Market Once Again Fails to Bounce Following a 90% Down Volume Session

The Market Vane survey of commodity trading advisors came in below 50% for the
second week in a row last week, meaning more than half of CTAs polled are
maintaining a negative outlook on stocks. Recall that last week was the first
sub-50% reading in over four years, ending the long-term bullish signal
triggered in 2003. In what’s been a particularly volatile period over the past
decade, this survey has consistently proved itself to be a useful gauge of
professional investor sentiment.

Stock indexes ended the week on a decidedly uninspiring note. The S&P500 once
again failed to rebound on the heels of Thursday’s 90% down volume day and
settled down 0.6% at 1325, its fourth consecutive lower close. When the market
can’t bounce following a monstrously lopsided session, it’s not an encouraging
sign. Friday’s lower close triggered the same short-term bearish setup that
was triggered January 16th and discussed in Wednesday evening’s commentary.

Intermediate and long-term measures have yet to reach extreme oversold
territory. OEX closed under its lower bollinger band for a second consecutive
session Friday. Back in mid-November I noted that four consecutive closes
under the lower band typically signals the final stages of a washout, so this
will be something to watch for early this week. Other indicators I’m watching
are the New High-Low Index, which still hasn’t fallen below the 10% threshold,
and the 14-day RSI for the S&P500, which hasn’t dropped under the 25 level.
Both of these setups have a good record at identifying intermediate-term
bottoms.

Fed funds futures are pricing in better than 70% odds of a 3/4-point cut to
the Fed Funds target by the end of the month. However, it appears the optimal
time for the Fed to have acted has come and gone. Now, even an aggressive cut
may not produce the desired results given their reactive, rather than
proactive approach. As I mentioned Thursday when discussing the potential for
a “surprise” cut, “one has to wonder if they haven’t lost so much credibility
that it might be the Fed that’s ultimately the one surprised.” Based on the
overnight action in S&P futures (currently off a whopping 60 handles), the
pressure will certainly be on when trading resumes Tuesday.

Assuming for the moment that overnight losses stick and the S&P settles lower
Tuesday, it will represent the fifth consecutive down day. In recent times,
the S&P has had a noticeable tendency to reverse course and close higher after
five straight lower closes. The last thirty times this pattern occurred are
listed in the table below. Note that in only three cases, or about 10% of the
time, did the S&P post a meaningfully lower close after five down days…

S&P500 Closes Lower Five Consecutive Days
02/27/07… S&P500 +0.6% next session
03/24/04… S&P500 +1.7% next session
02/24/04… S&P500 +0.4% next session
01/22/03… S&P500 +1.0% next session
12/05/02… S&P500 +0.6% next session
09/03/02… S&P500 +1.8% next session
04/26/02… S&P500 -1.0% next session (*)
02/07/02… S&P500 +1.5% next session
09/21/01… S&P500 +3.9% next session
05/11/01… S&P500 +0.3% next session
02/23/01… S&P500 +1.8% next session
11/13/00… S&P500 +2.4% next session
10/12/00… S&P500 +3.3% next session
09/26/00… S&P500 -0.0% next session
05/23/00… S&P500 +1.8% next session
04/14/00… S&P500 +3.3% next session
10/15/99… S&P500 +0.5% next session
08/04/99… S&P500 +0.6% next session
04/19/99… S&P500 +1.3% next session
03/01/99… S&P500 -0.9% next session (*)
12/12/97… S&P500 +1.1% next session
12/16/96… S&P500 +0.7% next session
12/06/96… S&P500 +1.4% next session
06/14/96… S&P500 -0.1% next session
04/11/96… S&P500 +0.9% next session
02/20/96… S&P500 +1.2% next session
08/03/95… S&P500 +0.0% next session
11/23/94… S&P500 +0.5% next session
09/22/94… S&P500 -0.4% next session
03/29/94… S&P500 -1.5% next session (*)

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

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