S&P Closes Higher, but Severe Underperformance among Bank Stocks Suggests Bounce will be Short-lived

From my June 3rd commentary... "NYSE TICK action has been generally negative
ever since it failed to confirm the S&P's push into new highs last October.
While we did see a 'higher low' in March, a positive divergence, buying power
has been very muted over the past three months. From a long-term perspective,
it still appears likely that the cumulative TICKscore will remain in a pattern
of lower lows, which has negative implications for the market in general."

On Monday, our TICKscore indicator closed at a very low -40, reflecting heavy
institutional selling that began around midday. While the market managed to
hold its own, there was clearly better selling pressure beneath the surface.
Note that the cumulative TICKscore has now taken out its March lows, a
negative sign from a longer-term perspective as it suggests the S&P will
ultimately follow suit.

The Nasdaq Volatility Index (VXN) settled over its upper bollinger band for a
second consecutive session Tuesday. Historically, this has been a good
indication that the Nasdaq will close higher the following session as
volatility falls out of technically overbought territory. We only have
historical data on the VXN since the beginning of 2001, but since that time
we've seen a total of 24 separate instances in which the VXN closed over its
upper band two days running. All of these occurrences are noted in the table
below, along with the performance of the Nasdaq100 the following session...

VXN Over Its Upper Band Two Consecutive Sessions
06/09/08... Nasdaq100 ??? next session
03/17/08... Nasdaq100 +4.4% next session
11/09/07... Nasdaq100 -2.6% next session
10/22/07... Nasdaq100 +2.2% next session
10/16/07... Nasdaq100 +1.3% next session
08/01/07... Nasdaq100 +1.1% next session
07/27/07... Nasdaq100 +0.9% next session
02/28/07... Nasdaq100 -0.5% next session
07/14/06... Nasdaq100 +0.4% next session
05/18/06... Nasdaq100 +0.9% next session
05/15/06... Nasdaq100 -0.7% next session
04/12/06... Nasdaq100 +0.4% next session
01/23/06... Nasdaq100 +0.6% next session
01/18/06... Nasdaq100 +0.8% next session
01/10/06... Nasdaq100 +0.8% next session
08/08/05... Nasdaq100 +0.7% next session
04/18/05... Nasdaq100 +0.8% next session
07/26/04... Nasdaq100 +1.7% next session
04/30/04... Nasdaq100 +1.0% next session
03/11/04... Nasdaq100 +2.1% next session
11/18/03... Nasdaq100 +1.0% next session
06/09/03... Nasdaq100 +1.5% next session
06/11/02... Nasdaq100 +2.0% next session
05/06/02... Nasdaq100 -0.2% next session
09/07/01... Nasdaq100 +0.8% next session

Note that in 20 out of 24 cases, the NDX proceeded to close higher the
following session, with only one case leading to a loss of more than 1%.

This setup was also triggered by the VIX. It too settled in statistically
overbought territory for a second consecutive session. The S&P's next-day
performance hasn't been quite as reliable as the NASDAQ/VXN setup above, but
downside is typically limited. The last thirty occurrences of a VIX over its
upper bollinger band two days running are listed in the table below. Note that
only two cases led to an S&P down more than 0.6% the following session...

VIX Over Its Upper Band Two Consecutive Sessions
03/17/08... S&P500 +4.2% next session
11/12/07... S&P500 +2.9% next session
07/27/07... S&P500 +1.0% next session
06/07/07... S&P500 +1.1% next session
03/05/07... S&P500 +1.6% next session
02/28/07... S&P500 -0.3% next session
06/13/06... S&P500 +0.5% next session
05/18/06... S&P500 +0.4% next session
05/15/06... S&P500 -0.2% next session
01/23/06... S&P500 +0.2% next session
10/06/05... S&P500 +0.4% next session
08/06/04... S&P500 +0.1% next session
05/10/04... S&P500 +0.8% next session
03/11/04... S&P500 +1.3% next session
11/18/03... S&P500 +0.8% next session
09/25/03... S&P500 -0.6% next session
08/04/03... S&P500 -1.8% next session (*)
01/27/03... S&P500 +1.3% next session
07/23/02... S&P500 +5.7% next session
07/16/02... S&P500 +0.6% next session
07/11/02... S&P500 -0.6% next session
06/04/02... S&P500 +0.9% next session
04/29/02... S&P500 +1.1% next session
02/05/02... S&P500 -0.6% next session
09/07/01... S&P500 +0.6% next session
02/21/01... S&P500 -0.2% next session
10/10/00... S&P500 -1.5% next session (*)
09/06/00... S&P500 +0.7% next session
04/05/00... S&P500 +0.9% next session
01/05/00... S&P500 +0.1% next session

On the negative side, it's noteworthy that the S&P managed to close higher
Monday despite the fact that the number of declining issues outpaced the
number of advancers by a wide margin. It's unusual to see anywhere close to
2:1 negative breadth on a day when the S&P500 settles higher. Historically,
when the market has managed to rally on a day with a closing advance/decline
ratio of .60 or lower, it's the breadth that's the better tell, and the market
will usually reverse course and trade lower the following session...

NYSE Adv/Dec Ratio <.60 on Up Day for S&P500
06/09/08 .55... S&P ??? next day
12/13/07 .51... S&P -1.4% next day
03/23/05 .28... S&P -0.1% next day
02/18/05 .58... S&P -1.5% next day
04/23/04 .53... S&P -0.5% next day
01/29/04 .59... S&P -0.3% next day
08/04/03 .56... S&P -1.8% next day
09/10/01 .58... S&P -4.9% next day
10/18/99 .57... S&P +0.6% next day
09/16/99 .44... S&P +1.3% next day
05/17/99 .54... S&P -0.5% next day
07/27/98 .46... S&P -1.5% next day
06/12/98 .59... S&P -2.0% next day
04/03/97 .58... S&P +1.0% next day
03/17/97 .51... S&P -0.8% next day
06/07/96 .37... S&P -0.2% next day
03/06/95 .54... S&P -0.7% next day
01/23/95 .59... S&P +0.0% next day
10/25/94 .57... S&P +0.2% next day
04/19/94 .50... S&P -0.1% next day
03/31/94 .49... S&P -1.5% next day
03/02/94 .56... S&P -0.4% next day
03/15/91 .55... S&P -0.4% next day
04/15/88 .58... S&P -0.2% next day

Given that this conflicts with the volatility-based setups above, indications
are somewhat mixed as far as Tuesday's session is concerned.

While a bounce is possible Tuesday, keep in mind that it wasn't a positive
sign to see the S&P close higher in the face of another sharp selloff in the
banking sector. There have been a total of 14 instances since the inception of
the BKX in which the S&P500 closed higher on the same day that the Bank Index
fell 2% or more. Note that in every case but one, the S&P posted a
subsequently lower close two or three sessions later...

BKX Settles Down 2%+, SPX Closes Higher
06/09/08... S&P500 ???
05/16/08... S&P500 -0.8% two sessions later
04/04/08... S&P500 -0.4% two sessions later
10/05/01... S&P500 -1.4% two sessions later
11/15/00... S&P500 -1.6% two sessions later
06/30/00... S&P500 -0.6% two sessions later
06/21/00... S&P500 -2.5% two sessions later
06/15/00... S&P500 -0.2% three sessions later
04/27/00... S&P500 -1.3% three sessions later
02/17/00... S&P500 -2.6% two sessions later
01/10/00... S&P500 -1.7% two sessions later
09/27/99... S&P500 -1.2% two sessions later
08/25/99... S&P500 -2.4% two sessions later
10/21/98... S&P500 +0.2% three sessions later
05/27/97... S&P500 -0.7% two sessions later

This illustrates that when the S&P is able to shrug off significant weakness
in the banks, it's rarely the start of a sustained move higher. While there's
potential for a bounce on Tuesday, the weakness seen in the NYSE TICK and the
banking sector indicates the market remains vulnerable to further downside.

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

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