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Market Breadth, Plotting Breath as Percentages of Stocks in Each Stage Analysis Stage

Introduction

Following my earlier work in implementing Pring's Bottom Fisher (PBF) I've now looked at using Stage Analysis Stages as a market breadth tool. The calculations for the PBF are quite slow, and would take quite a lot of careful programming to speed up, it is not onerous to add graphs of the % of each stock in each stage.

I'm breaking the sites standard limit of 800 pixels for charts in this post, but I consider that, for this specific post it aids clarity.

Identifying the Stages

The Stages of Stage Analysis are defined in more of a descriptive than a simple mathematical manner, with entry to Stage 2 being from a breakout from Stage 1 and entry into Stage 4 on a breakdown from Stage 3.  At best we can make an algorithm that identifies a reasonable approximation to the stages.  Picking breakouts for humans is easier than for computers - as typically for the computer to do so we need to plot a channel (e.g. a Donchian channel) and identify a breakout from it.  However, what is the approrpiate time period for the channel varies from chart to chart.  I've ignored channels and used an algorithm that works something like this:

• Start assuming we do not know what stage the stock is in.
  
• If price is above a rising 150 day Simple Moving Average of price then the stock is in Stage 2.
  
• ... unless the 50 day SMA is falling, then the stock is in Stage 3.
  
• If the price is below a falling 150 day SMA the stock is in Stage 4.
  
• ... unless the 50 day SMA is rising, then the stock is in Stage 1.
  
• If the stock did not get picked by any of the filters above and the stock was in Stage 2 for the last data point it is now in Stage 3.
  
• If the stock did not get picked by any of the filters above and the stock was in Stage 4 for the last data point it is now in Stage 1.
  

This gives a fairly good approximation in my view.  I suspect it is biased towards Stages 2 & 4.  The AMD chart below has a colour bar below the price plot.  The colour coding is:

• Stage 1 - blue
  
• Stage 2 - green
  
• Stage 3 - yellow
  
• Stage 4 - red.
  

   

This is not perfect, but I suspect this is a reasonable estimate of the Stages.  I could spend more time tuning the alogrithm, only for it to not work on another chart.  So I suspect it is reasonable close and further adjustment is not justified.

Plotting the % Stocks in Each Stage
I'm plotting the % stocks in each stage for my approximation of the Russell 3000.  My group of stocks is somewhat out of date, but I don't think this has too much of an impact on the outcome.
   
I've added some annotations to the chart which I can use for further discussion below, but I thought it was best to post an un-annotated version first for clarity.

Analysis of what the Stage Plots Show

   

A. I would not fully trust the graphs in this area as this is too near the beginnings of the data sets in my database.
B. The % Stage 2 stocks is high but starts to fall even as the S&P 500 continues to rise.  This suggests fewer, higher market cap stocks are moving the index upwards.
C. We have a 'bump' of stocks moving into Stage 3 as the % Stage 2 stocks continues to fall.
D. Following slightly behind the Stage 3 bump the number of Stocks in Stage 4 starts to rise, even as the S&P500 continues to rise.
E. The area of interest here are the Stage 2 and Stage 4 graphs, the number of stocks in Stage 2 and 4 cross over here.
F. Meanwhile, near the end of this crossover region the S&P500 makes is final high before entering perhaps a brief Stage 3 followed by a definite Stage 4.
G. In this area the % Stocks in Stage 4 makes a high then drops.  There is a noticeable bump in Stage 1 stocks and the number of Stocks in Stage 2 seems to at least halt its downtrend.
H. With the exception of the last couple of weeks we have (generally) higher highs and higher lows in the S&P500, a rise in the number of Stage 2 stocks and a drop in the number of Stage 4 stocks.

The most important points from the above, for me, are when the Stage 2 and Stage 4 stock percentages cross over and the strengthening of the number of stocks in Stage 2 and reduction of number Stage 4 following the S&P500 low last year.

Trendlines are also useful.

   

P. The % stocks in Stage 2 are all below a downward tendline which is not broken until quarter 3 last year.
Q. Similarly, an up trendline can be plotted for Stage 4 stocks.
R. & S. similarly show shorter trends that developed following the S&P hitting its bottom and appearing to have, at least for a while, higher highs and lows.
U & T. Trendlines R. & S. have more recently been broken.  At present the current high is lower.  Whether we have to wait for a higher high, or perhaps this is an indication things may go sideways?  We may have to wait longer to see what developes.

Overall this seems like a worthwhile exercise.