Tuesday, December 09, 2014

Three Views of Market Weakness, But is the Market Getting Weaker?

The recent post highlighted weakness that had shown up in the broad stock market.  Above we see three perspectives on that weakness.  The top chart tracks a cumulative total of the proportion of NYSE stocks trading above vs. below their daily volume-weighted average prices.  The idea behind this measure is that, in a strong/weak market, we should see the great preponderance of shares trading above/below their daily moving averages.  When stocks made their recent highs, we saw fewer shares participating in strength vis a vis their VWAPs.

The middle chart follows buying pressure vs. selling pressure, where zero represents a balance between the two.  Buying pressure is a function of moment-to-moment upticks among NYSE stocks; selling pressure reflects downticks.  In a strong/weak market, we should see the majority of stocks upticking/downticking.  Note how the balance between buying and selling pressure has been steadily waning in recent days.

The bottom chart tracks the proportion of NYSE stocks closing above/below their upper/lower Bollinger Bands.  Note here also how recent sessions have provided us with a negative Bollinger balance.  

What I look for are common themes among multiple indicators.  The big question I'm addressing is whether the stock market is:  a) rising and getting stronger; b) rising and getting weaker; c) in a balanced range; d) falling and getting weaker; or e) falling and getting stronger.  As market cycles evolve, we shift from a) to b) to c) to d) to e).  It is the preponderance of evidence, not any single market measure or chart pattern, that provides a meaningful answer to where we're at in a market cycle.   

Right now I'm gauging market strength vs. weakness for the current market versus where we stood at the end of December 1st.  So far, we're seeing more new highs and fewer new lows than at the start of the month, but also more stocks closing below their lower bands.  Raw materials and energy shares are down over 3% on the week; healthcare and financial shares are up over 1%.  It is not clear to me that what we're seeing so far is a broad based decline, as opposed to a correction in a broader topping process.  Trending markets generally cut across sectors.  When sectors are doing very different things, that smacks more of rotation than outright trend--and that keeps me nimble.

Further Reading:  How Markets Looked Before the October Swoon