High-volume Selloff a Short-term Negative Sign

Last week’s program trading report reveals that only 32.7% of total program
volume was executed as principal for member firms’ own accounts. From a long-
term perspective, it’s noteworthy that we’re not seeing the kind of elevated
program activity normally associated with major market bottoms. While
principal program trading has been on the decline for years, it really took a
dive in June of 2007 and hasn’t recovered since.

It was pretty clear things wouldn’t go well Thursday soon after Bernanke began
speaking. There would be no bold moves, no intermeeting rate cut (for now at
least). Instead, a plea for help? That’s not the kind of talk that inspires
confidence. While many expect the Fed to step in with a “surprise” cut Friday
morning (options expiration), one has to wonder if they haven’t lost so much
credibility that it might be the Fed that’s ultimately the one surprised.

NYSE TICK action was persistently positive during the recent six-day period
between January 9th – 16th, reflecting solid institutional buying. Yet when
the S&P sunk to new lows Wednesday and we were still seeing positive TICKscore
readings, it became apparent that perhaps what we were seeing was a market
unable to rally despite institutional buying. And if that were the case, it
would have particularly negative implications. After all, if that was the best
the market could do when institutions were buying, what would happen when they
shifted back to the sell side? Today’s session seemed to answer that question,
as institutional investors pounced on the 10am release of Bernanke’s speech
and sold aggressively. Our intraday TrendCatcher strategy triggered a sell
shortly thereafter, leading to the largest one-day profit since inception (28
S&P points). At the close, TICKscore settled at a low -43 as intraday NYSE
TICK action remained persistently bearish throughout the session. Cumulative
Adjusted TICK closed at -830. Breadth was 6:1 in favor of decliners, sending
the cumulative breadth line below all recent lows. Volume associated with
declining issues accounted for 90% of total big board volume, the second 90%
down volume session in just the last three days.

The CBOE Equity Put/Call Ratio closed at a high .99 Thursday as equity put
volume essentially matched equity call volume. That’s the third consecutive
session that the ratio has exceeded .80. Note from the long-term chart that
the 10-day moving average has now exceeded .80 as well, a fairly extreme
reading from a historical perspective. This is usually a sign that an
intermediate-term bottom is nearby, but it can be early.

Assuming for the moment the Fed doesn’t act Friday, there’s reason to be
cautious short-term. NYSE volume has increased the past three days in a row as
the S&P has shed over 5% in value. In recent years, three down days for the
S&P on successively greater NYSE volume has led to choppy conditions short-
term. In only three cases out of the last fifteen occurrences did the S&P
stage a meaningful rally over the next few sessions…

S&P500 Down Three on Increasing Volume
07/18/07… S&P500 -0.3% three sessions later
06/07/07… S&P500 +0.2% three sessions later
05/12/06… S&P500 -1.6% three sessions later
10/05/05… S&P500 -0.8% three sessions later
04/15/05… S&P500 -0.5% three sessions later
08/05/04… S&P500 -0.2% three sessions later
05/10/04… S&P500 +0.9% three sessions later
03/24/04… S&P500 +2.9% three sessions later
03/11/04… S&P500 +0.4% three sessions later
07/10/02… S&P500 -0.3% three sessions later
06/21/02… S&P500 -1.6% three sessions later
04/25/02… S&P500 -1.3% three sessions later
05/10/01… S&P500 -0.5% three sessions later
03/22/01… S&P500 +5.8% three sessions later
10/14/99… S&P500 -1.7% three sessions later

Categories : Archived EOD Commentary, End-of-Day Commentary

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