S&P Futures Post a Solid Loss on the Heels of Tuesday’s Unfilled Downside Gap

Stock indexes settled sharply lower Wednesday, following through on the short-
term bearish implications of 'six higher highs' outlined in Monday's column.
Banking stocks led the decline, with the BKX ending down over 2%, which is
fairly unusual given that the bond market also posted a solid down day
(meaning an uptick in rates). As a means of illustration, consider that since
1997 there have been a total of 240 sessions in which the Philadelphia Bank
Index (BKX) lost 2% or more in a single session. In only 35 of those 240
cases, or 15% of the time did the Ten-year Yield (TNX) gain 1% or more
(meaning a solid drop in treasury futures). When the bank sector and the bond
market both post a solid down day, it's generally a short-term negative sign
for the stock market in general. The table below lists each of the last thirty
instances in which the BKX fell 2% or more and the TNX gained 1% or more in
the same session. Note that in 25 out of 30 cases, or 83% of the time, the S&P
posted a subsequently lower close 1-2 days later. That's significantly higher
than the 61% at-any-time odds of a lower SPX close (below today's settlement)
within two days.

Bank Index -2%, Bonds Down (TNX +1%)
05/21/08... ???
05/13/08... No lower SPX close within two sessions
03/27/08... Lower SPX close one session later
02/14/08... Lower SPX close two sessions later
02/04/08... Lower SPX close one session later
12/14/07... Lower SPX close one session later
05/07/04... Lower SPX close one session later
04/13/04... Lower SPX close one session later
06/20/02... Lower SPX close one session later
09/20/01... Lower SPX close one session later
01/12/01... No lower SPX close within two sessions
06/21/00... Lower SPX close one session later
04/27/00... Lower SPX close one session later
02/09/00... Lower SPX close two sessions later
01/18/00... Lower SPX close two sessions later
01/03/00... Lower SPX close one session later
11/29/99... Lower SPX close one session later
11/17/99... No lower SPX close within two sessions
09/27/99... Lower SPX close one session later
08/30/99... Lower SPX close one session later
08/06/99... Lower SPX close one session later
07/29/99... Lower SPX close one session later
05/27/99... No lower SPX close within two sessions
05/14/99... Lower SPX close two sessions later
05/06/99... No lower SPX close within two sessions
02/24/99... Lower SPX close one session later
02/04/99... Lower SPX close one session later
02/01/99... Lower SPX close one session later
10/07/98... Lower SPX close one session later
04/27/98... Lower SPX close one session later
08/08/97... Lower SPX close two sessions later

Also suggesting the potential for further downside short-term is the fact that
S&P futures ended down over 1% on the heels of Tuesday's unfilled downside
gap. Historically, an outsized selloff immediately following a downside gap
generally leads to a bit more follow-through in the next 1-2 sessions. This is
a relatively rare phenomenon. Since 1990, there have been 133 sessions in
which S&P futures left a downside gap unfilled. In only 15 cases, or 11% of
the time did the S&Ps proceed to drop over 1% the following day. When this has
occurred, there's typically further downside in store, either immediately or
after a short-term period of consolidation. Every instance since 1990 in which
the front-month S&P contract closed down over 1% following an unfilled
downside gap is listed in the table below...

S&P Futures -1% following Unfilled Downside Gap
05/21/08... ???
11/18/03... Lower S&P close two sessions later
01/21/03... Lower S&P close one session later
09/24/02... Lower S&P close four sessions later
07/22/02... Lower S&P close one session later
03/12/01... Lower S&P close two sessions later
02/20/01... Lower S&P close one session later
09/15/99... Lower S&P close four sessions later
07/30/99... Lower S&P close two sessions later
05/06/98... Lower S&P close one session later
10/24/97... Lower S&P close one session later
12/12/96... Lower S&P close two sessions later
05/09/94... Lower S&P close two sessions later
03/25/94... Lower S&P close two sessions later
10/10/90... Lower S&P close one session later
08/22/90... Lower S&P close one session later

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

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