Saturday, January 17, 2015

Three Market Measures and What They're Telling Us

The recent post talked about the importance of being mindful of evidence for the other side of your trade and the bounce probability following short-term oversold conditions played out on Friday.  Above are three perspectives on the U.S. stock market at week's end.

The top chart depicts a ten-day moving average of all stocks across exchanges making three-month new highs vs. lows.  That breadth has been deteriorating since late October, but notice also that this week's price lows saw fewer shares making fresh net new lows than at the mid-December bottom.  For that reason, I'm viewing the market as a range one defined by the December highs and lows.

The middle chart takes a look at the balance between buying pressure (upticks) versus selling pressure (downticks) across all NYSE shares.  Note the recent intensity of selling pressure ahead of price lows, followed by Friday's buying surge.  This is a pattern that has been common at intermediate market lows and is consistent with the range perspective noted above.

Finally, in the bottom chart we see the 10-day average of changes in shares outstanding for the SPY ETF.  This has been an excellent sentiment gauge, as we have tended to see expansions in shares outstanding when traders have been bullish and contractions in shares outstanding when traders and investors have been bearish.  We finished 2014 with considerable bullishness and recently have swung to the opposite extreme, again consistent with the range notion.

The follow through to Friday's rally should tell us a great deal about the vigor of this market.  It would be understandable for traders to respond to strength with further buying, given the recent concerns regarding V bottoms.  A weak follow through would suggest that recent macro considerations (deflation, global economic weakness) pose ongoing headwinds.  I will be tracking that in days ahead.

Further Reading:  Gaining Fresh Perspectives