By Rainsford Yang
Sunday, August 12th 2007 9:00pm ET
Institutional
participation remained light during Friday's roller coaster ride, but the Federal Reserve jumped in as the 'buyer of last resort' through a series of three separate 'liquidity injections'.
This saved the market from another rout, as the S&P reversed an early 24-point loss to finish just above unchanged levels by the close. Market internals were less than impressive, however.
Breadth remained in negative territory throughout the session. While it rebounded out of the 4:1 negative territory where it started Friday's session, it still finished nearly 2:1 negative.
So while the S&P did manage to finish higher Friday, most stocks didn't follow suit. This can clearly be seen on
the chart of cumulative breadth, which fell below its August 3rd low on Friday.
Note that when the NYSE advance/decline ratio closes under .60 on a day when the S&P settles higher, it's usually breadth that's the better tell short-term, with the S&P typically flipping back down the following session (see track record.) We didn't quite see an a/d ratio under .60 on Friday, but it was close at .63, suggesting the potential for further weakness short-term.
Friday's price action also set up a likely lower close within the next couple of sessions. Historically, when the S&P trades sharply lower intraday but manages to finish with a modest gain, sellers typically regain the upper hand short-term. The table below lists all instances since 1990 in which the S&P500 traded down 1.5% or more intraday but ended with a gain of less than 1%. Note that out of seventeen occurrences, fifteen led to a lower S&P close within the next two sessions...
S&P Down 1.5%+ Intraday, Closes Up Less Than 1%
08/10/07... ???
06/08/06... Lower SPX close one session later
05/12/04... Lower SPX close one session later
03/20/03... Lower SPX close two sessions later
02/25/03... Lower SPX close one session later
10/23/02... Lower SPX close one session later
08/09/02... Lower SPX close one session later
07/30/02... Lower SPX close two sessions later
07/11/02... Lower SPX close one session later
06/24/02... Lower SPX close one session later
10/05/01... Lower SPX close one session later
03/01/01... Lower SPX close one session later
04/27/00... Lower SPX close one session later
01/05/00... No lower close within two sessions
05/12/99... Lower SPX close two sessions later
09/21/98... No lower close within two sessions
06/07/96... Lower SPX close one session later
03/31/94... Lower SPX close one session later
For the week, the S&P ended up 1.4%, although that hardly tells the whole story as it was up nearly 5% Wednesday before the rally evaporated over the next two sessions. Since 1970, there have been ten instances in which the S&P gained more than 4% intraweek but ended the week with a gain of less than 2%. The market's performance over the next week was very erratic (6 down, 4 up.) Looking out two weeks, there was an upside bias, with the S&P higher 7 times out of 10. In general,
the recurring theme was violent moves in both directions.
New 52-week lows didn't exceed 500 during Friday morning's plunge, creating another potential series of lower highs on the 52-week low chart. That's a positive sign if the pattern sticks, as it suggests waning downside momentum. I'd also note that this past week didn't see the kind of extreme negative NYSE TICK readings that were seen late July and the first few days of August. What's still missing, of course, is real institutional buying. Just about all of the setups currently on the board imply the market is in an intermediate-term bottoming process, which means we should see that kind of buying power appear shortly.
The Market Vane survey of commodity trading advisors ticked up slightly this past week, coming in at 58% vs. 56% the prior week. That's still in bullish territory, but it's also in some of the lowest territory of the past three and a half years. See last Sunday's column for more on this 'smart money' indicator.
The Investors Intelligence survey is also worth a mention (finally), as the percentage of newsletter writers that consider themselves bearish on stocks jumped to 31.5%, the highest reading of the year. There's nothing actionable here yet, but a bullish intermediate-term setup could be triggered if the trend continues. Our research has uncovered two reliable buy setups involving this survey - one based on a 'cross' of the bullish and bearish consensus readings (see track record), the other based on a bearish consensus reading over 40% (see track record.) Both take advantage of the fact that newsletters are typically a bit slow to react when a selloff gets underway, and by the time they turn convincingly bearish, the market is typically at an intermediate-term bottom. We're not at that point yet, but for the first time in a year this survey is worth watching again.
Friday's weak start and strong finish sent the Last Hour indicator surging to its highest level in over a month. Remember that the indicator is calculated via the formula (today's close - today's 3:00pm price) - (today's 10:30am price - yesterday's close). You can see why Friday's session sent this indicator soaring - the strong showing in the final hour created a solidly positive number, and the very weak first hour created a solidly negative reading. When you subtract a negative number, you're actually adding, which is why the Last Hour ended up jumping over 250 points to its highest level in over a month. As I recently discussed in my August 7th column, that's a red flag from a long-term perspective. In general it's a bad sign to see the Last Hour start ticking steadily higher after a prolonged downdraft. Note from the long-term chart that the retracement period after a big decline in the Last Hour often relates to some of the most severe selloffs of the last thirty years. Typically, the market isn't out of the woods until the Last Hour retraces the entire move down, at which point stocks could be trading significantly lower than current levels. This is 'big picture' stuff that could take a year or two to unfold, but it's definitely something to consider when the 'oversold buy' setups start falling off the board.
By Rainsford Yang
Thursday, August 9th 2007 10:30pm ET
They say news is worst at the bottom and best at the top, and there's no getting around the fact that recent news has been pretty awful. Scary, even. Today we learned of a surprisingly massive liquidity injection courtesy of the European Central Bank (see story) This is the kind of action normally reserved for disasters - think 9/11 - which begs the question, where exactly is the disaster? Sure, the French bank BNP Paribas admitted to being the latest sub-prime victim (even after their CEO dismissed such claims just last week), but isn't there most likely more to the story?
Treasury Secretary Paulson's failed trip to China last week, which received very little press, was also back in the spotlight as the Chinese are talking tough. Tough as in mentioning their 'nuclear option' (
see story.) Is it any wonder that institutional buying has been virtually nonexistent over the past month?
On a short-term time frame, this can clearly be seen on the current TICKscore chart. TICKscore measures institutional participation in the market by analyzing TICK extremes, and over the past month we've seen a near-total absence of positive TICK extremes. They're not absent entirely - we saw an intraday bout of buying
pressure during Wednesday's session (which was obliterated by the close under equally heavy selling pressure.) And we also saw a round of buying starting mid-day July 27th and most of July 30th. Otherwise, sellers have been dominant.
Some attribute the abnormally low TICK readings to the recent change to the uptick rule on July 6th, but as I've noted recently, I have my doubts. While the average TICK reading has fallen from around +200 to zero, that's what happens when institutions essentially stage a buyers strike (see my August 2nd column for prior examples and this long-term TICKscore chart for an illustration.)
Personally, I think the original TICKscore is accurately depicting the current environment - one in which there are no real buyers.
This will most likely change at some point soon. After all, we
should be seeing buyers given the extreme oversold conditions, but the near-total lack of interest has been troubling.
Sure, we got a nice bounce off that August 3rd bottom, but until the intense selling pressure of the past month abates, it's not a sustainable bounce. Thursday's whoosh lower proved that point.
Last week's program trading report reaffirms the notion that institutional investors are conspicuously absent at a time when they would normally be ramping up their trading activity. Rather than stepping in to support the market, they appear to be doing just the opposite, reducing their participation even further. From a long-term perspective, this doesn't bode well. Last week's report reveals that only 29.2% of total program volume was executed as principal, for member firms' own accounts. That's the fourth week out of the past six that we've seen a reading under 30%, which was unheard of in recent years (see long-term chart.) A supportive number would have been in the 40% range, and would have indicated that institutions were aggressively stepping up, in effect functioning as a stabilizing force. Of course, they're only going to do that if they believe their efforts will ultimately be rewarded. This is the first time since 2000 that principal program activity has remained flat and even declined in the face of a fairly significant selloff in stocks. And that suggests institutional investors don't see a rosy future.
By Rainsford Yang
Wednesday, August 8th 2007 11:30pm ET
From my July 29th column... "...the market will
remain range-bound for the foreseeable future, most likely between SPX 1450-
1550. Just as the market overshot on the upside in mid-July, it's most likely
overshooting on the downside presently." Now with the S&P500 right back in the middle of that range at 1500, there isn't much of an edge for the short-term. The oversold McClellan buy setup that was triggered at last Friday's close fell off the board today, leaving little to lean on near-term.
Even with today's solid
2:1 breadth, the
cumulative breadth
line continues to lag well behind the S&P itself, suggesting most stocks aren't having as easy a time
as the major averages lifting
out of oversold territory.
One measurement reflects just how oversold the market remains even with the recent rally. The
NYSE TRIN5 indicator, a running summation of the last five days' closing TRIN values, closed in 'market oversold' territory (>6) for the twelfth consecutive session Wednesday. That's extremely unusual.
In the thirty-year history of the TRIN5, nearly all prior instances
occurred in 2002, when the market was undergoing bouts of extreme selling. Interestingly, the market typically continued to struggle over the following week...
TRIN5 Over 6.0 Twelve Sessions
08/08/07... S&P ??? five sessions later
07/19/04... S&P -1.5% five sessions later
09/30/02... S&P -3.7% five sessions later
07/08/02... S&P -6.1% five sessions later
06/12/02... S&P -0.0% five sessions later
05/08/02... S&P +0.2% five sessions later
01/18/02... S&P +0.5% five sessions later
08/21/01... S&P +0.4% five sessions later
It's noteworthy that certain volatility indexes also managed to close higher Wednesday despite the solid gains,
suggesting the market remains wary of further volatility ahead.
Note, for example, that the Russell Volatility Index (RVX) closed higher
Wednesday despite a nearly 3% gain for the Russell. We've only seen a higher RVX on a 2%+ day twice in the limited history
of the Russell Volatility, both of which led to weakness over the short-term. The S&P100 Volatility Index (VXO) also closed higher Wednesday despite the 1.5% gain for the VXO.
NASDAQ volume was particularly heavy at over 3 billion shares, making
Wednesday the heaviest volume session of the year. That's a potentially negative sign short-term. When unusually heavy volume occurs on the third day of a rally, it's often a sign that buying power is at exhaustion point. The table below notes each of the last fifteen instances in which a six-month high for Nasdaq volume coincided with a third consecutive up day for the Nasdaq100...
Third Up Day for NDX, Nasdaq Volume at Six-Month High
01/11/06... NDX -0.7% two sessions later
12/03/04... NDX -1.6% two sessions later
01/07/04... NDX +0.4% two sessions later
05/29/03... NDX +0.3% two sessions later
06/28/02... NDX -8.4% two sessions later
02/17/00... NDX -3.8% two sessions later
01/20/00... NDX -4.7% two sessions later
01/08/99... NDX -1.8% two sessions later
07/16/97... NDX -2.9% two sessions later
05/05/97... NDX -2.5% two sessions later
04/24/96... NDX +0.4% two sessions later
07/07/95... NDX -0.6% two sessions later
02/03/95... NDX +1.1% two sessions later (*)
10/28/94... NDX -0.4% two sessions later
10/11/94... NDX -0.1% two sessions later
From a longer-term perspective,
Mark Hulbert over at MarketWatch had an interesting column recently on the NYSE New Highs-Lows Index.
This is a fairly well known technical indicator that's calculated by dividing the number of new 52-week highs on the NYSE by the sum of (new 52-week highs + new 52-week lows). This ratio is then smoothed with a moving average (10-day in this case.) When it hits unusually low levels, as it just did recently, we found it had a particularly good record at calling for a higher S&P three months later...
New Highs-Lows Index Ratio Down to 10%
08/07/07... S&P500 ??? three months later
10/19/05... S&P500 +7.3% three months later
07/24/02... S&P500 +4.3% three months later
09/27/01... S&P500 +12.4% three months later
10/21/99... S&P500 +13.4% three months later
08/28/98... S&P500 +15.7% three months later
08/04/98... S&P500 -0.4% three months later
11/22/94... S&P500 +7.1% three months later
08/15/90... S&P500 -9.5% three months later (*)
05/01/90... S&P500 +7.1% three months later
01/30/90... S&P500 +3.1% three months later
10/20/87... S&P500 +6.4% three months later
07/18/84... S&P500 +7.5% three months later
05/25/84... S&P500 +10.7% three months later
02/16/84... S&P500 +0.9% three months later
08/10/82... S&P500 +38.9% three months later
06/04/82... S&P500 +6.9% three months later
03/17/82... S&P500 +2.0% three months later
02/22/82... S&P500 +3.8% three months later
01/22/82... S&P500 +0.1% three months later
08/31/81... S&P500 +0.6% three months later
03/05/80... S&P500 +0.1% three months later
10/19/79... S&P500 +9.3% three months later
12/28/78... S&P500 +4.9% three months later
10/30/78... S&P500 +6.5% three months later
It should be noted that back in the early-to-mid 70's, when the market was fluctuating wildly, this setup performed rather poorly. Seventeen signals were triggered from 1970 through 1977, only eight of which proved profitable over the next three months. So the solid performance is clearly more of a recent phenomenon. Still, the record above spans nearly thirty years and 24 separate signals, only one of which was really proved wrong. The 92% win rate is significantly better than the 64% at-any-time odds of a higher S&P three months later. So you could definitely argue that this tilts the odds in favor of an SPX around the 1475 area or higher at the beginning of November.
By Rainsford Yang
Tuesday, August 7th 2007 10:00pm ET
From Ian Shepherdson at High Frequency Economics...
"The peak rate of ARM resets won't be reached until the end of this year. By then, the monthly value of mortgages resetting will be 50% higher than the current level, while the pace of resets will not wane until the fourth quarter of 2008."
That quote caught my eye, as the end of this year also coincides with another potentially destabilizing event - a seven-year high for the 90-day T-Bill rate. We're not there now, but note from
this chart that the 90-day rate continues to hover just below the high made earlier this year.
By the end of this year, that high (just above the 5% level) will become the new 'seven-year high'. If and when this high is breached, it would trigger a significant long-term sell for stocks.
This is somewhat similar to the sell signal triggered by the 10-year futures contract
back in June. The difference is that rather than merely a three-month sell, this signal remains in effect until the 90-day rate falls to a fifteen-month low. That means the sell is often in effect for a year or more.
As you might imagine, it's very hard to find a long-term sell signal for the stock market that's consistently worked. This is one of them. Credit goes to Dick Stoken, who discussed this setup in his book 'Strategic Investment Timing'.
Here's the track record over the last fifty years...
90-day T-Bill Rate Hits a Seven-Year High (for sells)
90-day T-Bill Rate Hits a Fifteen-Month low (for buys)
02/02/01 Buy 1349.47... ???
05/12/00 Sell 1420.96... +5.0%
12/11/81 Buy 124.93... +1037.4%
12/19/80 Sell 133.70... +6.6%
05/16/80 Buy 107.35... +24.5%
09/14/79 Sell 108.76... +1.3%
10/04/74 Buy 62.34... +74.5%
07/27/73 Sell 109.59... +43.1%
09/25/70 Buy 82.83... +32.3%
05/24/68 Sell 97.15... +14.7%
03/17/67 Buy 90.25... +7.6%
01/21/66 Sell 93.47... +3.4%
06/06/60 Buy 56.89... +64.3%
08/28/59 Sell 59.60... +4.5%
01/03/58 Buy 40.87... +45.8%
11/25/55 Sell 45.68... +10.5%
While on the subject of the 'big picture' outlook, keep in mind the
long-term chart
of the Last Hour indicator. Note the steep decline over the past two and a half years,
by far the most sustained decline on record. This reflects the fact that the last hour of the trading day has been consistently underperforming the first hour. Historically, this has meant trouble for stocks, although it is a lead indicator and the timing can be tricky. Once a decline of this magnitude gets underway, it's usually when the trend of the Last Hour flips back into an uptrend that the market starts running into real trouble. This makes sense if the indicator is truly reflecting the activity of the smart money crowd, as it suggests they've stopped selling (into strength) and started buying (into weakness.) We've found an effective method is to simply watch for the Last Hour to hit its highest level of the past month. This recently occurred in late 2006/early 2007, ahead of the February 27th selloff, and while
we're not at one-month highs yet, it's noteworthy that the indicator is beginning to
tick higher.
By Rainsford Yang
Monday, August 6th 2007 10:30pm ET
About an hour and a half before Monday's close, I opined that the session had
a very similar feel to last Monday's session (July 30th.)
The market was enjoying a decent lift thanks to a reduction in selling pressure, but there were just no institutional buyers in sight, calling into question the sustainability of the rally. I also noted the big pop in the number of new 52-week lows, which surged to nearly 700 during the morning selloff. You might recall that on Sunday I discussed the series of 'lower highs' on the chart of new 52-week lows. That pattern of lower highs was blown out by today's surge over 600, nullifying the 'waning downside momentum' argument and opening up the possibility of another spike lower.
As I said, that was about ninety minutes before the close. When I returned, the S&P had gone vertical. Instead of being up 15 points, it was up 30. A 'sell the rally' 1% up day had morphed into a solid 2% gain.
TICK action was persistently negative, however, as it's been during each of the last four weeks. No matter how you slice and dice the data, there was no way to put a positive spin on it.
TICKscores were negative. Even the
cumulative Adjusted TICK closed in negative territory, meaning the TICK spent more time trading below its recent average despite the big gains. And with breadth just barely positive on the big board, I fully expected our nightly research to crank out some bearish short-term setups.
A couple of patterns immediately struck me as worth investigating. The S&P500 had closed up over 2%, yet breadth was just barely positive. The NYSE advance/decline ratio closed at an unimpressive 1.15, meaning advancing issues only edged out decliners. I expected the combination of a big advance (2%+) on weak breadth (adv/dec ratio <1.25) to be a short-term negative sign. It's only happened seven times since 1980, so our sample size is too small to be statistically significant. Still, I was surprised to see that the S&P was usually higher one week later...
NYSE Adv/Dec Ratio <1.25 on 2%+ up day
08/06/07... S&P500 ???
04/17/00... S&P500 +5.4% one week later
03/09/00... S&P500 +4.1% one week later
01/31/00... S&P500 +2.1% one week later
10/20/99... S&P500 +0.6% one week later
10/16/89... S&P500 +0.6% one week later
10/27/87... S&P500 +7.6% one week later
10/20/87... S&P500 -1.5% one week later
A similar pattern that caught my eye was the fact that
despite a 2%+ gain, the S&P500 drew lower highs and lower lows on its daily chart. I assumed this too would be a short-term negative pattern, and it has been sometimes. But it's far from reliable. There have only been six times since 1980 in which this same pattern occurred, half of which led to a lower S&P three sessions later. But notably, like the pattern above, the S&P typically rebounded to close at a higher level one week later...
SPX +2%, Lower Highs & Lower Lows
08/06/07... S&P ???
10/13/00... S&P -2.3% in three days, +1.7% in five
01/31/00... S&P +2.2% in three days, +2.1% in five
09/01/98... S&P -2.0% in three days, +1.2% in five
10/28/97... S&P -0.1% in three days, +2.1% in five
10/16/89... S&P +1.2% in three days, +0.6% in five
10/20/87... S&P +4.8% in three days, -1.5% in five
Today was also the first time in recent memory that I can recall seeing over 500 new 52-week lows on the same day that the S&P gained 2%. In fact, this has only happened five times since 1980. Interestingly, the S&P was higher one week later in four out of five cases, and was higher two weeks later in all five occurrences...
500+ New 52-week Lows and S&P Gains 2%+
08/06/07... S&P ???
10/10/02... S&P +9.4% one week later, +9.8% in two weeks
07/24/02... S&P +8.1% one week later, +4.0% in two weeks
09/01/98... S&P +1.2% one week later, +5.2% in two weeks
10/20/87... S&P -1.5% one week later, +5.9% in two weeks
09/28/81... S&P +3.4% one week later, +4.9% in two weeks
The Philadelphia Bank Index soared over 5% Monday in a dramatic showing. It's been nearly five years since we've seen such a big spike in the BKX. But prior to 2003, this wasn't such a rare occurrence. Between 1995 and 2002, there were a total of eighteen separate instances in which the BKX gained 5%+ in a single session. Each of these cases is noted in the table below along with the BKX performance one week later. Rather than relating to a blow-off style top, the BKX typically continued moving higher over the course of the following week (13 out of 18 cases)...
BKX Rallies 5%+ In a Single Session
08/06/07... BKX ???
10/15/02... BKX +2.9% one week later
10/10/02... BKX +15.8% one week later
08/08/02... BKX +2.1% one week later
07/29/02... BKX -7.4% one week later
07/24/02... BKX +11.7% one week later
09/24/01... BKX +6.0% one week later
03/23/01... BKX +6.3% one week later
01/03/01... BKX -2.4% one week later
12/05/00... BKX +2.7% one week later
10/13/00... BKX -0.8% one week later
04/03/00... BKX -4.1% one week later
03/15/00... BKX +11.9% one week later
10/27/99... BKX +3.2% one week later
10/15/98... BKX +8.1% one week later
10/09/98... BKX +10.4% one week later
09/23/98... BKX -9.3% one week later
09/11/98... BKX +1.8% one week later
09/08/98... BKX +3.3% one week later
What does all of this tell us? You could argue not much, given the small sample sizes, but I was struck by the generally positive action. Granted, key indicators such as the NYSE TICK continue to reflect a market devoid of institutional buyers, and it's hard to imagine the market moving higher without their participation. The market is so oversold that you'd expect to see real buyers swooping in, but so far we haven't - even during today's afternoon surge. This absence could precede one final spike lower, but given the setups above and the bullish setups on the board, I'd expect such a spike to turn into a buying opportunity.
The FOMC announcement is scheduled to be released at approximately 2:15pm ET Tuesday.
August fed funds futures are pricing in less than a 10% chance of a cut, suggesting we won't see any action taken Tuesday. But looking out to the December contract, the market is pricing in a full 100% odds of a 1/4 point cut by the end of the year.
By Rainsford Yang
Sunday, August 5th 2007 8:00pm ET
Stock indexes took a pounding Friday, with TICK action revealing a near-total absence of buyers throughout the session.
The S&P500 settled down over 2% at a new three-month low of 1433, closing below July's settlement and
fulfilling the short-term negative seasonal pattern discussed Thursday.
Interestingly, new 52-week lows expanded on the
NASDAQ but not on the NYSE.
Only 370 issues hit new 52-week lows on the big board Friday, noteworthy considering the sizable drop for the major blue chip averages.
It's interesting to note that new 52-week lows peaked on July 26th, about 50 S&P points above current levels, and since then we've seen the number of new lows form a series of 'lower highs', suggesting waning downside momentum. This isn't apparent in price, yet, but it is reflected in this gauge of the market's internal health.
Volume associated with
declining issues accounted for over 90% of total big board volume Friday,
the third 90% down volume session seen in just the last two weeks. That's the type of extreme, concentrated selling pressure typically only seen in crash-like settings. In fact, over the last forty years, there have only been four separate instances in which three 90% down volume sessions occurred in a one-month time frame, much less two weeks.
Those instances were 05/25/70, 10/26/87, 08/31/98 & 03/13/07. The S&P's performance in the month following those dates was
+9.1%, +6.7%, +9.6% and +4.4% respectively. This continues to suggest that for the time being, those looking for some sort of crash scenario to develop are overlooking the fact that we've already experienced statistics consistent with a crash.
That's not to say there's really any signs of strength on the board. Rather, there's just a general theme that sellers are most likely at an intermediate-term exhaustion point.
Breadth was massively lopsided Friday by more than a 5:1 margin on the NYSE, sending the cumulative breadth line further into new lows.
The lopsided breadth also sent the McClellan Oscillator into extreme oversold territory (below -200), triggering a short-term buy setup in the process.
Also noteworthy was Friday's high closing NYSE TRIN of 3.37.
I've discussed off and on for some time now the fact that I basically don't trust the TRIN as an indicator ever since it essentially stopped working earlier this decade (see my 'Broken TRIN' column from April 24th for a recent discussion.) This is particularly true when the indicator is viewed on a longer-term time frame. For example, pull up this long-term chart highlighting the 50-day moving average and note that it's held above 1.0 throughout nearly the entire rally of the past four years. That's just the opposite of where the indicator is supposed to trade in a bullish environment (under 1.0 signals better buying power, over 1.0 better selling pressure.) This is a primary reason that TRIN-related indicators haven't been performing as expected in recent years - the indicator has essentially ceased to function as it was intended.
For instance, from 1994 to 2000, this same 50-day average held under 1.0 the vast majority of the time, correctly indicating better buyers. It also correctly moved over 1.0 in early 2001 and held there, correctly indicating better sellers. But then it got stuck. It's been holding over 1.0 pretty much ever since 2001, and the few times it has fallen under 1.0, it's actually signaled a market top rather than a buy. The most recent example of this was in May of this year when the 50-day average fell under 1.0 just as the S&P500 crossed the 1500 threshold.
That said, I would note that the indicator may still hold some value on a very short-term time frame. For instance, Friday's high 3.37 reading is only the third time in the last three years we've seen such a high closing TRIN. Historically, one-day readings in excess of 3.0 have been a pretty good indication that selling pressure is at an exhaustion point for the very near-term. Out of the past twenty-five occurrences stretching back to 1987, most led to a higher S&P close the following session, with only two leading to an S&P down more than 0.5% at the next day's close...
NYSE TRIN Closes Above 3.0
08/03/07 TRIN 3.37... Next day S&P ???
03/13/07 TRIN 3.49... Next day S&P +0.7%
02/27/07 TRIN 15.77... Next day S&P +0.6%
08/06/04 TRIN 3.24...Next day S&P +0.1%
03/22/04 TRIN 3.35...Next day S&P -0.1%
05/19/03 TRIN 3.47...Next day S&P -0.1%
03/24/03 TRIN 5.02...Next day S&P +1.2%
03/10/03 TRIN 5.81...Next day S&P -0.8% (*)
03/04/03 TRIN 3.70...Next day S&P +1.0%
12/27/02 TRIN 3.49...Next day S&P +0.5%
09/03/02 TRIN 3.42...Next day S&P +1.8%
04/11/02 TRIN 3.22...Next day S&P +0.7%
01/29/02 TRIN 3.06...Next day S&P +1.2%
04/03/01 TRIN 3.53...Next day S&P -0.3%
03/12/01 TRIN 3.42...Next day S&P +1.5%
04/14/00 TRIN 4.31...Next day S&P +3.3%
08/31/98 TRIN 3.32...Next day S&P +3.8%
01/09/98 TRIN 3.63...Next day S&P +1.2%
10/27/97 TRIN 10.20...Next day S&P +5.1%
11/15/91 TRIN 4.02...Next day S&P +0.7%
10/13/89 TRIN 4.19...Next day S&P +2.8%
08/22/88 TRIN 3.48...Next day S&P +0.1%
11/30/87 TRIN 4.64...Next day S&P +0.7%
10/26/87 TRIN 12.11...Next day S&P +2.4%
10/19/87 TRIN 14.07...Next day S&P +5.2%
10/16/87 TRIN 5.79...Next day S&P -20.5% (*)
While intermediate-term studies continue to suggest the potential for higher prices this month, certain longer-term indicators are beginning to roll over and bear watching. For one, I would note that the spread between the Equal Weighted S&P500 and standard S&P500 continues to contract as the Equal Weight index continues to lose ground to the standard (cap weighted) S&P. From my July 23rd column... "Note that the spread between the Equal Weighted S&P500 and the standard S&P500
closed at its highest level in over two months Monday. Since the 2000 top,
periods in which the spread is rising (meaning the standard S&P is
outperforming the equal weight S&P) have typically represented rough periods
for the market in general (see long-term chart.)" Additionally, I would keep close tabs on the Market Vane survey of commodity trading advisors. This survey has proven to be one of the more reliable 'smart money' indicators, and as of this past week, the survey hit its lowest level in over a year, with only 56% of respondents considering themselves bullish on stocks. That's considerably lower than after the sharp selloff in February, when the survey only fell to 65%, indicating CTA's are far more concerned this time around. Historically, this group has a strong track record of turning bearish on stocks (meaning a reading below 50%) ahead of virtually every significant selloff of the past twenty-five years (see long-term chart.) They were bearish ahead of the '87 crash, ahead of the '98 mini-crash and held a persistently bearish outlook from early 2000 right up until mid-2003. Since then, they've maintained a consistently bullish outlook. As I said, they have an enviable track record. This past week's reading of 56% is tied for the second-lowest reading of the past three years, so it will be most interesting to see if their outlook rebounds out of this territory, as it did in recent years, or if this group finally throws in the towel and switches to a bearish outlook.
Should that occur, it would be a significant red flag for the stock market's longer-term outlook.
By Rainsford Yang
Thursday, August 2nd 2007 11:00pm ET
Stock indexes closed higher Thursday, benefiting not so much from solid buying power as a reduction in selling pressure and a contraction in volatility. The Nasdaq100 closed up 1% at 1966, fulfilling the short-term bullish indication from the back-to-back days of overbought volatility. The
Nasdaq Volatility Index (VXN) closed down 10% at 21.24.
From a seasonal perspective, it's noteworthy that
early August has been a weak period of time for the stock market in recent years. Typically, the S&P will close below the last trading day of July sometime in the first 3-5 trading days of August. Here's a rundown of the last twenty occurrences stretching back to 1987...
S&P500 Performance Following Last Session of July
07/31/87... Lower S&P close three days later
07/29/88... Lower S&P close four days later
07/31/89... Lower S&P close three days later
07/31/90... Lower S&P close three days later
07/31/91... Lower S&P close three days later
07/31/92... Lower S&P close three days later
07/30/93... Lower S&P close four days later
07/29/94... Lower S&P close five days later
07/31/95... Lower S&P close three days later
07/31/96... No lower close in 3-5 days
07/31/97... Lower S&P close three days later
07/31/98... Lower S&P close three days later
07/30/99... Lower S&P close three days later
07/31/00... No lower close in 3-5 days
07/31/01... Lower S&P close four days later
07/31/02... Lower S&P close three days later
07/31/03... Lower S&P close three days later
07/30/04... Lower S&P close three days later
07/29/05... Lower S&P close five days later
07/31/06... Lower S&P close five days later
07/31/07... ???
The track record is admittedly not nearly as strong pre-1987, but given its run over the last twenty years and the
fact that we're entering into the 3-5 day time frame following the last session of July, I felt it worthy of a mention.
Returning to yesterday's discussion of the NYSE TICK, many are pointing to the fact that the average TICK reading has fallen from the +200 range to around zero as proof that things are 'different this time'. But an examination of historical TICK data reveals that the kind of action seen recently is not unprecedented. Since 2001, we've seen four separate instances in which the 20-day average TICK reading has dropped into the zero range...
From early March 2001, the average TICK reading held right around the zero level (+/- 50) right up until mid-April '01.
In the aftermath of 9/11, the average TICK held around zero until early October.
From mid-July 2002 until early August the average TICK was zero.
From the
end of April 2004 until mid-may '04 the TICK averaged zero.
This chart illustrates the action in the NYSE TICK over the last seven years.
It's what we call 'cumulative TICK', a simpler version of the cumulative 'adjusted TICK' created by Brett Steenbarger (see my May 23rd column.) Each day's reading is simply a summation of 1-minute readings from open to close. We then plot a 20-day moving average to smooth out the data. I bring this up because the long-term cumulative TICK chart illustrates those instances of unusually weak TICK action. When the 20-day moving average (seen in red) has fallen near the zero level, it's reflected times similar to the present when the mean value of the TICK was hovering right around zero.
It's likely that when we wrap up the long-term history of the cumulative Adjusted TICK, it will produce a chart very similar to that seven-year chart above. Brett's Adjusted TICK is a more sophisticated version of our Cumulative TICK (see that 5/23 column for the formula.) If you overlay the two indicators on the same chart, you'll find that the Adjusted TICK tends to lead our cumulative TICK slightly, suggesting the calculation method is superior to our simplified version.
Currently, it's only been since the last full week of July that the 20-day average TICK reading has fallen near the zero area (this is assuming no adjustments.) While the uptick rule may be the cause, it clearly wasn't the cause in the four instances above. In those cases, it was unusually heavy selling pressure that drove the TICK down to a zero average. Who's to say that isn't the case currently?
Is it just a coincidence that we're once again starting to see TICK readings in the +1000 range now that the S&P is off 80 handles in the last few weeks? I don't think so. Real buyers are starting to re-emerge after going into lockdown mode right around the July 4th holiday. They were heavy sellers going into the holiday and remained better sellers right into the false breakout of July 12th.
Could it be that the lower TICK range, which started July 3rd, two days before the uptick rule went into effect, actually reflected a combination of unusually heavy institutional selling coupled with a lack of meaningful buyers? Wouldn't it be something if, when the market begins to rally in earnest, the TICK moves back into its old range? If you don't think that's possible, I'd remind you that we're already seeing evidence that it's starting to occur. Beginning around mid-day last Friday and carrying over into Monday of this week, we saw the TICK run up to the +1000 area on multiple occasions. In mid-July, a lot of folks were proclaiming those kind of readings wouldn't be seen again due to the TICK's 'lower range'. But once again Thursday we saw the TICK back to its old tricks, reaching near or above the +1000 area multiple times as 'real' buyers began to gingerly step back in to the market. I say gingerly because when you look at indicators like the
TICKscore, even the
'adjusted' version is not exactly in a bullish posture. The unadjusted version remains in a freefall.
This indicator is a key component of our intraday trading program, and since July 6th we've backtested several modified versions of the TICKscore indicator. Interestingly, the best modified version had an almost identical track record as the original, unmodified TICKscore. Both ended the month of July essentially flat, which admittedly doesn't sound great. But despite the big moves over the last month, it's been a difficult time for short-term trend following. The fact that the original, unmodified TICKscore performed as well as the modified version further calls into question whether any modifications are really necessary.
To sum up, I have a strong hunch that the TICK's upper range was unaffected by the uptick rule. When real buyers come back to the market en masse, I expect we'll see +1000 readings on a regular basis. What caused the depressed TICK range of the past month? Selling! Heavy, persistent selling with no real buyers, like those four cases mentioned earlier.
I think the only possibility regarding a change in the TICK's behavior is that we MIGHT continue to see the TICK hit lower than normal levels given short sellers' ability to hit bids at will. That would mean more of an 'expanded range' rather than a lower range. But again, I don't think that's a sure thing. We could just as easily see the TICK shift back into its normal range once this fierce round of selling pressure fully abates. We'll get a better idea when a real rally day unfolds with true institutional participation.
By Rainsford Yang
Wednesday, August 1st 2007 11:30pm ET
Pull up the chart of the
Nasdaq Volatility Index (VXN) and note that it settled
over its upper bollinger band for a second consecutive session Wednesday.
This has typically been a good indication that the Nasdaq will settle flat-to-up
the following session as volatility falls out of technically overbought
territory. We only have historical data on the VXN since the beginning of
2001, but since that time we've seen a total of nineteen separate instances in
which the VXN closed over its upper band two days running. All of these
occurrences are listed in the table below along with NDX performance the
following session...
VXN Over Its Upper Band Two Consecutive Sessions
08/01/07... Nasdaq100 ??? next session
07/27/07... Nasdaq100 +0.9% next session
02/28/07... Nasdaq100 -0.5% next session
07/14/06... Nasdaq100 +0.4% next session
05/18/06... Nasdaq100 +0.9% next session
05/15/06... Nasdaq100 -0.7% next session
04/12/06... Nasdaq100 +0.4% next session
01/23/06... Nasdaq100 +0.6% next session
01/18/06... Nasdaq100 +0.8% next session
01/10/06... Nasdaq100 +0.8% next session
08/08/05... Nasdaq100 +0.7% next session
04/18/05... Nasdaq100 +0.8% next session
07/26/04... Nasdaq100 +1.7% next session
04/30/04... Nasdaq100 +1.0% next session
03/11/04... Nasdaq100 +2.1% next session
11/18/03... Nasdaq100 +1.0% next session
06/09/03... Nasdaq100 +1.5% next session
06/11/02... Nasdaq100 +2.0% next session
05/06/02... Nasdaq100 -0.2% next session
09/07/01... Nasdaq100 +0.8% next session
The NYSE McClellan Oscillator settled
in extreme oversold territory for a seventh consecutive session Wednesday,
tying the record for most number of days below -200. only one other time in history, in late March of 2005, have we seen seven consecutive sessions of a McClellan Oscillator below -200, illustrating the unusually oversold nature of the market.
It's noteworthy that despite such oversold conditions, institutional buying remains tepid at best.
We saw a late burst of buying in Wednesday's session that turned a 15-point loss into an 11-point gain for the S&P,
but indicators such as the
NYSE TICKscore,
cumulative Adjusted TICK and
breadth all remained negative.
We did see over 500 issues hit new 52-week lows, triggering another intermediate-term bullish signal (see my July 25th column for a recent track record.)
But until institutions become more active buyers, it's going to remain tough for the market to sustain rallies.
One key indicator to watch for signs of institutional participation is the NYSE TICK.
While everyone has seemingly come to an agreement that the TICK has downshifted to a new, lower range, I have a sneaking suspicion that it may only be the lower end of the TICK's range that has been affected by the uptick rule (and as I'll discuss in a moment, even that's not certain.) The argument goes that with traders no longer forced to wait for an uptick to short into (since July 6th), we've been seeing much lower TICK readings as traders aggressively hit bids. It's hard to make that argument with any degree of certainty, however, given that this rule change just happened to precede a particularly rough period for the stock market.
The type of unusually weak TICK readings we've experienced recently is not unprecedented.
Pull up this longer-term chart of our Cumulative TICK for an example. This is a simple summation of 1-minute TICK readings taken from the open to close each trading day, and is something we've tracked since the late 90's. Note from the chart that beginning in mid-April of 2004 we began experiencing unusually weak TICK readings, similar to what we began seeing in mid-July of this year. By the end of April '04, the 20-day average of 1-minute TICK readings had fallen from its usual reading in the +200 range down to zero, also similar to the current environment.
This persisted until mid-May when the TICK eventually rallied back into its old range as institutions stepped back in to the market. I don't pretend to know whether this time is different and the change to the uptick rule has permanently changed the TICK's range, but I have my doubts.
I particularly question whether the upper end of the TICK's range was really all that affected by the uptick rule, or if the recent scarcity of +1000 TICK readings simply reflects a dramatic reduction in institutional buying.
This Monday's session, for example, clearly illustrated that the TICK can and will run up to the old +1000 area even with the change to the uptick rule. Monday, which was the only session this month where any sort of meaningful buying was apparent, saw persistent TICK readings in the +1000 range throughout the session while recording only a handful of TICK readings in the -1000 range. Note that this buying pressure was actually a carry-over from Friday's session, when the TICK began showing signs of its old self starting around mid-day. Note from about 12:30pm ET on Friday right into the close, there were numerous readings in the +1000 range as real buyers stepped up to the plate.
That action from mid-day Friday through Monday could be a telling sign, as it suggests the upper end of the TICK's range may not have shifted downwards as everyone thinks.
Also noteworthy is that
our version of the
NASDAQ Cumulative TICK has not seen any sort of dramatic change in character since July 6th.
It even hit its highest level in two months during the rally of July 12th, the same one in which there was a conspicuous absence of positive NYSE TICK readings. Clearly, not all TICK readings were reflecting an absence of buyers. It was the NYSE specifically that saw no 'real' buyers. And it's probably no coincidence that NYSE stocks, the ones shunned by institutions during the 'upside breakout', are now suffering the most. Since July 12th, the NYSE composite is down 6.1% vs. a 3.8% drop for the typically more volatile Nasdaq100.
By Rainsford Yang
Tuesday, July 31st 2007 10:00pm ET
Stock indexes tried and failed to sustain Monday's rebound efforts. After trading up 1% in the morning session, the S&P gave back all of those gains and then some, closing down over 1% at 1455. TICK action was weak throughout the session, with the TICKscore closing at a low -49, reflecting an absence of positive TICK extremes. Breadth was also negative but not too bad considering the solid down day, and that helped keep the cumulative breadth line above Friday's low.
The S&P500 ended up forming an 'outside bar' after trading above Monday's intraday high and below Monday's low. That's noteworthy when you consider this outside bar is forming at a multi-month low on the daily chart. Historically, outside bars at high or low points on a chart can precede a reversal of the current trend. The table below lists every instance over the last thirty years in which the S&P closed down, hitting its lowest level in at least two months and forming an outside bar. There have been eighteen instances since 1975, and you can see that the majority led to a higher S&P one week later...
S&P500 Outside Day Closes Down at Two-Month Low
07/31/07... S&P500 ??? one week later
04/20/05... S&P500 +1.7% one week later
02/07/03... S&P500 +0.6% one week later
04/26/02... S&P500 -0.3% one week later
07/10/01... S&P500 +2.8% one week later
03/20/01... S&P500 +3.5% one week later
04/02/92... S&P500 +0.0% one week later
01/09/91... S&P500 +1.5% one week later
09/26/90... S&P500 +2.1% one week later
10/09/84... S&P500 +1.9% one week later
02/08/84... S&P500 +0.3% one week later
02/03/84... S&P500 -2.9% one week later
06/21/82... S&P500 +2.9% one week later
06/03/82... S&P500 -2.0% one week later
03/08/82... S&P500 +2.0% one week later
02/22/82... S&P500 +1.5% one week later
08/31/81... S&P500 -3.9% one week later
09/21/77... S&P500 +0.2% one week later
08/24/76... S&P500 +1.6% one week later
The Nasdaq100 fell over 2% Tuesday to close at 1932. That represents the first close under its lower bollinger band during this recent decline, meaning it closed more than two standard deviations below its 20-day moving average. It's interesting to note that today was the first Nasdaq close in statistically oversold territory since this decline began. Other indexes have already seen multiple days below their lower bands. The S&P closed under last Thursday and Friday, while the Russell recently wrapped up a five-day string under its bollinger band.
It's been particularly noteworthy when the NDX has settled under its lower bollinger band, as it sets up a potential intermediate-term buy setup at the next day's close IF the index remains under its lower band a second consecutive session. Historically, this has been a good indication that selling pressure is approaching an intermediate-term exhaustion point, and the Nasdaq has a good track record of closing at a higher level three weeks (fifteen trading days) later. All occurrences since 1995 are noted in the table below...
NDX Under its Lower Band Two Consecutive Sessions
03/05/07... Nasdaq100 +5.3% three weeks later
07/13/06... Nasdaq100 +2.2% three weeks later
05/12/06... Nasdaq100 -3.6% three weeks later
12/20/05... Nasdaq100 +4.9% three weeks later
06/27/05... Nasdaq100 +6.5% three weeks later
04/15/05... Nasdaq100 +3.4% three weeks later
01/21/05... Nasdaq100 +1.8% three weeks later
01/05/05... Nasdaq100 -3.6% three weeks later
08/06/04... Nasdaq100 +5.6% three weeks later
03/09/04... Nasdaq100 +0.5% three weeks later
08/06/03... Nasdaq100 +8.5% three weeks later
07/23/02... Nasdaq100 +1.2% three weeks later
05/06/02... Nasdaq100 +7.2% three weeks later
04/29/02... Nasdaq100 +3.7% three weeks later
09/18/01... Nasdaq100 +1.6% three weeks later
04/04/01... Nasdaq100 +28.6% three weeks later
02/09/01... Nasdaq100 -15.3% three weeks later
11/13/00... Nasdaq100 +0.6% three weeks later
10/11/00... Nasdaq100 +4.0% three weeks later
04/13/00... Nasdaq100 +3.8% three weeks later
05/25/99... Nasdaq100 +8.4% three weeks later
10/06/98... Nasdaq100 +14.2% three weeks later
08/31/98... Nasdaq100 +17.2% three weeks later
06/01/98... Nasdaq100 +8.4% three weeks later
12/12/97... Nasdaq100 +2.8% three weeks later
10/27/97... Nasdaq100 +7.2% three weeks later
07/12/96... Nasdaq100 +5.2% three weeks later
06/19/96... Nasdaq100 -4.8% three weeks later
01/10/96... Nasdaq100 +10.6% three weeks later
Note that out of
29 occurrences, 25 led to a higher NDX three weeks later. That 86% win rate is much better than the 58% at-any-time odds for a higher Nasdaq three weeks later.
For this setup to be triggered Wednesday, the NDX needs to close below 1926.10, which would keep the index under its lower band a second consecutive session (it settled today at 1932.)
By Rainsford Yang
Monday, July 30th 2007 11:30pm ET
Stock indexes rebounded Monday, with both S&P
and
Nasdaq futures posting their first white candlestick in eight sessions (meaning a close above the open.) Breadth was also positive for the first time in seven sessions.
The Nasdaq/NYSE Volume Ratio closed at 1.14, its lowest level in over three months. This ratio has been in a persistent decline since the big selloff on July 24th, but it really took a nosedive on Monday, reflecting a notable absence of speculative participation (probably because they were blown out during last week's rout.) Monday also marked the fifth consecutive session in which the ND/NY volume ratio declined from the previous day, illustrating a persistent decline in Nasdaq volume relative to big board volume. This further points out that speculators have become increasingly less involved as the market has traded lower. While there aren't many occurrences, it's noteworthy that similar instances in the past have typically led to a rally over the following week
(nine out of ten occurrences since 1998.) Each instance in which the Nasdaq/NYSE Volume Ratio initially fell five days in a row are noted in the table below, along with the performance of the NDX over the following week...
Nasdaq/NYSE Volume Ratio Down Five Consecutive Sessions
07/30/07... Nasdaq100 ??? one week later
08/31/05... Nasdaq100 +1.0% one week later
06/14/05... Nasdaq100 +0.8% one week later
12/17/03... Nasdaq100 +3.1% one week later
09/30/03... Nasdaq100 +6.8% one week later
02/07/03... Nasdaq100 +2.6% one week later
08/03/01... Nasdaq100 -6.3% one week later
06/15/01... Nasdaq100 +1.5% one week later
08/10/00... Nasdaq100 +6.6% one week later
01/04/99... Nasdaq100 +7.9% one week later
12/15/98... Nasdaq100 +6.3% one week later
While it's hard to make a convincing case out of only ten occurrences, this setup appears at a time when other short/intermediate-term indications are also pointing higher. Specifically, the three-week buy setup triggered by the spike in new 52-week lows last Thursday, as well as the short-term bullish setups on the board related to the recent string of 10%+ up days for the VIX/VXO.
By Rainsford Yang
Sunday, July 29th 2007 9:30pm ET
Last week's program trading report reveals that only 28.2% of total program volume was
executed as principal, for member firms' own accounts. That's the lowest reading in years, reinforcing the fact that principal program trading remains in a persistent downtrend (see long-term chart.) While it's been gradually declining for the last two years, it really took a nosedive beginning in June. That was a heads-up that institutional investors were pulling in their horns.
Stocks closed sharply lower Friday, due in large part to a late-session swoon as traders pulled bids ahead of what some fear will turn into a 'Black Monday' crash scenario. This past week's drubbing was certainly severe, with the S&P500 ending down nearly 5% and the Russell taking a 7% hit. The small cap selloff was so severe that it completely wiped out the gains for the year, with the RUT now trading in year-to-date negative territory. Still, as I mentioned in Thursday's commentary, most indications suggest stocks have already experienced the majority of the washout, indicating the market will most likely begin the process of putting in an intermediate-term bottom.
Just over 2.2 billion shares traded on the
NYSE Friday. While that's certainly a healthy amount of volume, it wasn't extreme, which means the 'crash warning' indicator discussed in last Thursday's column wasn't triggered. That's one positive development.
Another positive is that the number of new 52-week lows fell to less than 400 issues on Friday, less than half of Thursday's 800+ figure. This despite the fact that the S&P500 traded below Thursday's lows around mid-day Friday and again at the close. That tells you that unlike the S&P, many stocks were in the process of stabilizing Friday and holding above Thursday's lows, which could in turn set the stage for a rebound early this week.
Also worth noting is that the Nasdaq100 cash index (NDX) managed to form an 'inside day' Friday despite the general shellacking in the broad market and 2:1 negative breadth on the NASDAQ exchange. Normally you'll see a break of the previous day's low on a 2:1 negative breadth session. When the NDX manages to hold the prior day's low despite lopsided breadth, it typically leads to a short-term rally. Over the last fifteen years, there have only been nine cases in which the NDX posted an inside day on a 2:1 negative breadth session. In all but one case the NDX was trading at a higher level three sessions later...
Nasdaq Breadth 2:1 Negative & Inside Day
07/27/07... NDX ??? three sessions later
06/22/07... NDX +0.6% three sessions later
03/02/07... NDX +0.6% three sessions later
01/05/07... NDX +1.7% three sessions later
08/11/06... NDX +5.5% three sessions later
10/18/05... NDX +1.8% three sessions later
02/24/03... NDX +0.1% three sessions later
01/30/03... NDX -1.4% three sessions later
10/09/02... NDX +11.2% three sessions later
09/20/01... NDX +2.0% three sessions later
The S&P100 Volatility Index (VXO) surged 13% Friday to close just over the 25 level, its highest close since 2003. Friday's jump in volatility comes on the heels of a 20% jump on Thursday, which makes only the second time this year we've seen back-to-back gains of 10% or more for the VXO. Historically, gains of this magnitude in consecutive sessions indicates an unsustainable level of fear, which from a contrarian standpoint has positive implications for the short-term. Since 1990, the market has had a good record (19/21) of staging a short-term rally over the next 3-5 days as the market works off some of the excess pessimism...
VXO Rallies 10% Two Consecutive Sessions
07/27/07... OEX ???
06/07/07... OEX +0.1% three days later
11/27/06... OEX +1.1% three days later
07/13/06... OEX +0.9% five days later
06/13/06... OEX +2.2% three days later
04/14/05... OEX -0.2% five days later
08/06/04... OEX +0.9% three days later
03/11/04... OEX +0.3% three days later
01/27/03... OEX +1.5% five days later
03/12/01... OEX -0.6% five days later
10/12/00... OEX +1.1% three days later
05/03/00... OEX +0.3% three days later
10/13/99... OEX +1.2% five days later
01/12/99... OEX +1.5% five days later
10/01/98... OEX +0.3% three days later
12/11/97... OEX +1.3% three days later
03/31/97... OEX +0.6% five days later
07/23/96... OEX +1.7% three days later
01/10/96... OEX +0.4% three days later
11/04/93... OEX +0.5% three days later
02/07/91... OEX +2.3% three days later
08/06/90... OEX +1.6% three days later
From a longer-term perspective, it's noteworthy that the 10-day moving average
of advancing volume minus declining volume on the NYSE is near record low territory. It closed Friday at -778 million, the second-lowest reading ever. That means over the last two weeks, downside volume has been running an average of 778 million shares greater than advancing volume. The lowest reading on record was just under -800 million in July 2002 (at the ultimate market bottom), while the third lowest occurred in the aftermath of September 11th 2001.
Additionally, last Thursday's selloff marked the third time in just the past five sessions that breadth was extremely lopsided in favor of decliners (by more than a 3:1 margin.) Finding a similar cluster of 3:1 negative breadth sessions in such a short time frame is difficult, but if we loosen the parameters a bit, a longer-term bullish pattern emerges. The tables below note the S&P's performance whenever three 3:1 negative breadth sessions have appeared within an eight-day time frame (since the '87 crash.) The first table highlights the S&P's performance one month after the setup, while the second table highlights the market's performance three months later...
Three 3:1 Negative Breadth Days in Eight Sessions
07/26/07... S&P500 ??? one month later
06/12/07... S&P500 +1.7% one month later
03/05/07... S&P500 +3.7% one month later
06/13/06... S&P500 +2.9% one month later
05/17/06... S&P500 -1.1% one month later
05/07/04... S&P500 +3.8% one month later
04/20/04... S&P500 -2.4% one month later
07/23/02... S&P500 +17.5% one month later
09/20/01... S&P500 +8.5% one month later
08/31/98... S&P500 +9.6% one month later
10/27/97... S&P500 +8.0% one month later
07/15/96... S&P500 +5.7% one month later
06/24/94... S&P500 +2.6% one month later
03/30/94... S&P500 +1.2% one month later
10/11/90... S&P500 +4.1% one month later
08/21/90... S&P500 -1.6% one month later
11/16/88... S&P500 +4.0% one month later
08/15/88... S&P500 +3.4% one month later
12/04/87... S&P500 +15.5% one month later
Three 3:1 Negative Breadth Days in Eight Sessions
07/26/07... S&P500 ??? three months later
06/12/07... S&P500 ??? three months later
03/05/07... S&P500 +11.4% three months later
06/13/06... S&P500 +5.7% three months later
05/17/06... S&P500 -0.3% three months later
05/07/04... S&P500 -0.0% three months later
04/20/04... S&P500 -1.5% three months later
07/23/02... S&P500 +7.8% three months later
09/20/01... S&P500 +14.1% three months later
08/31/98... S&P500 +23.6% three months later
10/27/97... S&P500 +9.2% three months later
07/15/96... S&P500 +11.2% three months later
06/24/94... S&P500 +4.6% three months later
03/30/94... S&P500 +0.4% three months later
10/11/90... S&P500 +6.6% three months later
08/21/90... S&P500 -0.5% three months later
11/16/88... S&P500 +10.9% three months later
08/15/88... S&P500 +6.4% three months later
12/04/87... S&P500 +19.7% three months later
The three-month outlook is particularly interesting.
There have been seventeen completed signals, and the most noteworthy fact is that the market's longer-term downside potential has been quite limited following such a cluster of 3:1 negative breadth sessions. Out of seventeen signals, only one led to more than a 1% loss for the S&P three months later, and that was only a 1.5% loss. On the other hand, the average gain following this setup has been approximately 10%. Accordingly, this tends to reinforce the outlook that the market will remain range-bound for the foreseeable future, most likely between SPX 1450-1550. Just as the market overshot on the upside in mid-July, it's most likely overshooting on the downside presently.
Archived commentaries
DISCLAIMER
COMMENTS, DATA AND TRADING SIGNALS HEREIN ARE FOR INFORMATIONAL PURPOSES ONLY AND ARE NOT RECOMMENDATIONS TO BUY OR SELL. ALL INFORMATION
PRESENTED IS BELIEVED TO BE ACCURATE BUT IS NOT GUARANTEED.
COPYRIGHT NOTICE
COPYRIGHT 2007 ASTRIKOS LLC. THIS PUBLICATION IS FOR THE BENEFIT OF SUBSCRIBERS ONLY AND IS NOT TO BE SUMMARIZED, REPRODUCED, OR REBROADCAST IN ANY FASHION WITHOUT OUR WRITTEN PERMISSION.
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