Tracking Stock Market Dynamics: Demand and Supply

Two of the questions most important to understanding market behavior are:  1)  Who is in the market? and 2) What are they doing?  We need the broad participation of buyers and sellers to move markets, and we want to see if there is a skew in the participation of buyers and sellers.  So, in a sense, we can characterize any given market as being quiet, average, or busy with respect to volume and selling, neutral, or buying with respect to the relative dominance of buyers vs. sellers.

Above we can see the tracking of buyers vs. sellers over the past several months.  The top chart tracks buying pressure and is a measure of total upticking among all NYSE stocks.  The zero line means that we have average buying interest; positive values suggest strong buying and negative values indicate weak buying.

The general pattern during market cycles is that we come out of a market low by attracting longer timeframe participants, who respond to the lower prices as value.  This creates a surge of buying pressure out of market lows, as we saw early in October and as we have been seeing recently.  It is this sharp turn from diminished buying (levels below zero) to strong buying (highly positive values) that tells us that the skew of market participation has shifted.

The bottom chart tracks selling pressure and is a measure of total downticking across all NYSE shares.  The zero line represents average selling pressure; positive values represent below average selling and negative values indicate above average selling pressure.

As we move to market lows, selling pressure expands to a crescendo and typically hits its most extreme level shortly before we get a price bottom.  When those low prices attract longer timeframe participants, we see selling pressure reduce significantly, as the balance between buyers and sellers quickly inverts.

During the early phase of a market's topping process, we typically see above average buying pressure and below average selling pressure.  As the market cycle matures, we characteristically see buying interest wane and actually go below average, while selling pressure also remains low.  In the later stages of a market upturn, selling pressure picks up, while buying remains restrained, eventually pulling prices lower.

By tracking buying and selling pressure separately, we can more clearly identify where we're at in an intermediate-term market cycle and gauge the odds of reversals vs. continuation of recent moves.  In my next post, I will take a look at how overall levels of market participation vary across phases of intermediate-term cycles.

Further Reading:  Who Has the Upper Hand in the Market?
.