Wednesday, July 30, 2014

Are We Headed For a Stock Market Crash?

There have been some reports of very weak NYSE TICK statistics and the possibility those could foreshadow a stock market crash.  I've received several requests to update my Cumulative TICK Line for readers.  This consists of the summed total of five-minute high-low-close values for NYSE TICK (upticks minus downticks for all NYSE shares).  As you can see, the cumulative line has been making new highs--not diverging from large cap indexes.

I realize Mr. Cook looks at a proprietary version of this indicator, but the standard version has been unusually strong.  (My data come from e-Signal).  

As a check, I constructed a similar indicator, but now using upticks and downticks for every single US stock.  That includes NASDAQ and microcap issues as well as NYSE shares.  My thought was that this might show greater weakness, given the small cap underperformance of late.  It, too, however, has been hitting new highs in recent days.

My historical research suggests that market volatility bottoms out well in advance of bull market price peaks.  That was the case in the run up to the peaks in the late 1990s, 2000, and 2007-8.  It was also the case in the run ups to the big peaks in the late 1920s, 1968, and 1972.  With a VIX not far off its bull lows and realized volatility near bull market lows as well, this suggests that we may need to see more animal spirits before we encounter any crash.

Further Reading:  Bubbles, Booms, and Busts