BKX Rally Post-FOMC Not Necessarily a Positive Sign, Plus a Look at 80% Up Volume Days on the Naz

Stocks posted solid gains Thursday, with buyers focused primarily in tech. The
Nasdaq/NYSE Volume Ratio closed at a high 1.66, the third highest reading in
the last three months, and the CBOE equity put/call ratio closed at a low .58,
its lowest reading in three months. The former suggests excessive speculative
participation, the latter suggests relative complacency.

The Nasdaq surged over 3% Thursday on better than 2:1 positive breadth and
better than 80% up volume. That leaves the Nasdaq looking a bit overextended
short-term. Typically there's limited upside potential the day after an 80% up
volume day on the NASDAQ exchange. The last thirty occurrences are listed in
the table below...

80%+ Up Volume day on the NASDAQ
05/01/08... NDX ??? next session
04/18/08... NDX +0.7% next session (*)
04/16/08... NDX -0.3% next session
04/01/08... NDX -0.4% next session
03/20/08... NDX +3.6% next session (*)
03/18/08... NDX -2.6% next session
03/11/08... NDX -0.3% next session
02/25/08... NDX +0.3% next session
02/13/08... NDX -1.9% next session
11/28/07... NDX +0.3% next session
11/23/07... NDX -2.0% next session
11/13/07... NDX -1.4% next session
10/05/07... NDX +0.6% next session
09/18/07... NDX +0.3% next session
09/11/07... NDX -0.0% next session
08/31/07... NDX +1.6% next session (*)
08/29/07... NDX +0.5% next session
08/24/07... NDX -0.7% next session
08/17/07... NDX +0.2% next session
07/12/07... NDX +0.6% next session
06/27/07... NDX -0.1% next session
06/08/07... NDX -0.2% next session
05/02/07... NDX +0.3% next session
03/21/07... NDX -0.4% next session
03/06/07... NDX -0.4% next session
01/24/07... NDX -1.4% next session
12/04/06... NDX +0.3% next session
11/06/06... NDX +0.5% next session
10/12/06... NDX +0.5% next session
10/04/06... NDX +0.5% next session
09/25/06... NDX +0.5% next session

Note that in only three cases out of the last thirty occurrences did the
Nasdaq gain more than 0.6% the following session. This could be a particularly
interesting setup to keep in mind should the market gap up Friday.

Hard not to notice the 4%+ rally in the banking sector Thursday, particularly
on the heels of yesterday's FOMC announcement. While this could be interpreted
as a bullish reaction to the Fed, it's interesting that similar action over
the past decade has been more of a head-fake than the start of a sustained
rally. Out of the eighteen instances since 1998 in which the BKX closed up 1%
or more immediately following an 'FOMC Day', the sector typically struggled
over the next week. Two-thirds of the time the BKX was lower five trading days
later, and in only two cases did the BKX manage a gain of more than 1.5%. It
lost more than 1.5% eight times...

BKX +1% FOllowing FOMC Announcement Day
05/01/08... BKX ???
01/31/08... BKX -4.5% one week later
08/08/07... BKX -7.9% one week later
05/04/05... BKX -1.4% one week later
03/17/04... BKX -3.2% one week later
06/26/03... BKX -0.1% one week later
03/19/03... BKX -0.4% one week later
09/25/02... BKX +0.5% one week later
08/14/02... BKX +2.3% one week later (*)
06/27/02... BKX +0.4% one week later
05/08/02... BKX +1.5% one week later
01/31/02... BKX -6.5% one week later
06/28/01... BKX -2.1% one week later
05/16/01... BKX +1.4% one week later
03/22/00... BKX +1.7% one week later (*)
10/06/99... BKX -5.7% one week later
05/19/99... BKX -4.2% one week later
12/23/98... BKX -0.7% one week later
05/20/98... BKX -3.2% one week later

NYSE Cumulative TICK closed at a high +84,408, one of the highest readings
we've seen in recent months. That's a potentially positive sign for the
intermediate-term, as I recently discussed back on April 16th when the
Cumulative TICK did hit a two-month high (that did not occur Thursday.)

But two other gauges of the market's internal health suggest caution is
warranted. New 52-week highs on the NYSE continue to lag well behind the mid-
April peak despite the second series of higher highs for the S&P. That signals
fewer and fewer stocks are participating in the current advance, leaving the
market vulnerable to a reversal.

In addition, there were a surprising number of declining issues on the big
board Thursday, leading to a relatively tame 2.36 advance/decline ratio at the
close. In the last few years, big up days for the S&P500 in excess of 1.5%
have invariably coincided with 3:1 or better positive breadth. Consider that
since 2004, there have been 39 sessions in which the S&P closed up 1.5% or
more. In only two cases (including Thursday) did the NYSE advance/decline
ratio close below 2.50, a subtle clue that today's breadth was relatively
weak. While there are no specific sell setups currently on the board, I'd be
inclined to fade an upside breakout that occurs on tepid breadth, lagging new
52-week highs and heavy speculative participation.

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

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