The purpose of this article is to introduce a new set of
market indicators that DecisionPoint.com has recently released, indicators
constructed from only common stocks listed on the NYSE.
A little background, at its inception The NYSE Composite Index was composed of
all the issues listed on the New York Stock Exchange. The approximately 3,500
components were cap-weighted by total shares outstanding, and the NYSE Composite
was one of the dullest indexes in existence. In January 2003 this all changed in
a major way. The composition of the index was changed to include only common
stocks listed on the NYSE (approximately 2,050), and they are cap-weighted based
on the float (the shares available for trading). The result has been that the
new NYSE Composite is now one of the top performing broad market indexes. For
example, during the rally that launched off the July 2005 lows, the NYSE
Composite had gains second only to the Nasdaq 100 Index.
When the NYSE Composite was reconstituted in January 2003, the NYSE failed to
publish statistical breadth and volume data related to only the 2,050 components
on the index. Rather, the NYSE and all media sources continued to publish data
based all the 3,500 issues listed on the exchange, and most technicians (me
included) continued to use these flawed data to construct indicators for the
NYSE Composite. It was, after all, the only data available, but the resulting
indicators had to be taken with a grain of salt. Let me explain why.
The NYSE Composite components are only common stocks, whereas the approximately
1,500 issues excluded from the Index are mostly not common stocks and are
primarily issues sensitive to interest rates. By using data from all NYSE issues
listed, indicator results are being contaminated by 1,500 issues that are
totally unrelated to the Composite Index, and that often behave as a group in a
manner completely different from the 2,050 index components. As a consequence,
market indicators generated from this questionable data must necessarily be
considered somewhat unreliable.
In late-2005 we decided to fix this problem. Since we track the list of NYSE
Composite component stocks, we began collecting these Common Stock Only (CSO)
data, and we developed a standard set of indicators based upon it. We also
back-calculated the raw data and indicators back to January 2003. We have just
released the new set of 10 indicators to our subscribers. If I may be allowed
for a moment to be humility-challenged, the release of these indicators is a
very big deal for many technical analysts. The scarcity of the raw data means
that few services can offer these indicators, and some of these indicators are
only available from DecisionPoint.com.
Is there any real difference between the Common Stock Only (CSO) indicators and
those based upon All NYSE Issues? Yes, there are many differences, ranging from
subtle to significant. Let's look at New High New Low charts as an example.
Obviously, the CSO highs and lows have a smaller range because there are fewer
stocks involved, but one difference that really stands out is the huge down
spike of All Issues New Lows in May 2004, whereas, the CSO version shows merely
a slight down blip.
The following are samples of other charts in the series.
Bottom Line: Whenever possible, market indicators should be constructed
from data derived from the component stocks of the index to which the indicator
is applied. In other words, the S&P 500 Advance-Decline Line should be
constructed from the action of S&P 500 stocks. For too long NYSE Composite
indicators have been corrupted by data from stocks that are not part of the NYSE
Composite Index. It is with great pleasure that DecisionPoint.com has released a
set of NYSE Composite indicators that are based on real NYSE Composite Index
data.
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your
tactics if conditions change.
Carl Swenlin is a self-taught technical analyst, who has been
involved in market analysis since 1981. A pioneer in the creation of online
technical resources, he is president and founder of
DecisionPoint.com, a premier
technical analysis website specializing in stock market indicators, charting,
and focused research reports. Mr. Swenlin is a member of the
Market Technicians Association.
