Trader’s Narrative

One of the ways to measure market breadth is to look at the percentage of stocks above a moving average. The shorter the moving average (for example, 20 or 10 day MA) the more accurately it will measure short term extremes in the market.

Being the powerhouse research firm that they are, Lowry’s not only keeps track of such a measure, they have their own twist on it. They filter the securities out there to only include common stocks (excluding the hyper growing sector of closed end funds, preferreds, bonds, etc.) trading on NYSE, AMEX and NASDAQ.

According to Lowry’s, “a number of significant buying opportunities have been identified in the past after periods of market weakness have caused the percentage of stocks above their 10-day moving averages to drop below 10%. For example, as a result of the recent intense stock market drop beginning on February 27th, the 10-day % indicator dropped from its early-February’07 peak of 84.6% to a low of just 3.77% on March 5th, reflecting a deeply oversold market condition.”

Here’s a chart from 1990 to present showing this measure flagging (blue arrows) extreme oversold readings:

Interestingly enough, eventhough this is a short term volatility measure, it gets better the further we go in time. Measuring a 12 month return after a signal, we find that out of the 16 signals since 1990, only one of them produced a loss over that time period (-4.4% from the Sept 21st 2001 signal).