Gavekal Capital: World Stock Investors are Treading Water

Thursday, June 26, 2014

World Stock Investors are Treading Water

We are always keen to measure the behavior underlying stock price movements and one way in which we do that is to keep track of investor accumulation and distribution of stock. Investor accumulation of stock as prices rise signals confidence, and vice verse.

The way we measure accumulation and distribution is to tally up over a period of months all the days in which the ratio of advancing to declining stocks is heavily skewed in one direction or the other. We consider days skewed towards advancing issues accumulation days and days skewed toward declining issues distribution days. We then net out the number of accumulation days with distribution days to form our indicator, and then we compare our indicator to World stock prices.

What we find is that for pretty much the whole year our accumulation/distribution indicator has ranged from +1 to -1 (i.e. there's been meaningful accumulation or distribution on net). Meanwhile, stock prices have obviously shot up as the MSCI World Index has gained 4.6% YTD in USD terms. The obvious conclusion here is that prices have risen while investors have pretty much tread water when it comes to accumulating stock. This conclusion is supported by numerous other indicators painting the same picture of weakness in market breadth statistics, but lack of breadth hasn't stopped this market so far. In any case, we'd prefer to see our accumulation/distribution indicator catch up to stock prices as a signal of growing confidence.