' own accounts. That's the
second-lowest reading over the past five years, one sign that institutional
investors remain largely on the sidelines. This has been the case since mid-
2007, and this past week's reading merely reinforces this longer-term trend.

NASDAQ volume surged to its highest level in over two weeks Thursday, yet big
board volume remained below average. This produced a large spike in the
Nasdaq/NYSE Volume Ratio, which can be an early warning of an impending top.
Overall there's not much to lean on short-term, as the sell setups that were
triggered last week and early this week are off the board.

In addition to the recently discussed VIX:VXV Ratio, we're looking into adding
some new breadth charts to the site beginning this weekend. Rather than the
traditional breadth charts based on all NYSE or NASDAQ issues, these new
charts focus on sectors. First up is a version for the Philadelphia Bank
Index, which means that breadth in this case is limited to the 24 issues
comprising the BKX. We can therefore take a straight advancers-decliners
spread rather than creating a ratio, as it will always remain in the +24/-24
range (see chart).

We can also take that daily breadth spread and create a cumulative breadth
line specific to the BKX. See the chart here, which we're displaying on a line
chart to highlight the subtle divergences between price and breadth. While
it's too early to tell, initial testing suggests that when the concept of
breadth is applied to such a small universe of issues, the cumulative breadth
line may be a consistently lagging indicator over the short-term. This could
present trading opportunities, as it appears that a sharp turn in the BKX that
leaves the cumulative breadth line trending the 'wrong' direction usually
leads to a continuation move for the BKX over the short-term. The idea is that
those stocks with the heaviest weighting in the index most likely made a
sudden move, and many of the banks that comprise the BKX haven't followed
suit. If this persists for a couple of sessions, breadth typically falls in
line with price, meaning those stocks that hadn't turned before are now
following the lead of the heavier-weighted issues. This shift in momentum has
usually led to a continuation move for the BKX over the next couple of
sessions as the laggards play catch-up, keeping the short-term trend intact.
Over the past year, there have been 14 instances in which the BKX was up or
down two consecutive days while the cumulative BKX breadth moved in the
opposite direction both days. In 11 out of 14 instances, the short-term trend
of the BKX remained intact over the next two sessions, meaning consecutive up
days led to even higher prices and consecutive down days led to lower prices.
It will be interesting to see if this holds true when we add in more
historical data.

Categories : Archived EOD Commentary, End-of-Day Commentary

 Print This Post