Volume Count For New York Stock Exchange Reached Largest Extreme Since 1995 Price Pivot On The Week Of January 11th, Just Days Before Market Weakness
I had mentioned in my post on January 22 that I would have this up within a handful of days. Well, one thing led to another but better late than never.
The chart below is one we showed in a post back in 2009 soon after this rally started. It has obviously been updated. The most recent few weeks aren't reflected since I pulled the data two weeks ago but that really is irrelevant. (update: the graphic is now current.)
Below in blue italicized text are remarks taken from the original post in early 2009:
Below in blue italicized text are remarks taken from the original post in early 2009:
..similarly with volatility, volume is one of the least understood and analyzed tools in quantitative analysis. And, it is almost always completely discounted by chartists and other forms of technical analysis. Over the years I developed a count-based algorithm that is substantially based on market activity rather than made-up rules using counts to measure exhaustion in the market. ie, Demark's tools. Behind the visual representation below (In red) is a count-based algorithm of specific volume characteristics on the New York Stock Exchange. But the market is the determinant of counts in my work as opposed to Demark's work which uses rules that really don't reflect market reality.
On that note, certain patterns or rhythms exist within markets. These patters are very similar regardless of time frame. In other words, whether it be a monthly, weekly, daily or intraday view there are certain rhythms to the market that are common across all time frames. Below we have the same count-based volume algorithm overlaid on an intraday, daily, weekly and monthly chart of the S&P 500. I use the S&P simply because it is most representative of the overall U.S. and global economy.
If one is to consider we could eventually reach an exhaustion level of zero on the month data as this cycle winds down, and there are ample fundamental reasons to believe we may reach some absurdly low level, and even hit zero months before a price bottom, we will likely have more large price drops at some point in the future. But, from a weekly perspective, it would also be possible to see price advance substantially higher into the 1000-1100 region of the S&P before we take any such plunge. An upside price band I do believe we highlighted early in the year at a time no one thought such a move possible. That may or may not happen. But, the possibility does exist were we to see the market reach count extremes of 10-ish on the weekly data.
Those last few sentences in bold text were in fact exactly what has happened since the original post highlighting this algorithm. We hit 1100 on the S&P and we hit a reading of exactly 10 on the weekly algorithm count on the week of January 11th, 2010 as the market was making new rally highs as seen on the graphic below. Funny how that worked out. Or is it?
In the aforementioned original post we showed count-based looks at this algorithm on daily, weekly, monthly and intraday graphics. Above we simply have an updated weekly view. We are now at a point where this rally marginally exceeds the highest algorithm count of any rally since Wall Street's Frankenstein took its first breath in the mid 90s. That being a relative algorithm count of 10 as shown on the graphic above. The highest count relative count before this rally was 9. (Absolute being the actual reading on the right vertical axis of the graphic. Relative being the delta taken from the count level reading before the rally and at the rally's peak.) We see every time we have had a rally with a cycle count of 6 or greater, we have been close to peaking for some relatively lengthy period of time. When we have seen a relative cycle count maximum of 9, we have eventually witnessed either months or longer of consolidation or outright crash. We have now reached an unprecedented relative count reading of 10. Obviously, this alone doesn't tell us what the market will do in coming months but the probabilities from this data point do not match the level of incredible enthusiasm we now witness with the Wall Street herd. Enthusiasm based purely on opinion rather than any indication of what the market is telling us.
In fact, I read commentary from a well-respected source on Wall Street just as this algorithm was peaking that he expects a melt-up in stock prices from this point. To see that happen would require an unprecedented break with market rhythms. Ironically, a second well-respected commenteur and hedge fund manager made similar market "melt upward" remarks right before the initial market collapse in 2008. A time when this count algorithm was warning of impending weakness. Now this second person was calling for a 5-10% correction a few weeks ago. Again at a time when this algorithm is possibly pointing to greater concerns. Then there is a very well-respected economist who, just days before this weakness started, said he doesn't see a market correction until the second half of the year. This economist missed the 2009 rally and instead was very bearish as this algorithm had reached a level of zero and instead had started to rise as the market made one final push lower into March of 2009 thus pointing to a possible rally developing. Not to mention he missed the monetary policy actions fueling the rally - as an economist he clearly should have understood this dynamic. Now this economist has again changed his outlook just since a few weeks ago as the market proves him wrong. You would recognize all three of these gentlemen as well-respected members of the finance engine in the U.S. but they'll remain anonymous because I want to make a point rather than being overly concerned about what particular personalities are saying.
On that note, certain patterns or rhythms exist within markets. These patters are very similar regardless of time frame. In other words, whether it be a monthly, weekly, daily or intraday view there are certain rhythms to the market that are common across all time frames. Below we have the same count-based volume algorithm overlaid on an intraday, daily, weekly and monthly chart of the S&P 500. I use the S&P simply because it is most representative of the overall U.S. and global economy.
If one is to consider we could eventually reach an exhaustion level of zero on the month data as this cycle winds down, and there are ample fundamental reasons to believe we may reach some absurdly low level, and even hit zero months before a price bottom, we will likely have more large price drops at some point in the future. But, from a weekly perspective, it would also be possible to see price advance substantially higher into the 1000-1100 region of the S&P before we take any such plunge. An upside price band I do believe we highlighted early in the year at a time no one thought such a move possible. That may or may not happen. But, the possibility does exist were we to see the market reach count extremes of 10-ish on the weekly data.
Those last few sentences in bold text were in fact exactly what has happened since the original post highlighting this algorithm. We hit 1100 on the S&P and we hit a reading of exactly 10 on the weekly algorithm count on the week of January 11th, 2010 as the market was making new rally highs as seen on the graphic below. Funny how that worked out. Or is it?
In the aforementioned original post we showed count-based looks at this algorithm on daily, weekly, monthly and intraday graphics. Above we simply have an updated weekly view. We are now at a point where this rally marginally exceeds the highest algorithm count of any rally since Wall Street's Frankenstein took its first breath in the mid 90s. That being a relative algorithm count of 10 as shown on the graphic above. The highest count relative count before this rally was 9. (Absolute being the actual reading on the right vertical axis of the graphic. Relative being the delta taken from the count level reading before the rally and at the rally's peak.) We see every time we have had a rally with a cycle count of 6 or greater, we have been close to peaking for some relatively lengthy period of time. When we have seen a relative cycle count maximum of 9, we have eventually witnessed either months or longer of consolidation or outright crash. We have now reached an unprecedented relative count reading of 10. Obviously, this alone doesn't tell us what the market will do in coming months but the probabilities from this data point do not match the level of incredible enthusiasm we now witness with the Wall Street herd. Enthusiasm based purely on opinion rather than any indication of what the market is telling us.
In fact, I read commentary from a well-respected source on Wall Street just as this algorithm was peaking that he expects a melt-up in stock prices from this point. To see that happen would require an unprecedented break with market rhythms. Ironically, a second well-respected commenteur and hedge fund manager made similar market "melt upward" remarks right before the initial market collapse in 2008. A time when this count algorithm was warning of impending weakness. Now this second person was calling for a 5-10% correction a few weeks ago. Again at a time when this algorithm is possibly pointing to greater concerns. Then there is a very well-respected economist who, just days before this weakness started, said he doesn't see a market correction until the second half of the year. This economist missed the 2009 rally and instead was very bearish as this algorithm had reached a level of zero and instead had started to rise as the market made one final push lower into March of 2009 thus pointing to a possible rally developing. Not to mention he missed the monetary policy actions fueling the rally - as an economist he clearly should have understood this dynamic. Now this economist has again changed his outlook just since a few weeks ago as the market proves him wrong. You would recognize all three of these gentlemen as well-respected members of the finance engine in the U.S. but they'll remain anonymous because I want to make a point rather than being overly concerned about what particular personalities are saying.
That point is science, be it fact or theory, no matter how simplistic, is basing analysis on some type of measurable or observable reality. Most everything I write on here as it pertains to markets is based on some level of scientific observation or analysis. That includes my writings on China, emerging markets, the banking crisis, the Euro zone, commodities as an investment or asset class or any of my other incessant babblings. That doesn't mean I am always going to share what that science is or that I will always be correct, but as the brilliant Louis Pasteur told us, "In the fields of observation, chance favors only the prepared mind.". The three gentlemen above and most of Wall Street are seldom prepared as have seen repeatedly. So why do we listen to them? Well, as a matter of fact, fewer people than at any time in our history are listening to anyone other than themselves. And what a wonderful world it will be when we all believe in no one other than ourselves, our family and friends and our own analysis of any data be it stocks, health care, democracy or anything else. A world where diverse ideas are embraced. Where common folk dream dreams that nobility tells them are unattainable. Were we all re-embrace the enlightenment of free thought and self-determination. Where our dreams are made reality when we are allowed to act upon them without some bureaucrat standing in our way.
My point is Wall Street commentary based on opinion versus any type of measurable market reality is useless. Frankly, as is political commentary without understanding and analysis of facts. All three of the people (mentioned above) and more were and are making commentary diametrically opposed to what this count algorithm and by conclusion what market rhythms were telling is at the peak in 2008, at the bottom in 2009 or today. Or, frankly for the matter, commentary diametrically opposed to a substantial number of other quantifiable factors. And, as that goes, if one had only used this count mechanism and simply bought the market when we reached low readings, and sold when we reached relative count levels of 6-9 (or absolute count levels of 9-11) and corresponding times of price weakness, one would have participated in every rally in the last fifteen years while missing every period of market weakness including more than a few collapses. Now, I don't use this algorithm as a primary timing tool and am not advocating such a position but it's a far better than listening to babble. Obviously at some point in time market dynamics may change, but I doubt they will change until we see financial reform or some other measurable change which could possibly impact financial markets.
Additional to the absolute or relative count metrics provided by this algorithm, there is a cyclicality or rhythm to the counts. We remarked of this in our post last year where we used this algorithm to anticipate the next possible price lows. The dates for those anticipated lows we discussed back in early 2009 still stand.
Let me put this another way. This market has not started to exhibit weakness because President Obama made remarks about regulating banks - something we have known was coming for a long time yet the markets continually shrugged off any such concerns for the last ten months. Nor is it weak because people are finally starting to talk about the scope of this crisis outside of the United States. Something that we have uniquely been hammering on for years. Instead, this market is weak because the natural rhythms of the market are telling us it is time to be weak. It's that simple.
Toppings can be complex structures so no one really knows if the market will chop for some period of time, fall completely out of bed in coming weeks, levitate for some period of time or completely discount this algorithm all together and roar to strong new price highs. Yet, if we follow the last 15 years, (since Wall Street's current manipulation of financial markets really started) we are very likely close to a change in trend. We could very well be within some matter of weeks or months of a major top. That could involve relative chop followed by another major market drop or a continued rapid dump or some combination if this algorithm continues to have any validity. This just as Wall Street, drunk with free taxpayer money used to fuel their constant stupidity, became the most bullish in decades. And more importantly, has allocated enormous sums of money reflecting that stupidity. Money that will eventually be sent to money heaven forever and ever and ever.
Finally, no one in the mainstream blogosphere, media or financial community is calling for new lows in equity markets yet this cycle. And I do mean no one. There are a few crazy outliers such as this blog who still anticipating new price lows. That is because the mainstream seemingly have no idea how to value equities, what is driving this crisis, the global horror of it and what dynamics will almost surely force the market down to such low levels. Of course, I could be the one who is wrong. I'm sure we are going to find out.
Again, it isn't debt as we have written so often. Debt is now seemingly the only topic everyone wants to write about. That's because it is so easily recognizable as a coincident data point. It is easily apparent to everyone the problem is now debt. And a mistruth perpetuated by many reinforcing this myth is that debt was the cause of the Great Depression. I could solve a vast amount of the debt problem in about ten minutes as it pertains to the United States. It won't fix the economy but it would yield time so that policy decisions could be made to fix the economy. There are a wealth of easily instituted solutions to many of the U.S.'s problems which would blindside the debt critics. Not that keepers of the status quo are going to stand up and proactively institute these solutions. They are the problem. They'll perpetuate the status quo for their own personal gain as long as they are allowed to. The U.S. economy would start roaring almost immediately with the right policies. And I do mean roar.
My point? Our downside target on the S&P remains 200-450 as it has for quite a few years. Technically, we adjusted our original downside target of 400-450 off of the 1995 S&P price pivot to 200-450 a year ago. Fair value for the S&P is around 400-450 but due to the combination of lack of constructive economic changes and horrendous policy decisions which were being enacted. President Obama now owns this crisis with his policy decisions regardless of who created it. His head is in the right place. His policy is written on toilet paper scribed while visiting the outhouse. (For partisans who believe our President is the anti-Christ or something similar, the corporatist policies of Washington Republicans would be even worse. This is a party whose leadership hailed the recent fraudulent Supreme Court ruling on unlimited campaign funds by corporations as a positive ruling.) How, if and when the S&P gets to that target is well too complicated to predict but until I see some specific economic and policy decisions instituted, (which I clearly don't expect without first experiencing a full-blown global crisis) my downside target holds as does every other macro theme we have discussed over the years. As I have said numerous times, whenever a major macro theme changes, we will acknowledge it and write about it. Until then, you should assume nothing has changed in my work.
Enjoy the party. It's the biggest gala in centuries.
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