Wednesday, January 07, 2015

Sizing Up the Down Market

Stocks have started the year on a particularly weak note, retracing the lion's share of rally from mid-December.  This has very much fit the earlier mentioned query, in which very high levels of bullishness among ETF buyers has led to poor near-term returns.

Above are three updated views on the market weakness.  The top chart illustrates the high level of programmatic selling swamping the recent market.  This measure, based on a basket of institutional favorite stocks and their simultaneous upticking vs. downticking, shows that selling pressure in these large cap shares has been intense.

When we look at the entire market, however, it's not clear that the deep selling of the institutional favorites has translated so far into highly broad selling.  The second chart tracks stocks across all exchanges making fresh three month highs vs. three month lows.  Note how new lows are nowhere near the levels seen in mid-December and mid-October.

That same picture emerges from my measure of buying pressure (upticks) versus selling pressure (downticks) across all NYSE shares (bottom chart).  While the balance between buying and selling has turned negative, it by no means reflects the breadth of selling that we saw in mid-October or mid-December.

Deep selling that cannot become broad selling invites the hypothesis of underlying strength in the broad stock market. I will be watching new highs and lows and sensitive momentum measures closely to see if this decline begins to gain or lose steam.  If the latter, we could see a healthy rally emerging from the recent gloom.

Further Reading:  When V Bottoms are not V Bottoms