Why a Rally on Wednesday will most likely Represent a Short-term Sell, Plus Reason to Watch the VXO

The NDX bucked the trend of the broad market and closed higher Tuesday despite
the fact that declining issues outnumbered advancers on the NASDAQ exchange.
That makes two days in a row the NDX has managed to rally in the face of
deteriorating breadth. While not a sell in itself, this is a sign that fewer
and fewer stocks are participating in the advance. Should we see another
higher close on Wednesday, it will most likely represent a short-term sell. In
the table below I've listed the last thirty instances in which the NDX closed
higher two consecutive days, the NASDAQ advance/decline ratio closed lower
both days and the NDX rallied the following session...

Naz Up Two, A/D Down Two + Higher Close Next Day
01/31/08... Nasdaq100 +0.8% next day (*)
10/31/07... Nasdaq100 -1.9% next day
07/06/07... Nasdaq100 +0.0% next day
05/31/07... Nasdaq100 +0.0% next day
05/09/07... Nasdaq100 -1.6% next day
09/15/06... Nasdaq100 -0.0% next day
08/18/06... Nasdaq100 -1.0% next day
01/11/06... Nasdaq100 -0.6% next day
11/25/05... Nasdaq100 -1.0% next day
11/07/05... Nasdaq100 -0.1% next day
07/13/05... Nasdaq100 +1.0% next day (*)
05/23/05... Nasdaq100 +0.3% next day
05/04/05... Nasdaq100 -0.1% next day
12/06/04... Nasdaq100 -1.9% next day
11/08/04... Nasdaq100 -0.0% next day
10/06/04... Nasdaq100 -1.3% next day
09/14/04... Nasdaq100 -1.3% next day
05/28/04... Nasdaq100 +0.2% next day
09/02/03... Nasdaq100 -0.1% next day
08/21/03... Nasdaq100 -0.8% next day
05/30/03... Nasdaq100 -1.1% next day
04/17/03... Nasdaq100 -0.2% next day
11/06/02... Nasdaq100 -3.8% next day
05/17/02... Nasdaq100 -2.5% next day
03/06/02... Nasdaq100 -0.9% next day
11/05/01... Nasdaq100 +2.9% next day (*)
10/08/01... Nasdaq100 -2.7% next day
05/02/01... Nasdaq100 -4.3% next day
08/24/00... Nasdaq100 -0.5% next day
03/27/00... Nasdaq100 -2.6% next day

Note the general theme of limited upside potential. The Nasdaq closed lower
the following day 77% of the time, well above the 48% at-any-time odds. In
only three cases did the NDX gain 0.5% or more, while it lost 0.5% or more
seventeen times.

With the Fed announcement on tap, we're likely to see a contraction in
volatility. The table below highlights the VXO's performance from open to
close during each of the last thirty regularly scheduled Fed days...

Volatility Performance on FOMC Announcement Day
04/30/08... VXO ??? from open to close
03/18/08... VXO -13.0% from open to close
01/30/08... VXO -4.1% from open to close
12/11/07... VXO +12.0% from open to close (*)
10/31/07... VXO -13.3% from open to close
09/18/07... VXO -21.3% from open to close
08/07/07... VXO -6.2% from open to close
06/28/07... VXO -3.0% from open to close
05/09/07... VXO -8.6% from open to close
03/21/07... VXO -12.0% from open to close
01/31/07... VXO -8.4% from open to close
12/12/06... VXO -3.3% from open to close
10/25/06... VXO -1.6% from open to close
09/20/06... VXO -1.4% from open to close
08/08/06... VXO -2.0% from open to close
06/29/06... VXO -17.5% from open to close
05/10/06... VXO -1.9% from open to close
03/28/06... VXO +0.6% from open to close
01/31/06... VOX +1.4% from open to close
12/13/05... VXO -9.3% from open to close
11/01/05... VXO -2.7% from open to close
09/20/05... VXO +6.0% from open to close (*)
08/09/05... VXO -3.3% from open to close
06/30/05... VXO +1.3% from open to close
05/03/05... VXO -1.6% from open to close
03/22/05... VXO +5.9% from open to close (*)
02/02/05... VXO -5.2% from open to close
12/14/04... VXO -1.4% from open to close
11/10/04... VXO -0.7% from open to close
09/21/04... VXO -9.1% from open to close
08/10/04... VXO -7.9% from open to close
06/30/04... VXO -9.9% from open to close

The VXO has had a clear tendency to close below the open on an FOMC day. In
only three cases out of the last thirty did the volatility index gain 5% or
more, while it lost 5% or more thirteen times. This tendency remains
consistent throughout all 124 FOMC announcements since the beginning of 1993.
Invariably, the VXO will trend sideways or head convincingly lower off the
open. In only 8 cases out of 124 did the index close up 5% or more from its
opening. 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 have 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 -9.9% two months later
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

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

 Print This Post