Assessing Demand and Supply in the Stock Market

By now readers are aware that measures I track closely are buying pressure (demand) in the market versus selling pressure (supply).  My measures are derived from a decomposition of the NYSE TICK, which is issued by the New York Stock exchange.  The TICK is a running total, updated many times per minute, of the number of stocks trading on upticks versus the number trading on downticks.  My buying pressure and selling pressure measures separate upticking from downticking in the time series, treating strength and weakness as distinct variables.  While demand and supply are reasonably well correlated in the short-run, that is not the case over a period of days.  Any given period can show high amounts of buying and high amounts of selling; high amounts of buying and low amounts of selling; low amounts of buying and low amounts of selling; and low amounts of buying and high amounts of selling.  Indeed, the interplay among buying and selling pressure is a useful way of tracking phases of intermediate-term market cycles.

As you can see from the charts above, we've recently made fresh highs in SPY.  During that period, we've seen below average buying pressure (the zero level is average) and more than average selling pressure (values below zero show heavier selling).  That suggests that more stocks have been trading on downticks than upticks, even as the broad market average has risen to new highs.  This is the first divergence we've seen in the cumulative NYSE TICK in many months.

This excess of supply pressures over demand helps account for the weak breadth of the recent rally.  Interestingly, yesterday we hovered at new highs in the index, but only 500 stocks across all exchanges traded at fresh one-month highs, while 389 touched fresh one-month lows.  Volume in SPY has also been unusually low during the past several sessions.  Since 2013, when SPY volume has been in its lowest quartile, the next ten days in SPY have averaged a loss of -.08%.  When volume has been in its highest quartile, the next ten days in SPY have averaged a gain of 1.41%.

A break to new highs on expanded volume and breadth would clearly violate the pattern of weakness noted above.  Until that point, I don't see an edge in chasing the upside.  More on this topic at this evening's gathering.

Further Reading:  Tracking Market Dynamics
.