Paul L. Dysart, Jr.
Provided by George A. Schade, Jr., CMT
THE WELL TRAVELED ROAD AND THE NOT SO WELL KNOWN TRAVELS OF THE NEGATIVE AND POSITIVE VOLUME INDICATORS
Nearly 70 years have passed since the Negative Volume and Positive Volume Index indicators were invented. Their history is a captivating tale, told here, of how these indicators came about and underwent change. They remain useful to identify market trends and assess their strength. This article ends by showing that a 21-day rate of change of the original version of the Negative Volume Index can provide good trading signals.
In 1936, Paul L. Dysart, Jr. began accumulating two series of advances and declines distinguished by whether volume was greater or lesser than the prior day’s volume. He called the cumulative series for the days when volume had been greater than the prior day’s volume the Positive Volume Index (PVI), and the series for the days when volume had been lesser the Negative Volume Index (NVI).
Dysart worked in Chicago’s LaSalle Street during the 1920s. After giving up his Chicago Board of Trade membership, he published an advisory letter geared to short-term trading using advance-decline data. In 1933, he launched the Trendway weekly stock market letter and published it until 1969 when he died.
The New York Stock Exchange’s daily volume and the NYSE Composite Index’s advances and declines drove Dysart’s indicators. Dysart believed that “volume is the driving force in the market.” He began studying market breath numbers in 1931, and was familiar with the work of Col. Leonard P. Ayres and James F. Hughes, who pioneered the tabulation of advances and declines to interpret stock market movements.
Dysart calculated NVI as follows: 1) if today’s volume is less than yesterday’s volume, subtract declines from advances, 2) add the difference to the cumulative NVI beginning at zero, and 3) retain the current NVI reading for the days when volume is not greater than the prior day’s volume. He calculated PVI in the same manner on the days when volume was greater than the prior day’s volume. NVI and PVI can be calculated daily or weekly.
Initially, Dysart believed that PVI would be the more useful series, but in 1967, he wrote that NVI had “proved to be the most valuable of all the breath indexes.” He relied most on NVI, naming it AMOMET, the acronym of “A Measure Of Major Economic Trend.”
Dysart’s theory was that “if volume advances and prices move up or down in accordance [with volume], the move is assumed to be a good movement - if it is sustained when the volume subsides.” If the market “holds its own on negative volume days after advancing on positive volume, the market is in a strong position.”
It’s said that NVI shows buying by the “smart money” that buys on declining volume, unlike the public that buys on frenzied and expanding volume. I have not found anything written by Dysart that supports this assertion for NVI. It may have been derived from Dysart’s discussion of positive volume.
He called PVI the “majority” curve. Dysart distinguished between the actions of the “majority” and those of the “minority.” The majority tends to emulate the minority, but its timing is not as sharp as that of the minority. When the majority showed an appetite for stocks, the PVI was usually “into new high ground” as happened in 1961.
Besides an article he wrote for Barron’s in 1967, not many of Dysart’s writings are available. What can be interpreted about Dysart’s NVI is that whenever it rose above a prior high, and the DJIA was trending up, a “Bull Market Signal” was given. When the NVI fell below a prior low, and the DJIA was trending down, a “Bear Market Signal” was given. The PVI was interpreted in reverse.
But not all movements above or below a prior NVI or PVI level were signals, as Dysart also designated “bullish” or “bearish penetrations.” These penetrations could occur before or after a Bull or Bear Market Signal, and at times were called “reaffirmations” of a signal. In 1969, he articulated one rule: “signals are most authentic when the NVI has moved sideways for a number of months in a relatively narrow range.”
For example, these basic rules for interpreting Dysart’s NVI would have given short-term bullish signals in August 2004 and February 2005. In each case, the NVI rose and stayed above a prior high, but exit points would have required more subjective judgment.
Regarding Dysart’s PVI, the late James E. Alphier wrote:
“It had a massive upward bias, and its rare signals occurred when it either failed to move to a new high when the averages did (bearish), or moved to a new low when the averages did not (bullish).”
I was unable to obtain the full complement of Dysart’s rules from his limited writings made available to me, but it appears that at times he injected subjectivity in interpreting NVI and PVI, a view consistent with his belief that “there is no mathematical system devoid of judgment which will continuously work without error in the stock market.”
According to Dysart, between 1946 and 1967, the NVI “rendered 17 significant signals,” of which 14 proved to be right (an average of 4.32% from the final high or low) and 3 wrong (average loss of 6.33%). However, NVI “seriously erred” in 1963-1964 and in 1968, which concerned him. In 1969, Dysart reduced the weight he had previously given to the NVI in his analyses because NVI was no longer a “decisive” indicator of the primary trend, although it retained an “excellent ability to give us ‘leading’ indications of short-term trend reversals.”
A probable reason for the NVI losing its efficacy during the mid-1960s may have been the steadily higher NYSE daily volume due to the dramatic increase in the number of issues traded so that prices rose on declining volume. Dysart’s NVI topped out in 1955 and trended down until at least 1968, although the DJIA moved higher during that period.
Norman G. Fosback has attributed the “long term increase in the number of issues traded” as a reason for a downward bias in a cumulative advance-decline line. Fosback was the next influential technician in the story of NVI and PVI.
Fosback studied NVI and PVI and in 1976 reported his findings in his classic Stock Market Logic. He did not elucidate on the indicators’ background or mentioned Dysart except for saying that “in the past Negative Volume Indexes have always been constructed using advance-decline data….” He posited, “There is no good reason for this fixation on the A/D Line. In truth, a Negative Volume Index can be calculated with any market index - the Dow Jones Industrial Average, the S&P 500, or even ‘unweighted’ market measures…. Somehow this point has escaped the attention of technicians to date.”
The point had not been lost on Dysart, who wrote in Barron’s, “we prefer to use the issues-traded data [advances and declines] rather than the price data of any average because it is more all-encompassing, and more truly represents what’s happening in the entire market.” Dysart was a staunch proponent of using advances and declines.
Fosback made three variations to NVI and PVI:
Fosback’s versions of NVI and PVI are what are popularly described in trading books and posted on Internet financial sites. Often reported are his findings that whenever NVI is above its one-year moving average there is a 96% (PVI - 79%) probability that a bull market is in progress, and when it is below its one-year moving average, there is a 53% (PVI - 67%) probability that a bear market is in place. Usually not explained is that the test period was 1941-1975; to my knowledge these findings have not been updated.
Today, NVI and PVI are commonly associated with Fosback’s versions, and Dysart, the inventor, is little known. It cannot be said that one version is better than the other. While Fosback provided a more objective interpretation for these indicators, Dysart’s NVI offers greater value as an indicator of short-term trend reversals.
Paul Dysart invented the NVI and PVI indicators based on daily advances and declines. Norman Fosback used the market index’s percent change rather than advances and declines and provided objectivity to Dysart’s more subjective interpretation of these indicators. Traders can benefit from both innovations.
Source: This article is based upon research done by George A. Schade, Jr., CMT. He can be reached at firstname.lastname@example.org.