Wednesday, December 17, 2014

Measuring Stock Market Sentiment Minute by Minute

Suppose we could ask all participants in the U.S. stock market whether they are bullish, bearish, or neutral on the market's direction and get a fresh reading every minute?  That might be useful information, as it would show when bullish or bearish sentiment is turning; when it is becoming extreme; when it is staying bullish or bearish over time, etc.

When market participants pay up to buy a stock by accepting the best offer price ("lifting the offer"), they display urgency getting into their positions.  Similarly, when they sell a stock at the best bid price ("hitting the bid"), they show their urgency getting out of positions.  If a participant has no particular urgency, they will leave orders in the market to achieve better execution by buying at bid prices and selling at offers.  

Urgency reveals sentiment on a moment-to-moment basis.  

Above we see a chart for yesterday's price action in SPY (blue line) and a measure of bid/offer sentiment.  (Raw data from e-Signal).  This measure looks at where each trade in each stock occurs relative to the best bid/best offer at that moment and tells us how many stocks in the NYSE universe are executing at offer prices minus those executing at bids.  Savvy readers will recognize that this is similar to the logic behind the Market Delta measure and is similar (but not identical) to the NYSE TICK measure I've covered in the past.

Notice the dramatic shift in sentiment near the day's high price and how later periods of bullish sentiment occurred at successively lower price levels.  In short, the bulls were lifting offers, but their sentiment was not able to lift price higher.  That's a nice tell for a weak market.

Further Reading:  Upticks vs. Downticks for All Stocks Across All Exchanges