First, however, a quick review of basics: Market cycles typically begin with a liftoff from lows on very strong breadth and momentum. As the upward phase of the cycle matures, we begin to see increasing differentiation among stock sectors, with the strongest continuing higher and the weaker ones diverging. During this maturation, volumes tend to drop and, with them both volatility and correlation. During the more mature phases of a cycle, the intensity of buying pressure wanes, but selling pressure also remains low. It is when selling pressure picks up that we begin an actual down phase to the cycle.
One of the ways I track the net buying and selling activity in the stock market is through the cumulative upticking vs. downticking of a wide variety of shares. You can think of this as an instantaneous advance-decline line, where every transaction across every stock is counted as a buy (uptick) or sell (downtick). When the cumulative line moves steadily higher, we have strong net buying interest. When it flattens out, we know that a greater balance of buying and selling is present.
Please note that the job of a trader is not to shill for the bull or bear side of the market. Rather, the trader's job is to accurately assess what the market is doing now and adapt to the environment that is presented. Grounding a view of the environment in a wide variety of data is a way of staying cognitively and emotionally grounded and avoiding, as much as possible, biases in one's desires for upward or downward movement. Some of the best tools for trading psychology are tools for accurate market analysis.
The top three charts represent the cumulative upticking vs. downticking for all NYSE shares (top chart); all U.S. stocks traded on major and regional exchanges (second chart); and the Dow 30 stocks (third chart). (Data obtained from e-Signal). This gives us three perspectives, from the large caps (Dow stocks) to the broad market (NYSE stocks) to the entire stock universe (U.S. stocks). Note that all three display a notable sharp upward trajectory from the October lows. Quite simply, buying interest has consistently outweighed selling interest, and that has not abated. From that perspective, the rally is quite intact.
Does that mean all is rosy in the stock universe? Not quite. As the bottom chart illustrates, fewer shares have been closing above their upper Bollinger Bands as we've moved higher recently. Similarly, fewer shares have been registering fresh new highs vs. lows. For example, we closed at a new high on Thursday, but only 897 common stocks across all exchanges registered fresh monthly highs. Just a few days earlier, on October 31st, we rang up 1975 new monthly highs. We're just starting to see some divergences in the upside activity of stocks, with Russell and NASDAQ shares lagging the SPX of late.
Such divergences can continue for a while during the maturation phase of a market cycle, so I don't expect any new bear leg in the immediate future. It is when we see cumulative selling interest start to equal and exceed buying pressure that we know that a cycle is getting long in the tooth. The top two charts illustrate that quite nicely during the September topping. Nothing like that is happening quite yet, but we are seeing glimmers of differentiation in the patterning of market strength.
Further Reading: Measuring Buying and Selling Power in the Stock Market
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