How Bad Is The Market Right Now?

How bad is the market? Every trader and investor who pays attention to the markets is trying to answer that question right now.

Since the beginning of the year, Goldman Sachs (GS) is down 15.5%, Amazon.com (AMZN) is down 23.6%, and Staples (SPLS) is down 25.7%.

But before concluding a bear market has begun, consider that Tyson Foods (TSN) is up 25%, Alcoa (AA) is up 23.8%, and Garmin (GRMN) is up 18.9%. The charts of these three stocks show minor selling at worst.

The S&P 500 is due for a short-term cycle low. On March 17th, 2014 I showed this chart and how the S&P 500 was likely to set a short-term low, around the 1800 level, within a few weeks.

Updating a chart I regularly publish shows the S&P 500 is at a likely short-term low, and it happens to be just above a trendline drawn from the November 2012 low – a good support level that could attract buying.

That's a good argument for a short-term low. How about the bigger picture? Could this pullback turn into a larger, arguably overdue intermediate-term decline?

To get a better feel for the state of individual stocks, I am going to focus on the Up/Down Volume Ratio. This is a value frequently mentioned in Investor's Business Daily, and they define it as “A 50-day ratio that is derived by dividing total volume on up days by the total volume on down days. A ratio greater than 1.0 implies positive demand for a stock.”

A 50-day period means 50 trading days, which covers about 2 calendar months. That's a good period because the stock market in general displays a rather regular 1-1/2 to 2-month cycle pattern.

I took an interest in the U/D Volume Ratio about 12 years ago and have developed a good feel for it. From my experience, an U/D Volume Ratio of 1.3 or greater usually indicates a stock that is under steady accumulation by institutions.  I haven't concentrated much on low U/D ratios as an indication of institutional selling because in recent years we've had mostly bull markets. But an U/D Vol ratio less than 0.8 should be a good indicator of steady selling.

What I wanted to determine by using U/D Ratios is whether there is evidence of more or less accumulation in top-name stocks. I believe that will give me some idea on how to view the current market.

I therefore took the symbol list of the S&P 500, the index of 500 of the largest companies listed on the NYSE, and calculated the U/D Volume Ratios of every individual stock. I counted how many had U/D Ratios of 1.3 or greater, indicating stocks under likely accumulation, and I counted how many had U/D Ratios of less than 0.8, indicating stocks under likely distribution.

Then I took recalculated the U/D Ratios back a month ago, and compared them to see if stocks are generally attracting less interest nowadays.

The results surprised me. It isn't a large swing, but more stocks are under likely accumulation (have U/D ratios >= 1.3) now then 1 month ago, and there are fewer stocks under likely distribution (U/D Ratios under 0.8). Here are the results:

For the week of Monday, March 17, 2014

So one month ago, 102 were under possible accumulation, and 105 were under possible distribution.

For the week of Monday, April 14, 2014

Currently, 130 are under possible accumulation, and 72 are under possible distribution. This suggests that even though the recent selloff has produced some concern, stocks may actually be under increasing accumulation.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on this link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2014 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

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