Sunday, October 05, 2014

Indicator Review for 10/5/2014: Buyers on Strike

Above are three charts that provide current perspective on the U.S. stock market.  The first two chart are my measures of "Buying Power" and "Selling Power", as described in the August post.  By separating out upticks from downticks among all NYSE stocks, we can gain a perspective of demand and supply in the marketplace.  The third chart is a measure of composite breadth across all 500 stocks in the SPX average.  It tracks the proportion of SPX shares trading above their 3, 5, 10, and 20-day moving averages.

What we can see from the first two charts is that there has been a dramatic shift in buying pressure over the course of 2014.  Fewer stocks overall are upticking.  Interestingly, we can see that buying power completely stalled out at the recent market peak and has actually picked up during the recent decline, although it still remains below the zero, average line.  Selling pressure, on the other hand, has behaved in a much more uniform fashion through the year.  It tends to peak (lightest selling) ahead of price during intermediate market cycles and tends to bottom (heaviest selling) around cycle price lows.  Note how the recent decline has occurred at levels of selling very similar to the levels reached at recent cycle bottoms.

With the breadth measure, we can see that breadth tends to top ahead of price peaks and bottom either ahead of or coincident with price lows for intermediate-term cycles.  Once again, we can see that breadth completely petered out at the recent price cycle high and has bottomed very close to levels seen at recent cycle bottoms.

The bottom line here is that stocks have suffered during the latter half of the year from an absence of buying, not from unusual levels of selling.  This has been particularly evident in the smaller capitalization portion of the market.  Are we preparing for a fresh bull leg higher?  Is the stock market finally topping out after a historic run?  I strongly suspect we'll get the answer in the behavior of the buyers and their ability to generate Buying Power.