Friday, July 11, 2008

Tracking Participation in Market Moves

With the GSEs falling like a stone and further selling among such financial shares as LEH, it made sense that today's market would be in the toilet. While the S&P 500 Index (top chart) was making fresh lows for the week, however, the small cap Russell 2000 Index (bottom chart) remained well above the horizontal blue support line from the 7/8 lows.

The market today was weak, to be sure. My preliminary numbers show 268 NYSE, NASDAQ, and ASE issues making new 20-day highs today, against 2366 lows. The number of new lows, however, on Monday was 3276 and on Tuesday was 2390. In other words, while the financial, housing, and consumer discretionary sectors were leading the large cap index lower late in the week, other market segments were not participating in the weakness.

When we get moves to new lows in which many stocks are not participating in the breakout, the odds of reversal are enhanced. This is what we saw late in the day today. If this is part of a larger bottoming process, we'll need to see buying interest come into the market early in the week. For intraday traders, however, the moral of the story is to look, look, look at the level of participation in any market move: the rising (and falling) tides that fail to move all boats are the most suspect.


Why Participation Matters


Rick said...

You talk about seeing what stocks are making new lows and highs. Where do you get that data? If a stock breaks to a new low and then retraces above the previous low, how do you treat that? Is that the same as a stock closing below the previous low?

gamingthemarket said...

I'm interested in your thoughts about this:

Front Running A Systemic Market Crash: PPT Style

Brett Steenbarger, Ph.D. said...

Hi Rick,

The new high/low data is tracked by I don't track stocks as a function of their retracements, though that's an interesting concept--


Brett Steenbarger, Ph.D. said...

Hi Gaming the Market,

Excellent post; thanks for sharing. If the Fed and Treasury work together to stabilize banks I assume they'd work together to stabilize markets. That doesn't mean, however, that every short-covering rally in high volatility markets is induced by a PPT. The point re: avoiding future 1987 scenarios strikes me as very much on target--