Carpenter Analytix

Cross-Section Analysis

How the Market Points Where It's Heading

Cross-section analysis tracks the evolving  “shape” of stock market returns distribution.  A cross-section of stocks generates a mostly “bell-shaped” distribution of returns, with most stocks near the middle or average, and fewer stocks further away (extremely positive or negative). The particular shape of the returns distribution expresses elemental nature of market trend.

  • Dispersion (red horizontal arrows) of daily returns distribution measures energy and volatility in a trend.
  •  Skew shows which direction (pos or neg) has more energy and less resistance.

 

 

The shaded areas at each end of the distribution represent equal areas but unequal horizontal range.  In this stylized example, the positive tail area has greater range than the negative tail area.  Comparatively, the strongest stocks are “running free” while the weakest stocks are meeting resistance.

Tail Skew analysis focuses on the horizontal range or span of these top tail and bottom tail of distribution areas.*  These tail spans are measured daily both for the NYSE and Nasdaq markets.  The daily readings are compiled into EMA time series called “P-tail” and “N-Tail,” shown on the following page.

 

*Tail Skew is different from overall skew of a distribution.  Cross-sectional overall skew is tracked separately (and differently) in the S&P CSQ Cumulative Skew path.