When Volatility Increases in the Face of a Lopsided Positive Breadth Session
By
Rennie on Tuesday, January 29th, 2008 at 11:45 pm
From my October 30th, 2007 commentary… “This tendency remains consistent
throughout all 120 FOMC announcements since the beginning of 1993. Invariably,
the VXO will trend sideways or head convincingly lower off the open. In only
seven cases, or about 6% of the time, did the VXO close up 5% or more from its
opening print. Rarely has the VXO managed any substantial gains because the
market has already priced in the potential for stepped-up volatility prior to
the actual Fed announcement. It’s only when the VXO gains 5% or more (from the
open) that it reflects a market caught off guard by the Fed’s announcement.
Not surprisingly, these cases typically led to a rough period for stocks over
the next two months, as the table below illustrates…
VXO +5% or More from Open on Fed Day
12/11/07… VXO +12.0%… S&P ??? two months later (ends 2/8)
09/20/05… VXO +6.0%… S&P +0.6% two months later
03/22/05… VXO +5.9%… S&P +1.2% two months later
01/28/04… VXO +12.1%… S&P -1.7% two months later
10/03/00… VXO +4.6%… S&P -5.9% two months later
02/05/97… VXO +4.9%… S&P -2.6% two months later
02/04/94… VXO +42.8%… S&P -4.6% two months later
09/21/93… VXO +8.3%… S&P +3.0% two months later
The sharp rise in volatility at the last FOMC meeting on December 11th ended
up being a good early warning indicator, so we’ll certainly want to see if the
VXO falls back into its usual pattern of trading lower off the open this time
around.
The S&P500 closed up 0.6% Tuesday at 1362.30, a strong session on the heels of
Monday’s lopsided positive breadth. As I noted at the end of Monday’s column,
when the S&P manages a gain of more than 0.5% immediately following a 3:1
positive breadth session, it’s a positive sign for the intermediate-term. In
only one case out of the last 24 was the S&P down more than 1% three weeks
later.
On an intraday basis, keep in mind that the short-term bullish ‘pre-FOMC’
seasonal setup is in effect until 2pm ET Wednesday. See my December 10th
column for the recent track record.
Short-term, we did see an ’80/60′ setup triggered Tuesday as advancing volume
accounted for over 60% of total NYSE volume. When a 60%+ up volume session
immediately follows an 80% up volume session (as we saw Monday), it’s
historically preceded further strength over the short-term (see track record).
This past year was unusual, however, in that this setup only batted 50%
accurate (compared with 80% over the prior decade), with each of the last four
signals failing to lead to further strength.
It’s noteworthy that advancers outnumbered decliners by more than a 2:1 margin
Tuesday. Since 1990, there have only been 19 separate instances in which NYSE
breadth closed 2:1 positive immediately following a 3:1 positive session (as
we saw Monday). In every case but two the S&P closed at a higher level three
sessions later…
2:1 Pos Breadth Following 3:1 Pos Breadth
01/29/08… S&P500 ??? three sessions later
09/04/07… S&P500 -2.4% three sessions later
03/20/07… S&P500 +1.8% three sessions later
10/05/06… S&P500 +0.0% three sessions later
09/13/06… S&P500 +0.2% three sessions later
08/16/06… S&P500 +0.2% three sessions later
07/25/06… S&P500 +0.8% three sessions later
06/30/06… S&P500 +0.3% three sessions later
05/26/06… S&P500 +0.4% three sessions later
01/04/06… S&P500 +1.3% three sessions later
07/11/05… S&P500 +0.6% three sessions later
02/01/05… S&P500 +1.2% three sessions later
11/04/04… S&P500 +0.2% three sessions later
10/16/98… S&P500 +1.3% three sessions later
05/05/97… S&P500 -1.2% three sessions later
08/02/96… S&P500 +0.3% three sessions later
07/29/92… S&P500 +0.7% three sessions later
12/31/91… S&P500 +0.2% three sessions later
12/24/91… S&P500 +4.0% three sessions later
02/05/91… S&P500 +2.3% three sessions later
One development does call into question the market’s upside potential on
Wednesday. Despite breadth closing 2:1 positive, the OEX Volatility Index
(VXO) closed higher Tuesday. When volatility increases in the face of a
lopsided positive breadth session, the market typically struggles to post more
than modest gains the following session. Out of the last 30 occurrences, only
two led to an S&P up more than 0.5% the next day…
Breadth 2:1 Positive, VXO Up
01/29/08… S&P ???
08/08/07… S&P -3.0% next day
04/25/07… S&P -0.1% next day
10/16/06… S&P -0.4% next day
10/05/06… S&P -0.3% next day
06/30/06… S&P +0.8% next day (*)
01/04/06… S&P +0.0% next day
07/28/05… S&P -0.8% next day
06/16/05… S&P +0.5% next day
05/27/05… S&P -0.6% next day
12/28/04… S&P -0.0% next day
12/13/04… S&P +0.4% next day
11/12/04… S&P -0.0% next day
11/04/04… S&P +0.4% next day
03/05/04… S&P -0.8% next day
12/18/03… S&P -0.1% next day
10/27/03… S&P +1.5% next day (*)
10/13/03… S&P +0.4% next day
09/08/03… S&P -0.8% next day
09/02/03… S&P +0.4% next day
07/07/03… S&P +0.3% next day
06/04/03… S&P +0.4% next day
05/27/03… S&P +0.2% next day
05/06/03… S&P -0.5% next day
03/17/03… S&P +0.4% next day
11/27/02… S&P -0.3% next day
11/06/02… S&P -2.3% next day
03/06/02… S&P -0.5% next day
07/03/00… S&P -1.6% next day
10/29/99… S&P -0.7% next day
04/16/99… S&P -2.2% next day
When Volatility Increases in the Face of a Lopsided Positive Breadth Session
By Rennie on Tuesday, January 29th, 2008 at 11:45 pmFrom my October 30th, 2007 commentary… “This tendency remains consistent
throughout all 120 FOMC announcements since the beginning of 1993. Invariably,
the VXO will trend sideways or head convincingly lower off the open. In only
seven cases, or about 6% of the time, did the VXO close up 5% or more from its
opening print. Rarely has the VXO managed any substantial gains because the
market has already priced in the potential for stepped-up volatility prior to
the actual Fed announcement. It’s only when the VXO gains 5% or more (from the
open) that it reflects a market caught off guard by the Fed’s announcement.
Not surprisingly, these cases typically led to a rough period for stocks over
the next two months, as the table below illustrates…
VXO +5% or More from Open on Fed Day
12/11/07… VXO +12.0%… S&P ??? two months later (ends 2/8)
09/20/05… VXO +6.0%… S&P +0.6% two months later
03/22/05… VXO +5.9%… S&P +1.2% two months later
01/28/04… VXO +12.1%… S&P -1.7% two months later
10/03/00… VXO +4.6%… S&P -5.9% two months later
02/05/97… VXO +4.9%… S&P -2.6% two months later
02/04/94… VXO +42.8%… S&P -4.6% two months later
09/21/93… VXO +8.3%… S&P +3.0% two months later
The sharp rise in volatility at the last FOMC meeting on December 11th ended
up being a good early warning indicator, so we’ll certainly want to see if the
VXO falls back into its usual pattern of trading lower off the open this time
around.
The S&P500 closed up 0.6% Tuesday at 1362.30, a strong session on the heels of
Monday’s lopsided positive breadth. As I noted at the end of Monday’s column,
when the S&P manages a gain of more than 0.5% immediately following a 3:1
positive breadth session, it’s a positive sign for the intermediate-term. In
only one case out of the last 24 was the S&P down more than 1% three weeks
later.
On an intraday basis, keep in mind that the short-term bullish ‘pre-FOMC’
seasonal setup is in effect until 2pm ET Wednesday. See my December 10th
column for the recent track record.
Short-term, we did see an ’80/60′ setup triggered Tuesday as advancing volume
accounted for over 60% of total NYSE volume. When a 60%+ up volume session
immediately follows an 80% up volume session (as we saw Monday), it’s
historically preceded further strength over the short-term (see track record).
This past year was unusual, however, in that this setup only batted 50%
accurate (compared with 80% over the prior decade), with each of the last four
signals failing to lead to further strength.
It’s noteworthy that advancers outnumbered decliners by more than a 2:1 margin
Tuesday. Since 1990, there have only been 19 separate instances in which NYSE
breadth closed 2:1 positive immediately following a 3:1 positive session (as
we saw Monday). In every case but two the S&P closed at a higher level three
sessions later…
2:1 Pos Breadth Following 3:1 Pos Breadth
01/29/08… S&P500 ??? three sessions later
09/04/07… S&P500 -2.4% three sessions later
03/20/07… S&P500 +1.8% three sessions later
10/05/06… S&P500 +0.0% three sessions later
09/13/06… S&P500 +0.2% three sessions later
08/16/06… S&P500 +0.2% three sessions later
07/25/06… S&P500 +0.8% three sessions later
06/30/06… S&P500 +0.3% three sessions later
05/26/06… S&P500 +0.4% three sessions later
01/04/06… S&P500 +1.3% three sessions later
07/11/05… S&P500 +0.6% three sessions later
02/01/05… S&P500 +1.2% three sessions later
11/04/04… S&P500 +0.2% three sessions later
10/16/98… S&P500 +1.3% three sessions later
05/05/97… S&P500 -1.2% three sessions later
08/02/96… S&P500 +0.3% three sessions later
07/29/92… S&P500 +0.7% three sessions later
12/31/91… S&P500 +0.2% three sessions later
12/24/91… S&P500 +4.0% three sessions later
02/05/91… S&P500 +2.3% three sessions later
One development does call into question the market’s upside potential on
Wednesday. Despite breadth closing 2:1 positive, the OEX Volatility Index
(VXO) closed higher Tuesday. When volatility increases in the face of a
lopsided positive breadth session, the market typically struggles to post more
than modest gains the following session. Out of the last 30 occurrences, only
two led to an S&P up more than 0.5% the next day…
Breadth 2:1 Positive, VXO Up
01/29/08… S&P ???
08/08/07… S&P -3.0% next day
04/25/07… S&P -0.1% next day
10/16/06… S&P -0.4% next day
10/05/06… S&P -0.3% next day
06/30/06… S&P +0.8% next day (*)
01/04/06… S&P +0.0% next day
07/28/05… S&P -0.8% next day
06/16/05… S&P +0.5% next day
05/27/05… S&P -0.6% next day
12/28/04… S&P -0.0% next day
12/13/04… S&P +0.4% next day
11/12/04… S&P -0.0% next day
11/04/04… S&P +0.4% next day
03/05/04… S&P -0.8% next day
12/18/03… S&P -0.1% next day
10/27/03… S&P +1.5% next day (*)
10/13/03… S&P +0.4% next day
09/08/03… S&P -0.8% next day
09/02/03… S&P +0.4% next day
07/07/03… S&P +0.3% next day
06/04/03… S&P +0.4% next day
05/27/03… S&P +0.2% next day
05/06/03… S&P -0.5% next day
03/17/03… S&P +0.4% next day
11/27/02… S&P -0.3% next day
11/06/02… S&P -2.3% next day
03/06/02… S&P -0.5% next day
07/03/00… S&P -1.6% next day
10/29/99… S&P -0.7% next day
04/16/99… S&P -2.2% next day