"The relationship to an asset's own historical behavior is the key."

Our trading cycle indicator is one of the most advanced technical screens in the world. Nearly two decades in the making, it blends together 6 factors across multiple time frames to classify an asset’s current position relative to moving averages and its historical cycles.

We look at the relationship between price and the weekly/monthly simple average to determine short-term behaviour; and quarterly/annual simple averages for longer-term. A standard deviation benchmark establishes the historical extremes. Once an asset is classified based on its historic trading patterns, it is adjusted for relative performance and current overbought/oversold conditions using Welles Wilder’s RSI calculation.

"Market breadth gauges the strength of the wind propelling an investment. It’s an essential quality check we use when building our probability sets, and reveals a great deal about the behavior of the 'herd' in the market."

When evaluating the constituents of an ETF we model several types of market breadth:

%A:

The percentage of market cap in an ETF that is up or down on a given day, averaged for one and three month periods. This compares the price performance of the sector with the percentage of the sector advancing and declining. On the most recent decline, the average daily breadth in the past month made a lower low than did the price of the index that represents the ETF, suggesting more stocks decline on weak days than rise on strong days.

52-week high/low %:

Are more or less stocks making new highs within the sector than on previous rallies? This gives us more insight into the underlying metrics of the sector. We know that when 30% or more of the sector is making 52-week lows, that we are close to a major bottom for the sector based on the historical performance metrics in past cycles. This alerts us early to potential value buying opportunities.

 

 

 

 

 

Relative Strength

If we have one dollar to invest for our clients, we want to put that dollar in a diversified basket of ETFs. In order to determine which ones are showing leadership, we evaluate the performance of an ETF relative to a benchmark (sector funds relative to the broad market).

In this case we can see as at the recent low XEG (TSX Energy Sector ETF) underperformed the broad market, XIU (S&P TSX 60 ETF), by about 15% during the past year. During this period, an investment in the XEG would have lost money, while an investment in the XIU would have made money.

"It’s all about being in the right place at the right time. Relative performance is a key instrument we use to navigate the world so that we can put our clients' dollars in the best relative performing vehicles."

 

 

 

 

 

 

 

Relative Strength Indicator (RSI)

We look at how well an ETF is performing relative to its own past performance. Welles Wilder’s RSI (relative strength Index) is a popular technique that helps us quantify this. In a strong up trend, the day to day change in price on the advancing days should be much stronger than on the declining days. The RSI indicator measures the relationship of the day to day closing prices and gives us a percentage reading.

ETFs with values below 30 are considered oversold and we look for signs of price exhaustion as an early warning sign for a trend change. An overbought condition reading above 70 for several days suggests most good news is already priced in.

"When combined with our trading cycle model, relative performance and RSI give us very timely early warning signals for potential trend changes - letting us know it’s time to come about."

 

 

Linking Breadth & Relative Strength

Looking at the percent of the ETF that is overbought or oversold based on the RSI indicator, we can project based on history where the high probability turning points may be.

"This analytic is an early warning indicator, helping us determine if investors are becoming more bullish or bearish."

In the example (left) over 65% of the weight in the ETF was oversold based on RSI at every turning point over the past year. Recently, both OB and OS have diminished in intensity - indicating a potential weakening of strength within future rallies.