Thursday, February 19, 2015

Revisiting Buying and Selling Pressure and What It Means for Stocks

As readers know, the NYSE TICK is one of my favorite market measures, as it gauges upticking versus downticking on a moment-to-moment basis across all NYSE stocks.  A while ago, I decided to treat upticks and downticks as separate time series and create distinct measures of buying and selling pressure.  What I found was eye-opening:  as intermediate-term market cycles top out, we see a distinct withdrawal of buying pressure from the market, as well as diminished selling pressure.  As the market tops out, selling pressure exceeds buying pressure, eventually resulting in significant selling extremes at or near cycle lows.  Interestingly, buying pressure picks up into and following those lows, as value-oriented, longer-timeframe participants are attracted to the lower share prices.  (All raw data from e-Signal).

What we're seeing at present is a significant reduction of buying pressure in recent sessions (top chart) and also diminished selling pressure (second chart), but selling pressure beginning to overtake buying (third chart).  As volume and realized volatility have been collapsing, buyers have withdrawn from the market relative to sellers.  This is occurring even as many broad market averages are at new highs, but the number of shares registering fresh new highs has been well below late 2014 levels (bottom chart; raw data from the Barchart site.)

All of this looks more like a topping market rather than one gaining buying interest and expanding its breadth.  We need to see a resurgence of buying pressure to sustain the breakout from the late 2014 trading range.

Further Reading:  Who Has the Upper Hand in the Market?