2010=2007?
By
Rennie on Sunday, December 5th, 2010 at 4:37 pm
Historically, structural changes in NYSE TICK data have coincided with fundamental changes in trading, like the elimination of the uptick rule or the switch from fractions to pennies. There’s been no such change in the last few months that I’m aware of, so we have to take the current TICK action at face value.
If you regularly incorporate the NYSE TICK in your trading, you probably already know something’s been off since the start of September. We’re just not seeing the kind of extreme positive readings that you would expect given the stock market’s 15%+ surge in the last three months. Where are all the +1000 TICK readings that used to be a regular occurrence? The recent rally certainly qualifies as the type of strong up move that would coincide with bullish TICKs, but they’re just not there, which is why indicators like TICKscore have been significantly underperforming. TICKscore monitors for relative extremes in intraday TICK action, and since the beginning of September it’s been recording steadily more negative TICK extremes than positive TICK extremes despite the market rally. How can this be? If institutions aren’t actively buying, one explanation is slow, steady buying on the part of the Fed has put a consistent bid under the market. Why institutional investors aren’t participating along with the Fed is the key question. They must foresee much more risk than potential reward, and a great deal of uncertainty as to what happens when the Fed stops buying.
I have a theory that when this recent cluster of POMO ends, this rally will end. Not gradually, but abruptly, with none of the upside follow-through seen after last year’s POMO cluster. In 2009 institutions were aggressive buyers along with the Fed. Even when the large cluster of POMO ended in September, the market continued to rally, benefiting from the huge six-month buying wave between March and September that led to upside follow-through over the next six months. Look at a long-term chart of cumulative TICKscore or Up-Down Volume (NYSE or NASDAQ) and the buying wave is easy to spot.
This time around we’ve seen little-to-no evidence of institutional buying since the start of POMO in September (see aforementioned charts), which could mean a very different outcome when the Fed winds down their buy program. I expect we could see zero upside follow-through once the current cluster of POMO ends, because there’s no real buying to create legitimate follow-through. Markets can be pushed in one direction for some time with enough money, but to create a sustainable long-term rally you need real buyers.
Let’s keep a close eye on the upcoming POMO schedules, posted at this page on the New York Fed’s website. Since late August we’ve seen POMO activity multiple times a week, so we’ll want to pay particular attention when the schedule points to a slow down to once-a-week or less.
Take a look at a new chart coming to the site… the percentage of stocks within the S&P500 that are trading above their 50-day moving average. This is similar to the ‘percentage of stocks over their 20-day average’ that we already track, but the intermediate-term picture is clearer when utilizing the 50-day average. Note in particular that the percentage is forming a major divergence with price for the second time in two months. Back in mid-October we had over 90% of SPX stocks over their 50-day average. By early November that figure was under 90%, and now in early December it’s under 80% even with the S&P making new highs. It’s hard to embrace an upside breakout in which fewer and fewer components are participating.
2010=2007?
By Rennie on Sunday, December 5th, 2010 at 4:37 pmHistorically, structural changes in NYSE TICK data have coincided with fundamental changes in trading, like the elimination of the uptick rule or the switch from fractions to pennies. There’s been no such change in the last few months that I’m aware of, so we have to take the current TICK action at face value.
If you regularly incorporate the NYSE TICK in your trading, you probably already know something’s been off since the start of September. We’re just not seeing the kind of extreme positive readings that you would expect given the stock market’s 15%+ surge in the last three months. Where are all the +1000 TICK readings that used to be a regular occurrence? The recent rally certainly qualifies as the type of strong up move that would coincide with bullish TICKs, but they’re just not there, which is why indicators like TICKscore have been significantly underperforming. TICKscore monitors for relative extremes in intraday TICK action, and since the beginning of September it’s been recording steadily more negative TICK extremes than positive TICK extremes despite the market rally. How can this be? If institutions aren’t actively buying, one explanation is slow, steady buying on the part of the Fed has put a consistent bid under the market. Why institutional investors aren’t participating along with the Fed is the key question. They must foresee much more risk than potential reward, and a great deal of uncertainty as to what happens when the Fed stops buying.
I have a theory that when this recent cluster of POMO ends, this rally will end. Not gradually, but abruptly, with none of the upside follow-through seen after last year’s POMO cluster. In 2009 institutions were aggressive buyers along with the Fed. Even when the large cluster of POMO ended in September, the market continued to rally, benefiting from the huge six-month buying wave between March and September that led to upside follow-through over the next six months. Look at a long-term chart of cumulative TICKscore or Up-Down Volume (NYSE or NASDAQ) and the buying wave is easy to spot.
This time around we’ve seen little-to-no evidence of institutional buying since the start of POMO in September (see aforementioned charts), which could mean a very different outcome when the Fed winds down their buy program. I expect we could see zero upside follow-through once the current cluster of POMO ends, because there’s no real buying to create legitimate follow-through. Markets can be pushed in one direction for some time with enough money, but to create a sustainable long-term rally you need real buyers.
Let’s keep a close eye on the upcoming POMO schedules, posted at this page on the New York Fed’s website. Since late August we’ve seen POMO activity multiple times a week, so we’ll want to pay particular attention when the schedule points to a slow down to once-a-week or less.
Take a look at a new chart coming to the site… the percentage of stocks within the S&P500 that are trading above their 50-day moving average. This is similar to the ‘percentage of stocks over their 20-day average’ that we already track, but the intermediate-term picture is clearer when utilizing the 50-day average. Note in particular that the percentage is forming a major divergence with price for the second time in two months. Back in mid-October we had over 90% of SPX stocks over their 50-day average. By early November that figure was under 90%, and now in early December it’s under 80% even with the S&P making new highs. It’s hard to embrace an upside breakout in which fewer and fewer components are participating.