Introducing the 'Map of Stock Trends'

The Stock Trends Inference Model is a quantitative approach to interpreting the categorical data that is the core value-added analysis presented here. The Stock Trends indicators are derived from base tenets of the market technician’s encyclopedia - a toolset designed to reduce a complex market dynamic to a categorical, and hierarchical framework. By evaluating the statistical significance of this framework we can apply meaningful algorithmic trading methods.

However, the first step is to understand the data and interpret the Stock Trends Inference Model results. Every week we sample 30-years of data to assign a probability for future returns on over 7,000 North American stocks. Using combinations of categorical data and making assumptions about the distribution of returns, we apply statistical inference methods to differentiate stocks (ETFs and income trusts, too) by the estimated returns in the coming periods (4-weeks, 13-weeks, and 40-weeks). You can see the result of that analysis in the Profile section of each Stock Trends Report.

I’ve already introduced the Stock Trends Inference Model in previous editorials. Subscribers to Stock Trends Weekly Reporter can interpret this information weekly, as well as review the reports on issues with the best expected returns. The Stock Trends ‘Select’ report, as well as the Top 4-wk/13-wk/40-wk returns expectations reports give users a new way to make the Stock Trends reports actionable.

However, these reports can be augmented by data visualizations. Graphical presentations of data are always useful in translating vast data points into more accessible interpretations. A good graph saves us time and points us in the right direction.

The Stock Trends Profile reports include heatmaps which help us compare returns expectations among industry group member stocks. Another useful display method for this data, especially when we want to broaden the use of the data hierarchy, is a treemap. A treemap is specifically designed for hierarchical data and is commonly used. A popular example in our equity analysis space is the Map of the Market.

Today I am introducing a treemap of the Stock Trends Inference Model - the Map of Stock Trends. It takes the data results from the weekly analysis, sorting 4-week and 13-week returns expectations by trend category.

In the treemaps displayed below large capitalization stocks (U.S. stocks with a market cap greater than $1-billion, Canadian stocks with market cap greater than $500-million) are grouped by Stock Trends indicator (Bullish , Weak Bullish , Bearish , Weak Bearish , Bullish Crossover , Bearish Crossover ). Each stock within these groups are visually differentiated in two ways: spatially by their relative probability of a return greater than the base 13-week mean random return (2.19%) , with larger cells (higher probabilities) sorted and displayed from the upper left quadrant and moving down to the lower right corner for the lower value. Secondly, the 4-week returns expectations are differentiated visually by color gradation, with darker green hues representing stocks with higher probabilities of exceeding the base average 4-week random return (0%) and darker red hues representing the stocks with the poorest probabiltity of a positive return in 4-weeks.

 

 

Dark green cells in the upper left of each trend category are stocks with the best statistical trend characteristics. Dark red cells in the lower right quadrant of each trend category are stocks with the worst statistical trend characteristics.

Below are the current Map of Stock Trends treemaps for the U.S. and Canadian stock markets. Each Stock Trends trend indicator category grouping is identified by the translucent indicators in the background of each box. In the future the treemap will be developed in an application that allows users to click on an individual cell and go directly to individual Stock Trends Reports, but for now the visualizations help direct us to the stocks with the most favourable current Stock Trends Reports.

 

U.S. stock exchanges - big cap stocks

Toronto Stock Exchange - big cap stocks

Bearish sentiment builds

Investors are always looking for the door. Even when returns are abundant and investor sentiment is wildly bullish, shareholders know that plump investment accounts are but paper profits - only real when the trigger is pulled and equity is once again cash. The degree to which investors look more nervously to the exit is proportional to the degree to which their equity positions are compromised. How we measure that compromise helps us identify critical shifts in investor sentiment and recognize high-risk market periods.

Stock Trends is by design a categorical reporting framework that gives us a measure of aggregate investor sentiment and a metric for determining when market participants are feeling the squeeze and most ready to dash for the cash. The Stock Trends Bull/Bear Ratio is now serving notice that the exit doors are wide open.

Most market analysts look at benchmark indexes of price level, pointing to areas of support and resistance to anticipate market rallies and corrections. Certainly, the 6% drop in the S&P 500 index from the market high in September sounded alarm bells. But we have had corrections of 5% and more multiple times during the bull market run since 2009. Can we expect this is just another typical and expected correction that will soon be subdued? Price level analysis can conjecture about that, but a measure of market breadth is the best barometer of how sentiment has truly shifted.

The Stock Trends Bull/Bear Ratio measures the distribution of Stock Trends trend categories and tells us something quite simple: are the majority of stocks trending positively or negatively? Are the diversified holdings of investors buoyed by a rising tide or sinking in aggregate?

The Stock Trends trend indicators categorize individual trends by the conditions of a simple moving average study. The base categories -Bullish or Bearish - are determined by the relationship of the 13-week and 40-week moving averages of price. If the 13-week average price is above the 40-week average price the stock is categorized as Bullish. If it is below the stock is categorized as Bearish. This is a factual reporting of past price performance.

The price smoothing aspect of average prices gives us a clearer idea of trends, and although these longer-term time parameters are lagging in nature, they do make it possible to characterize long-term price movement. It is this long-term price movement that most shifts the balance of investor sentiment and creates heightened periods of anxiety about equities.

Stock Trends tabulates the Bull/Bear Ratio for individual North American exchanges. The New York Stock Exchange Bull/Bear Ratio has been plummeting since August, and is now at 1.07. The Nasdaq Bull/Bear Ratio dropped below 1.0 in June and is now at 0.66. When we look at the composite of both major exchanges - some 5,660 common stocks that currently have Stock Trends trend indicators - we get a good look at the trend breadth of the U.S. stock market.

The graph below highlights periods where the Stock Trends Bull/Bear Ratio for the combined Big Board and Nasdaq exchanges has been rated as 'Bullish'. These shaded areas tell us when investor sentiment provides more fertile ground for market rallies and rebounds. There will be times when the S&P 500 index rallies without broader market support , like in late 2006, but these can represent divergences between large cap and small cap performances. Generally, a strong bullish investor sentiment is characterized across the stock market. The Stock Trends Bull/Bear Ratio gives us that representation of market breadth.

Where are we at now? The U.S. market Bull/Bear Ratio has been flirting with a Bearish investor sentiment reading since the market top in the summer, and has now dropped to 0.7. Canadian investors sentiment has also dipped into Bearish territory - the Stock Trends TSX Bull/Bear Ratio fell below 1.0 this week (now at 0.85).

Investors should take note that this aggregate North American trend condition makes the market vulnerable to a crash as investors increasingly weigh in about making an exit. The S&P 500 index's 4.1% recovery last week may be heartening, but fading investor sentiment should keep investors on high alert.

The Big Board gets a Bell Curve

Not surprisingly, the NYSE had to change its market capitalization listing rules in the current bear market. With stocks like Citigroup (NYSE:C), General Motors (NYSE:GM) and Ford (NYSE:F) all flirting with a share price level that would trigger delisting - a $1 minimum - the exchange temporarily suspended its minimum rule late last year and lowered the minimum market cap to $15-million last month. Now the lower standard is being floated as a more permanent fix. This is a sign of the time, but surely raises some questions about standards going forward. The Big Board ain't so Big anymore.