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.
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
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.
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.