I have been experimenting with Levy ratio dispersion as a measure of market breadth. Saturday, I posted this chart on Stock Twits, showing lower lows, lower highs, and declining RSI for $OEXA200R.

The chart shows that 87 of the S&P 100 are trading above their respective SMA(200) lines, but it doesn’t tell us by how much. Some could be teetering on the line, and some could be soaring above it. Here is a chart of six stocks, relative to each one’s long term trend. Following Levy, I use SMA(131) but I divide it into SMA(10) to smooth the series.

This “smoothed Levy ratio” is a measure of momentum, like MACD. The chart shows it increasing for AK Steel, and decreasing for Sony. Pepsi, as you can imagine, never strays far from its long term trend. Below is Lincoln Electric, still in an uptrend but losing momentum. Note the concurrence of the MACD indicator.

For an individual stock, there are several indicators of momentum, but the Levy ratio gives us a way to compare groups of stocks. Below is the distribution of Levy ratios in the S&P 500. For consistency, I am using the same 500 as I did in October, with the same scale.

Now, instead of saying that 87% are trading above their SMA(200), I can say that the mean Levy ratio is 1.05 with a standard deviation of 0.08. This is a stronger and tighter distribution than the one I posted in October. I can even test the hypothesis that the group’s aggregate momentum is flat, which it obviously is not (with 74% confidence).

Levy showed that a stock’s relative rank over the last 26 weeks was a good predictor of its rank 26 weeks later. This is the basis of momentum trading. He also analyzed what he called “divergence” from the mean, finding that greater divergence was generally bearish.

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