Week Starts on a Strong Note, but Short-term Sustainability is Questionable

It's interesting to note that Monday's 8% tumble by the VIX sent the VIX:VXV
ratio into market bearish territory (less than 0.90). As the CBOE states in a
paper on the VXV, when the "3-month VXV was higher than the 1-month VIX by
more than 10%, the average closing VIX level over the following 20 trading
days was, on average, higher by at least 5%. Moreover, this effect became more
pronounced as the slope of the term structure steepened" (as the ratio
declined further).

The fact that big board volume closed at another low for the year Monday
indicates the rally probably wasn't the start of a multi-day run. Typically, a
lopsided positive breadth day sees average to above-average volume, not multi-
month lows. When NYSE breadth has closed 2:1 positive and big board volume was
the lightest of the past month, the S&P has usually reversed course and posted
a subsequently lower close within the next couple of sessions. All occurrences
of this setup since 1995 are listed in the table below...

Breadth 2:1 positive, Volume Lightest of Past Month
05/12/08... ???
12/24/07... Lower S&P close two days later
11/23/07... Lower S&P close one day later
08/24/07... Lower S&P close one day later
05/25/07... No lower close within two days
12/26/06... No lower close within two days
07/03/06... Lower S&P close one day later
05/26/06... Lower S&P close one day later
05/27/05... Lower S&P close one day later
05/09/05... Lower S&P close one day later
11/24/04... Lower S&P close two days later
08/27/04... Lower S&P close one day later
02/06/04... Lower S&P close one day later
04/14/03... Lower S&P close two days later
02/18/03... Lower S&P close one day later
08/26/02... Lower S&P close one day later
07/05/02... Lower S&P close one day later
02/11/02... Lower S&P close one day later
11/23/01... Lower S&P close two days later
11/24/00... Lower S&P close two days later
08/11/00... No lower close within two days
07/03/00... Lower S&P close one day later
05/28/99... Lower S&P close one day later
07/03/97... Lower S&P close one day later

Also interesting to note that with breadth closing 2:1 positive on both the
NYSE and NASDAQ, upside volume (expressed as a percentage of total volume) was
higher on the NASDAQ. That's another sign that Monday probably didn't mark the
start of a multi-day run. The last thirty times in which breadth settled 2:1
positive on both exchanges and upside volume was greater on the NASDAQ (in
percentage terms) are listed in the table below. Note that the S&P posted a
subsequently lower close 2-3 sessions later in 24 out of 30 cases, or 80% of
the time, compared with 57% at-any-time odds...

2:1 Pos Breadth Both Exchanges, Greater Upside Volume on NASDAQ
05/12/08... ???
05/01/08... Lower S&P close two sessions later
04/18/08... Lower S&P close two sessions later
03/24/08... Lower S&P close two sessions later
06/27/07... Lower S&P close two sessions later
01/24/07... Lower S&P close two sessions later
12/04/06... Lower S&P close three sessions later
11/06/06... Lower S&P close three sessions later
10/26/06... Lower S&P close two sessions later
10/12/06... No lower close 2-3 sessions later
10/05/06... Lower S&P close two sessions later
09/12/06... No lower close 2-3 sessions later
08/15/06... No lower close 2-3 sessions later
07/28/06... Lower S&P close two sessions later
06/21/06... Lower S&P close two sessions later
03/29/06... Lower S&P close two sessions later
03/01/06... Lower S&P close two sessions later
12/01/05... Lower S&P close two sessions later
10/31/05... No lower close 2-3 sessions later
07/19/05... Lower S&P close two sessions later
07/08/05... No lower close 2-3 sessions later
06/28/05... Lower S&P close two sessions later
05/26/05... Lower S&P close two sessions later
04/21/05... Lower S&P close three sessions later
04/19/05... Lower S&P close three sessions later
02/04/05... Lower S&P close two sessions later
01/26/05... Lower S&P close two sessions later
12/01/04... Lower S&P close two sessions later
10/27/04... No lower close 2-3 sessions later
08/25/04... Lower S&P close three sessions later
07/29/04... Lower S&P close three sessions later

I'd add that when the NYSE saw a greater percentage of upside volume, the odds
of a lower S&P close 2-3 sessions later was a much lower 53%. If you're
looking for signs of a sustainable upside move over the short-term, you
generally want to see buying power focused on NYSE issues.

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

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