On Monday of this week, the [^PTSPX] reversed back into a column of Xs from below a chart level of 50%. The indicator now maintains a chart level of 64%, maintaining its upper field position and what we consider a “healthy market environment”.
Out of the several indicators that we have on the Dorsey Wright, the positive trend for the S&P 500 is one that can provide some context behind the long-term strength of a specific universe or group of stocks. The ^PTSPX measures the percentage of stocks of stocks within the S&P 500 that are trading in a positive trend, a measure of long-term strength of individual stocks. Looking at the chart below, you can see that reversals for the ^PTSPX happen rather infrequently. Typically, reversals back into Xs are most meaningful when you reach very washed-out levels. After markets struggled in April, the ^PTSPX moved down to a chart level just above 30% as the indicator moved near washed-out levels. Since then, and over the course of the next few months, the ^PTSPX improved in its column of Xs, as a higher percentage of stocks began trading back in a positive trend.
On Monday of this week, the ^PTSPX reversed back into a column of Xs from below a chart level of 60%. The indicator is now at a chart level of 64%, maintaining its upper field position and what we consider a “healthy market environment.” This means that roughly 2 in every 3 stocks within the S&P 500 trade in a positive trend or above their bullish support line.
The chart below highlights the forward returns for SPX following a reversal in the indicator. As mentioned before, reversals in either a column of Xs or Os happen rather infrequently. Since the indicator reversed into Xs from just under 60%, we can see that “Rev Up from 40-60” has only happened 8 other times, as shown in the “Count” column. The forward returns for the following weeks tend to be quite strong, with the 2-week average return at 2.53%.
Looking down even further, the 12 months ahead return provided an average gain of 9.35%, roughly in line with historical averages for the index. Additionally, when looking at the forward returns for days when the ^PTSPX is in Xs between 60-80, you can see that the forward returns are roughly in line with historical averages as well, much higher than the “30-40” and the “40-60” groups. In conclusion, the ^PTSPX does not provide a direct forecast of what the future holds but can provide some guidance as to what we can expect moving forward.
