Is This Market Weak, Strong, Not Weak, or Not Strong?

The recent post on market strength and weakness made the case for looking at strength (buying pressure) and weakness (selling pressure) as independent variables.  We can have markets in which both buyers and sellers are active, and we can have ones in which both are relatively dormant.  By measuring upticks and downticks across all stocks separately, we can gain some insight as to the behavior of both buyers and sellers. 

The two charts above update views on strength and weakness.  The top chart looks at all stocks within the NYSE universe and tracks those closing above their upper Bollinger Bands versus those closing below their lower bands.  (Data from the StockCharts site.)  The idea here is that in a strong market, we'll have more shares closing above their upper bands and vice versa for a weak market.  In a market in which buyers and sellers are relatively dormant, we will see few stocks close above or below their bands.

Note how this is exactly what has happened in recent sessions:  we have had a waning of strength (fewer stocks closing above their bands), but not an excess of weakness (net stocks closing below their bands).  At the market peaks in July and September, we saw an excess of stocks closing below their bands *prior* to the reaching of an ultimate price high for those cycles.  In other words, it wasn't just diminished buying but net selling that preceded the market fall.  Markets don't get weak unless some market components are actively leading the way.

This is similarly reflected in the bottom chart, tracking the daily balance of upticks versus downticks among all NYSE shares.  That balance has come down in recent sessions, but is nowhere near the levels of net selling pressure that we saw prior to the October drop.  In recent sessions, buying and selling pressure have been relatively balanced; we have not seen selling pressure swamp buying activity.  Again, the takeaway is that markets don't get weak unless sellers become active and dominant.

To be sure, small cap stocks have been underperforming large caps of late and shares in the energy sector (XLE) have been understandable laggards, given the significant drop in the value of crude oil.  Thus far, however, weakness in those areas has not been sufficient to bleed over to the broad NYSE universe.  Buyers are not grabbing bargains as aggressively as in the latter portion of October, but neither are sellers taking advantage of high prices the way they were in September.  With prospects of monetary stimulus most recently from China, following Japan and Europe, prices that looked frothy a couple of months ago have not found broad selling lately.

Further Reading:  International Stock Performance
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