Friday, January 18, 2008

Market Sentiment and Weight of Evidence

* Blog Traffic - I've noted before that the periods of highest daily traffic on this blog have corresponded to periods of market weakness, particularly in March and August of last year. Interestingly, we have not had elevated traffic on the blog until this week. Three of the busiest traffic days of the past thirty have occurred this week, with traffic running 25% above average. I checked, and this can't be attributed to external links from other sites. Rather, it appears that periods of volatility, uncertainty, and falling prices lead people to seek out information--not only on this site, but across the board. In that sense, blog traffic represents a kind of sentiment measure. (Note yesterday's jump in VIX and recent elevated equity put/call readings). Although not precise timing indicators, such periods of elevated traffic have generally meant that an intermediate-term bottom is not far away.

* Weight of Evidence - I've also noted that we've seen unusual strength in the Adjusted NYSE TICK during the latter portion of this decline. Either the measure is quite early, or it is not doing as good a job with timing as it has in past cycles (which may be ways of saying the same thing). This is why I look at multiple indicators and base my decisions on the weight of evidence, not just the readings of any single measure. In a bear market, markets become oversold and stay that way. We're seeing that in many of the measures I'm following, such as Technical Strength and the number of stocks making new lows relative to new highs. We're also seeing weakness spread from small caps, housing, and financials to the broader list of stocks, including the large caps and consumer-related stocks. This is evident in the Advance-Decline lines specific to the common stocks traded on the NYSE and the S&P 500 Index, both of which are making new lows. Weakness has also spread to the international markets, as noted recently. It's the weight of evidence as a whole, not any single indicator reading, that is important in gauging market strength and weakness.

* Longer-Term Oversold - I've mentioned before that, over the last 20 years, bear market bottoms have not occurred until we have 20% of fewer NYSE stocks closing above their 200-day moving average. For the first time in this downward move, that occurred on Thursday, with 19% of NYSE issues hitting the criterion. That number can go lower to be sure--and the majority of lows have occurred with an even lower figure--but it's an indication that the downside has been significant historically and has me watching for evidence of bottoming going forward.

* Continued Divergences - No question the stock markets have been weak this week, yet we're seeing fewer stocks make new lows even after Thursday's rout than they did last week. Among NYSE common stocks, we had 8 new 52-week highs and 300 lows--weak to be sure. Last week, the new lows exceeded 500, however. Interestingly, among the S&P 600 small caps we're seeing some drying up of new lows. We had 4 new 52-week highs and 85 new lows on Thursday. That is fewer new lows than on Tuesday and far fewer than the 187 new lows last week. Among S&P 500 Index stocks, we had only half the number of 52-week new lows on Thursday as we did last week. Not all stocks are following this market lower: it's something I'm watching closely.

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7 comments:

Anatrader said...

Brett

Your observation on Blog traffic is stimulating as a possible indicator to market sentiment; I know my mentor would like to test this out on his new Blog:

http://www.tradingsuccess.com/blog/

Brandon Wilhite said...

Possibly another avenue, what about somehow collecting an aggregate of blog traffic from selected blogs? I guess the writers would have to make their traffic known...Does this kind of thing already exist?

BW

adidudu said...

Hi Brett,

This much awaited and predicted bottom should come in arround 1326 which is major muiltianual support.

Regards,
Adrian

Anatrader said...

With reference to the suggestion by Brandon that an aggregate of blog traffic from selected blogs be studied or collected, it is a good idea.

However, who will undertake the study?

It should not pose a great problem if the blogs concerned only have to test the traffic against other days to reach a 'sentiment', without having to disclose the actual density of the traffic.

PS I wish to make a correction: Daniel Goleman not GOREMAN in my earlier post on Emotional or Social Intelligence.

Angella said...

Please keep us posted about how you view the markets and whaat you see. Its very insightful with a view of market sentiment.
Thanks and your book is the best book out there on Trading Psychology!

-optiondragon

Brett Steenbarger, Ph.D. said...

Hi Brandon,

I'm not aware of any aggregation of traffic across blogs. It would be interesting--

Brett

Brett Steenbarger, Ph.D. said...

Thanks, OptionDragon; I appreciate the support--

Brett