Tuesday, February 24, 2009

Recognizing Significant Buying Pressure in the Stock Market

The previous post took a look at significant selling days in the stock market, based upon one-minute readings in which the NYSE TICK hit or fell below -1000. What we saw was that selling meaningfully expanded on the break below 800 in the S&P 500 Index, validating that breakout move.

Above we see the flip side: the frequency of strong buying minutes in the stock market based upon one-minute readings in which the NYSE TICK hits or exceeds +1000. Once again, this is a rare reading, as it requires 1000 or more issues to trade on upticks at the same time. Only significant buying pressure from institutional participants can generate such a reading. By cumulating the strong buying minute readings over a one-day moving average period (pink line above), we can see how such sentiment has correlated with movement in the S&P 500 e-mini (ES) futures (blue line) since the start of 2009.

What we see is that the peaks in the strong buying minutes have been diminishing; with each rally, we've had fewer strong buying minutes. This suggests that institutional buying has waned, even as we've seen a pickup in institutional selling per the previous post. Note also an interesting pattern in which the frequency of strong buying minutes tends to peak ahead of price on intermediate-term market rallies.

A rising market needs significantly more strong buying minutes than strong selling ones; a falling market requires the reverse. By catching the distribution of extreme readings in NYSE TICK, we can make a reasoned assessment as to whether buying or selling sentiment are dominant, or whether they are relatively balanced.

An interesting exercise would be to take extreme readings in Market Delta (the proportion of volume traded at offer minus that traded at bid) and see if similar distributions occur in trending and non-trending markets. I hope to address this at a later juncture. In the interim, I will include observations about the distribution of NYSE TICK values in my morning real time market comments via Twitter (free subscription via RSS).



Prospectus said...

Thanks, Dr. Brett. This is an interesting way to think about extreme tick readings. I've been of the school of thought that high TICK readings should be faded, at least for quick intraday trades. I would think that institutions could accumulate or distribute stock without moving the whole market universe, but these extreme TICK readings do show where the aggregate is leaning. I guess short term they are a fade, but longer term they show where the herd is headed.

If anybody is on Think or Swim, I wrote a free intraday TICK fade indicator that you can get here.

abel said...

Barring an exogenous event, I think a case can be made for a strong rally from these time / price levels. I define strong as 'stronger than we have seen in the past two and a half weeks', perhaps proportionately equivalent to the past two rallies over the past month and a half, (1-20-09 to 1-28-09, and 2-3-09 to 2-9-09).

Strong may be a relative term, in that a moderate rally may in fact feel strong, and be strong, in this market climate.