Taking the Market’s Temperature

Taking the Market’s Temperature

Howard Marks has often written about the importance of taking the market’s temperature in order to get a sense of where it is in its cyclic process. He suggests investors avoid trying to make predictions about the markets. I agree making predictions or listening to the forecasts of others is pointless. To borrow an idea from metaphysics it’s important to focus on the “now”, to stay in the current moment and focus on what is happening in front of you. In other words, what is the market doing now and where is it within its own cyclic rhythm.

I cut my teeth on technical analysis in the first 15 years or so of studying the markets. I eventually decided I was better served by focusing on the individual fundamentals of the companies I was investigating. However I found technical analysis very useful in studying the breadth of the market. To do this I track the advancing/declining volume and the New High/Low index of the NYSE. I make a running total of the difference of the adv/dec volume and cumulate it over time. I then keep a couple moving averages (19 day and 39 day)  of that cumulative total. I subtract the longer moving average from the shorter one. This creates a trend deviation indicator which tracks the intermediate momentum of the cumulative adv/dec line (based on the volume of the NYSE.)

I also keep track of a short term oscillator (10 day moving average of the difference between the daily adv vol and dec vol).

The short term oscillator made a deep low in late December while intermediate term momentum made a deep low the last few trading days. This is an important market reference point. If this low holds, the market will likely start to build a bottom over the next few weeks/months. If this low is violated, more market weakness should ensue. Based on the history of these indicators I think the low is in and a bottoming process will now ensue over the next little while. Late December seemed to be the point of capitulation where people gave up and just sold into a vacuum of buyers.

That is the current context of the overall market. Pessimism is everywhere. Remember the Speculator’s Edge…to Demand Supply and Supply Demand. There is a lot of quality merchandise out there going at good prices. This is an opportunity to buy low. 

Knowing things like this can give an investor a sense of perspective he will never realize if he just gets his information from the media who are just there to confuse and over-hype the news of the day causing confusion and worry.