Market Breadth: Part II — Market Breadth — GCC Market Analytics
Market Breadth: Part II | GCC Market Analytics

Saturday, 4 September 2010

Market Breadth: Part II

In the previous post on market breadth I looked at the advance/decline indicator and how it could be applied to the Dubai market to determine the future price direction of the DFM General Index.

In this post I want to share the results of applying the advance/decline indicator to other GCC markets.

A quick recap. The advance/decline indicator is calculated on a daily basis and represents the net number of rising versus declining stocks as a percentage of the total number of stocks. The daily advance/decline percentages are averaged over a certain number of trading days so the results are smother and easier to interpret.

When the advance/decline indicator in greater than zero this tells us that more stocks have risen in price than fallen.  When the indicator is less than zero more stocks have declined in value.

In the previous post I looked at the performance of the DFM General Index when the advance/decline indicator was either above or below zero.  The results showed that the Index tended to increase in value when the advance/decline indicator was above zero and decrease in value when it was below zero.

The charts below show the results of applying the advance/decline indicator on other GCC markets. The charts on the left-hand side show the historical price performance of each GCC market index and the corresponding advance/decline indicator.  The right-hand charts show the historical performance of each market index (blue line) and the performance of the index when the advance/decline indicator was above zero (green line) or below zero (red line).

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As you can see, the above results are similar to those for the DFM General Index in the last post. The performance of all market indexes was significantly better when the advance/decline indicator was above, rather than below, zero.  Quite impressive results for such a simple application of the indicator.

In the next post on this topic I'll introduce a study based on the advance/decline indicator which I'll use to evaluate the GCC markets on an ongoing basis.


P.S. The results above are based on slightly different rules than I used in the last post.  In this post I used a 10-day rather than 20-day advance/decline indicator and there was no requirement for the indicator to be greater/less than it was two weeks ago. The reason for the change was simply because the rules used in this post performed more consistently across all markets than did the rules in the last post.

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