Market breadth is an important technique used in technical analysis, as it helps to gauge the general direction of the market. One way that we track market breadth at Dorsey, Wright & Associates (DWA) is through “participation” indicators, such as the Bullish Percent, which measures the percentage of stocks within a given universe that are on a Point & Figure buy signal. When more stocks are on buy signals, participation rates across a particular universe are much wider, indicating an expansion of market breadth. When fewer stocks are on buy signals, it is an indication that a lower number of stocks are participating in rallies, an indication of absolute weakness and potentially, lower market prices. In the end, these indicators are simply a record of what is actually happening in the marketplace.
Over the past couple of months, we’ve observed some interesting developments take place on the Bullish Percent chart for the Nasdaq-100 (NDX) Index. We saw it rise up to its 2015 high of 78%, indicating that 78% of the Nasdaq-100 were on buy signals, and then ebb back down to the 52% level, indicating that over half of the Nasdaq-100 are on buy signals. While this indicator has ebbed and flowed in recent months, it is still well above its January 2016 low of 20%. The overall increase in buy signals has been a bullish sign for this particular segment of the market, as participation rates, ie: market breadth, has increased. To elaborate on the significance the NDX Bullish Percent as well as what this means for the Nasdaq-100, it is worth taking a step back and reviewing what these two instruments represent.
The Nasdaq-100 (NDX) is a modified capitalization weighted index that tracks the largest non-financial companies listed on the Nasdaq Stock Exchange. The top 10 companies within the Index represent roughly 50% of the Index and often, but not always, may sway the direction in which the Index trades. The Bullish Percent chart is an oscillating indicator that gives each stock within the Index equal representation as it measures the percentage of stocks within a given universe that are on Point & Figure buy signals.
In other words, the Point & Figure chart of NDX takes a cap-weighted approach to those 100 stocks and the Bullish Percent chart takes an equal-weighted approach to the same 100 stocks. With all of this in mind, we wanted to take some time and review the multitude of products on the market that track components of the NDX and the differences in how the products track the Index.
DWA has written a full report on the Nasdaq-100. Included in the report are analyses of:
- Cap-Weight vs Equal Weight
- Tech vs Ex-Tech
- Alternative Nasdaq-based ETFs
To get a copy of the full report, please click here >
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