Friday, June 30, 2006

When Demand Swamps Supply

The Demand measure followed by the Trading Psychology Weblog is an index of the number of stocks displaying significant momentum (bullish/bearish) on a short- and intermediate-term basis. After Thursday's rise on the heels of the Fed news, we had the strongest Demand to Supply reading since the bull market began in late 2002.

When Demand has been extraordinarily high (over 160; N = 12) since October, 2002 (N = 942), the market (SPY) has been up by an average of .78% four days later (11 up, 1 down)--much stronger than the average four-day gain of .16% (518 up, 424 down) for the entire sample.

This fits well with my prior research, which suggests that strong and broad upmoves tend to persist in the near term.


Casey said...

Yes demand has swamped supply here , but we must look at the charts to see some previous resistance ( overhead supply). Should one look at the different sectors, XLB, XLK, XLE, XLF, XLI, XLY and XLU , one will see that there is possible resistance areas from the May 18th to June 8th time frame. If price was above these areas I would agree with a possible continuation move , but since price is where it is , I'm not so sure .... enjoying your posts....

Brett Steenbarger, Ph.D. said...

Nice observation, Casey. I do find sector observations helpful in assessing the broad market. It is the broad as well as strong nature of the current rise that leads me to believe that we could have near-term follow through. Whether that leads to fresh bull market highs in the S&P 500, Russell 2000, NASDAQ, etc. is a more doubtful proposition IMO. Thanks for the note.