Wednesday, October 22, 2014

A Look at the Recent Buying Surge

The recent post noted the drying up of downside breadth in the stock market, even as we were posting fresh price lows.  I said at that time that I would be surprised if the bottoming process were over, but that I'd be on the lookout for continued signs of strengthening breadth.  Well, I was surprised, and we certainly have had the strengthening breadth!

The charts above document the recent surge in buying interest.  The Buying Power measure, which is derived from a measure of the number of upticks among NYSE shares, has hit its highest level since I began collecting those data in early 2012.  Over that same period, short-term breadth among SPX stocks has moved from deeply oversold to strongly overbought (middle chart), which is reflected in the radical shift in the shape of the Momentum Curve (bottom chart; the percentages of SPX shares trading above their various moving averages).

As we can see from the middle chart, surges in breadth from oversold levels tend to show momentum:  further price gains even as breadth wanes.  Many investors and traders have missed this "V-bottom", and that provides powerful incentives to buy the first dips.  

Further Reading:  Institutional Participation and Momentum