Friday, May 08, 2015

Selling Pressure in Stocks and What That's Telling Us

One of my more reliable measures of market strength and weakness comes from a disaggregation of the NYSE TICK, the cumulative measure of upticks vs. downticks among all NYSE stocks.  I treat the upticks and downticks as separate distributions, reflecting buying and selling pressure respectively.  In the chart above, we're looking at a 10-day moving average of downticks (raw data from e-Signal; all computations in Excel). 

Generally, we see a relative absence of selling (high levels of the red line on the chart) preceding market tops and an intensity of selling pressure (low levels of the red line) at relative market lows.  Note the increase in selling pressure in recent sessions, taking the measure below -400.

Going back to 2012, when we've had readings of -400 and less (N = 132), the next five days in SPY have averaged a gain of +.71% versus an average gain of +.21% for the remainder of the sample, with 88 occasions closing higher and 44 closing lower.  

This and the excess number of sell signals we've been seeing from the technical systems I follow leave me open to the possibility that the market's current choppy range will ultimately find resolution to the upside.  I find these kinds of market queries more helpful in formulating hypotheses than hard and fast conclusions.  It's when markets look strongest and weakest that it's helpful to look at what has happened historically under those conditions.  Very often that tempers any recency bias and tendency to extrapolate the recent past to the near-term future. 

Further Reading:  NYSE TICK