V.8:5 (204-205): Stocks above moving averages by Arthur A. Merrill, CMT

V.8:5 (204-205): Stocks above moving averages by Arthur A. Merrill, CMT
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Stocks above moving averages by Arthur A. Merrill, CMT

The percentage of stocks above their moving averages has been tracked for a number of years by Investor's Intelligence, a weekly report that includes the number of New York Stock Exchange issues above their 10-week and 30-week moving averages.

How useful are these figures? I calculated the standard deviations over the past 10 years. As benchmarks, I tried two-thirds of a standard deviation above and below the mean and a full standard deviation. Using these benchmarks to determine which figures were noticeably low or high, I checked their success in forecasting the direction of the market during the next week, the next five weeks, the next 13 weeks, the next 26 weeks and during the next year.

The results didn't show significant success over the short term. The only statistically significant scores for the percentage over 10 weeks were in forecasting the direction over the next 26 weeks. If the number above one standard deviation is considered bullish and the below minus one standard deviation is considered bearish, the indicator was right 61% of the time, or 3-to-2 odds. This isn't startling, but the chi square test did indicate significance.

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