One of the great differentiators between technical analysis indicators is whether they “lag” price action or “lead” price action. To see the difference clearly, let’s look at examples of both.Laggards versus Leaders
Lagging indicators tell us where the market has been. They generally operate on the premise that the price will continue in the direction it’s been going until proven otherwise. The best known lagging indicators are moving averages (MA). Here’s a chart that shows how a moving average follows prices well in strongly trending periods, but then gets chopped up by price movements in directionless or sideways periods.
Leading indicators attempt to anticipate the market's next move. The most popular indicators are momentum oscillators like stochastics and the Relative Strength Index (RSI). At the most basic level, leading indicators can tell us to sell overbought markets and buy oversold ones.
Keep in mind that leading indicators are not panaceas. In some cases they can be very useful in identifying price turning points; however, in other cases they “call” turns before they actually happen.Another Kind of Indicator
Today, I’d like to show a very interesting chart from the research folks at Astrikos. The top chart shows the S&P 500 cash index since 1996 and the bottom chart shows the total number of actively traded stocks (total issues) on the New York Stock Exchange (NYSE).
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With only several moves visible in this chart, there are too few data points to draw any truly statistically significant conclusions. Still, the charts give us some interesting food for thought.
As you can see, a reduction in the number of listed stocks tends to happen ahead of market drops and an increase occurs before market bottoms. You can also see that as a predictive indicator (presuming of course that the level of total issues has any predictive prowess), it was very early in its forecasts—by as much as a year. Also note that the number of stocks trading on the NYSE has not recovered significantly from the March 2009 bottom and is, in fact, sliding back toward its 14-year low.A Healthy Bull?
Think for a moment about what the total issues chart says from the perspective of overall “health” for equities markets. If growing new companies are not joining the stock exchange to raise money, could you honestly say that this is a sign of renewed health for the equities markets in the coming year? While there are other ways to raise capital, this chart suggests that selling stock is not very attractive for companies right now or that there are simply fewer companies around that meet the NYSE's listing requirements. Neither of these cases should encourage the bulls much in their outlook for an intermediate-term move up.