QCHA Numbers: The Merit in Looking Backwards

Includes: DIA, SPY
by: Lee Eugene Munson, CFA

Co-Written by Lee Munson, CFA, CFP®, and Lorn Davis

Though investors are constantly preoccupied with the future, it is always beneficial to take a moment and look backwards to rediscover the things that have fallen through the cracks. One such thing that we at Portfolio Asset Management have recently revived from the history books is the un-weighted average percentage gain of all traded stocks on the NYSE.

It’s a great indication of the overall sentiment in the market and can be used to create an index to compare with the S&P 500 and the Dow. This index is then used in detecting divergences with the Dow and S&P 500. So, for example, if the Dow and S&P 500 are in the middle of a rally but the average stock’s average gain is comparatively weaker or negative, we can then presume that the rally is deteriorating and narrowing down to the large-caps only. This comes from the S&P 500 and Dow giving a highly skewed image of what is happening in the market due to their weighting system which allows for a handful of Goliath-sized stocks to be the primary data for the calculation of the index. If the average stock’s average gain is leading, we can presume that there is broad participation in the rally and action is lively even for the smaller stocks.

It used to be that you could get the average stock’s average gain easily through the ticker symbol QCHA (Quotron Change) as legend “Buzzy” Schwartz relates in his book “Pit Bull”. But with the proliferation of more focused indices, information regarding the average stock seemingly lost its appeal to investors and consequently the QCHA or any other alternative faded into history. So when we decided at the firm that we wanted to include this indicator in our arsenal we needed to figure out a method to calculate it ourselves, which entailed getting the closing quote table for all traded stocks on the NYSE each day and calculating the average percentage gain from that data.

But because we have found this information so useful in our trading, we have mentioned it to others in the investment community and found them to be so intrigued that they wished to include the average stock’s average gain in their indicator set as well. Keep in mind Barron’s runs the QCHA numbers but only at the end of the week, not each day like we do. This prompted us to consider the usefulness of this indicator in this modern age may be directly related to the crowded arena of overly specific indicators and indices tracking minute market details that had originally led to the QCHA demise.

Therefore we believe it to be of value for the rest of the investment community to take a closer look at this “dated” indicator and, from its utility, realize that there is always merit in looking backwards. And not just to price histories and annual reports, but also to the techniques and approaches that were used in the past.

Disclosure: No Positions