S&P Rallies, but Underperformance by the Bank Index a Short-term Negative Sign

It's readily apparent from the Investors Intelligence survey that newsletter
writers aren't very good at anticipating market direction. They're typically a
bullish bunch, making them much more reactionary when it comes to market
selloffs. Historically, it's only after a steep decline that the survey has
registered a bearish majority. By the time this occurs, it usually marks an
intermediate-term bottom (see this long-term chart for an illustration).
Unlike their smart money counterparts, this is a group you look to fade when
they turn negative on stocks.

We came awfully close to seeing a cross Wednesday morning when the latest
Investors Intelligence results were released. (We call it a 'cross' when the
bearish consensus crosses over the bullish consensus.) The bullish consensus
fell to 37%, while the bearish consensus rose to 36%, the closest survey since
June 2006. Should this trend continue and we see a bearish majority in the
next few weeks, it would trigger a contrarian buy signal with a three-week
horizon. Historically, the S&P has a good track record of moving higher in the
weeks following this setup. We didn't quite see one this week, but it's
noteworthy that we came close. Every cross since 1990 is noted in the table
below...

Investors Intelligence Bears Outnumber Bulls
10/11/02 Cross...S&P +7.9% three weeks later
08/09/02 Cross...S&P +0.8% three weeks later
07/19/02 Cross...S&P +7.3% three weeks later
09/21/01 Cross...S&P +13.0% three weeks later
09/25/98 Cross...S&P +1.1% three weeks later
09/04/98 Cross...S&P +7.3% three weeks later
08/29/97 Cross...S&P +5.7% three weeks later
04/11/97 Cross...S&P +10.2% three weeks later
08/02/96 Cross...S&P +0.7% three weeks later
11/03/95 Cross...S&P +1.6% three weeks later
04/15/94 Cross...S&P +0.4% three weeks later
02/18/94 Cross...S&P -0.3% three weeks later
11/05/93 Cross...S&P +0.8% three weeks later
05/21/93 Cross...S&P +0.3% three weeks later
10/09/92 Cross...S&P +4.0% three weeks later
12/27/91 Cross...S&P +3.1% three weeks later
11/29/91 Cross...S&P +3.2% three weeks later
08/10/90 Cross...S&P -3.9% three weeks later
04/27/90 Cross...S&P +7.8% three weeks later
01/26/90 Cross...S&P +2.1% three weeks later

The Nasdaq Volatility Index closed down 10% Wednesday at 25.35, settling below
its lower bollinger band in the process. Keep an eye out for a close below
25.67 on Thursday, as this would keep the VXN in statistically oversold
territory for a second consecutive session and trigger a short-term bearish
setup in the process.

While the S&P enjoyed a surprisingly strong session Wednesday, the
underperformance by the Bank Index was noteworthy. The BKX only managed a 0.6%
gain vs. a 1.4% gain for the S&P500. Looking back at times when the S&P closed
up 1% or more and doubled the performance of the BKX, it typically reversed
course and closed at a lower level within the next couple of days. The last
thirty occurrences are listed in the table below. Note that in 25 cases, or
83% of the time, the S&P closed below the setup day's settlement within two
sessions. That's much higher than the S&P's 62% at-any-time odds, indicating
significant underperformance by the bank sector on a solid up day has short-
term bearish implications...

SPX +1%, Doubles Performance of BKX
02/13/08... ???
01/14/08... Lower SPX close one session later
10/31/07... Lower SPX close one session later
08/24/07... Lower SPX close one session later
08/22/07... Lower SPX close one session later
03/06/07... Lower SPX close one session later
05/25/06... Lower SPX close two sessions later
04/21/05... Lower SPX close one session later
11/12/03... Lower SPX close one session later
05/09/03... No lower close within two sessions
04/10/02... Lower SPX close one session later
10/03/01... Lower SPX close one session later
08/24/01... Lower SPX close one session later
07/25/01... No lower close within two sessions
06/05/01... Lower SPX close one session later
05/21/01... Lower SPX close one session later
04/25/01... No lower close within two sessions
04/19/01... Lower SPX close one session later
04/17/01... No lower close within two sessions
01/18/01... Lower SPX close one session later
12/27/00... Lower SPX close two sessions later
11/14/00... Lower SPX close two sessions later
08/07/00... Lower SPX close two sessions later
06/13/00... No lower close within two sessions
05/05/00... Lower SPX close one session later
04/07/00... Lower SPX close one session later
03/09/00... Lower SPX close one session later
02/03/00... Lower SPX close one session later
01/10/00... Lower SPX close one session later
01/07/00... Lower SPX close two sessions later
11/18/99... Lower SPX close one session later

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

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