Market Tells Evening Edition (January 6th, 2008)

Stock indexes closed sharply lower Friday in one-way trading, with over 500
issues hitting new 52-week lows. Breadth settled better than 3:1 in favor of
decliners. Downside volume accounted for over 90% of total big board volume,
the fourteenth 90% down volume session in just the past year. If that sounds
unusual, that’s because it is. Prior to last year, we’ve never seen more than
six such lopsided volume sessions in a one-year time span. I’ll be discussing
this further in Monday evening’s commentary.

Interesting to note that even with Friday’s lopsided session, the cumulative
breadth line is holding just above its December lows, creating a potentially
positive divergence.

I’d also note that the TICKscore indicator closed at a relatively tame -13 on
Friday. This indicator reflects institutional buying/selling pressure, and
it’s noteworthy that selling pressure was significantly heavier prior to the
Christmas holiday. Since the holiday break, we’ve still seen better selling
pressure, but it hasn’t been as intense. Notice that the cumulative TICKscore
is putting in what could be a higher low, the first time in quite a while that
the cumulative line isn’t breaking down along with the market.

A number of short-term setups suggest the likelihood of a bounce over the
near-term. The S&P100 Volatility Index (VXO) closed more than 10% above its
10-day moving average for a third consecutive session Friday. That triggers a
short-term buy setup that remains in effect until the VXO closes less than 10%
above its 10-day average. While this signal can be early, it generally does a
good job at identifying potential short-term bottoming periods. The last
thirty times this signal has been triggered are noted in the table below,
beginning with the date when the VXO closed 10% above its 10-day average for a
third consecutive session, and ending with the date when the VXO closed below
that threshold and the S&P’s performance in this time frame. Note that the S&P
was down more than 1% in only three cases out of thirty, while it gained 1% or
more sixteen times…

VXO >10% Above 10day Avg Three Days
01/04/08 – ??/??/??… S&P500 ???
11/09/07 – 11/13/07… S&P500 +1.9%
11/05/07 – 11/06/07… S&P500 +1.2%
08/16/07 – 08/17/07… S&P500 +2.5%
07/26/07 – 08/02/07… S&P500 -0.7%
06/26/07 – 06/27/07… S&P500 +0.9%
03/01/07 – 03/06/07… S&P500 -0.6%
07/17/06 – 07/19/06… S&P500 +2.1%
06/09/06 – 06/15/06… S&P500 +0.3%
05/19/06 – 05/25/06… S&P500 +0.5%
10/07/05 – 10/14/05… S&P500 -0.8%
04/18/05 – 04/19/05… S&P500 +0.6%
10/13/04 – 10/15/04… S&P500 -0.5%
08/09/04 – 08/10/04… S&P500 +1.3%
03/12/04 – 03/17/04… S&P500 +0.3%
09/26/03 – 09/29/03… S&P500 +1.0%
01/28/03 – 01/29/03… S&P500 +0.7%
09/05/02 – 09/06/02… S&P500 +1.7%
07/23/02 – 07/24/02… S&P500 +5.7%
07/12/02 – 07/17/02… S&P500 -1.7% (*)
02/06/02 – 02/08/02… S&P500 +1.2%
09/04/01 – 09/24/01… S&P500 -11.4% (*)
02/22/01 – 02/26/01… S&P500 +1.2%
10/12/00 – 10/16/00… S&P500 +3.4%
04/14/00 – 04/17/00… S&P500 +3.3%
07/26/99 – 07/27/99… S&P500 +1.1%
01/14/99 – 01/15/99… S&P500 +2.6%
10/02/98 – 10/09/98… S&P500 -1.8% (*)
08/31/98 – 09/08/98… S&P500 +6.9%
08/04/98 – 08/06/98… S&P500 +1.6%
07/23/98 – 07/30/98… S&P500 +0.3%

The 2-day RSI for the OEX closed under the 2.0 level on Friday, signaling
extreme oversold conditions. This suggests downside momentum is likely to
taper off in the coming 1-2 days as sellers back off and buyers gain the upper
hand. The table below highlights the last thirty instances in which the 2-day
RSI closed under 2, followed by the performance of the OEX until the RSI rose
back over 2.0. Note the impressive performance of the oscillator at timing
short-term bottoms in the market. Out of thirty signals over the past decade,
twenty-eight led to a higher OEX close by the time the 2-day RSI rose out of
extreme oversold territory, invariably within two days of the signal date.
This suggests the S&P is likely to bottom out and push higher over the near-
term…

OEX 2-day RSI Closes Under 2.0
01/04/08… OEX ???
02/27/07… OEX +0.6% one session later
02/12/07… OEX +0.7% one session later
06/13/06… OEX +0.6% one session later
06/24/05… OEX +0.7% two sessions later
03/22/05… OEX +0.1% one session later
01/04/05… OEX +0.1% two sessions later
03/10/04… OEX -0.5% two sessions later
01/22/03… OEX +1.1% one session later
09/03/02… OEX +1.8% one session later
07/23/02… OEX +5.9% one session later
06/03/02… OEX +0.3% one session later
04/26/02… OEX +0.0% two sessions later
04/09/02… OEX +1.2% one session later
09/20/01… OEX +2.4% two sessions later
06/18/01… OEX +0.4% one session later
02/23/01… OEX +2.1% one session later
11/10/00… OEX +1.5% two sessions later
10/11/00… OEX +0.7% two sessions later
09/26/00… OEX +0.2% one session later
09/15/00… OEX -0.3% two sessions later
04/14/00… OEX +4.2% one session later
01/24/00… OEX +1.1% one session later
01/04/00… OEX +0.3% one session later
08/04/99… OEX +1.0% one session later
07/26/99… OEX +1.2% one session later
08/31/98… OEX +4.2% one session later
07/23/98… OEX +0.4% one session later
01/09/98… OEX +1.4% one session later
10/27/97… OEX +5.8% one session later
10/17/97… OEX +1.2% one session later

Also noteworthy on a short-term basis is Friday’s high closing TRIN of 4.23.
Historically, one-day TRIN readings in excess of 3.0 have been a pretty good
indication that selling pressure is at a short-term exhaustion point. Out of
the past twenty-eight 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
01/04/08 TRIN 4.23… Next day S&P ???
10/19/07 TRIN 3.54… Next day S&P +0.4%
08/28/07 TRIN 3.23… Next day S&P +2.2%
08/03/07 TRIN 3.37… Next day S&P +2.4%
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% (*)

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

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