When the NYSE Posts Three Consecutive 2:1 Negative Breadth Days

TICKscore settled at -11 Tuesday, cumulative TICK -19,700. Breadth ended
better than 2:1 in favor of decliners, the third consecutive session of
lopsided negative breadth. The table below highlights the last thirty times
that the NYSE advance/decline ratio closed under .50 three consecutive
sessions, along with the S&P’s performance over the following week…

Three Consecutive Days of 2:1 Negative Breadth
06/07/07… S&P500 +2.2% one week later
07/14/06… S&P500 +0.3% one week later
04/15/05… S&P500 +0.8% one week later
03/23/05… S&P500 +0.7% one week later
01/05/05… S&P500 +0.3% one week later
05/10/04… S&P500 -0.3% one week later
07/22/02… S&P500 +9.7% one week later
09/21/01… S&P500 +7.8% one week later
01/14/99… S&P500 +1.1% one week later
08/28/98… S&P500 -5.2% one week later
08/04/98… S&P500 -0.3% one week later
04/27/98… S&P500 +3.3% one week later
07/24/96… S&P500 +2.1% one week later
03/30/94… S&P500 +1.2% one week later
10/11/90… S&P500 +3.5% one week later
08/23/90… S&P500 +3.8% one week later
08/06/90… S&P500 +1.3% one week later
03/28/88… S&P500 +0.2% one week later
10/16/87… S&P500 -12.3% one week later
10/12/87… S&P500 -27.3% one week later
05/19/87… S&P500 +3.3% one week later
04/13/87… S&P500 +2.6% one week later
09/12/85… S&P500 -0.2% one week later
07/29/83… S&P500 -0.5% one week later
08/06/82… S&P500 +0.1% one week later
05/19/82… S&P500 -1.6% one week later
01/13/82… S&P500 +0.3% one week later
09/18/81… S&P500 -3.0% one week later
09/08/81… S&P500 +1.5% one week later
08/25/81… S&P500 -1.7% one week later

While the market has been more likely to rally under such circumstances,
especially in recent years, it’s also preceded the occasional plunge. With the
market so oversold, a failure to rally over the next couple of sessions would
signal a real absence of buying power. That would most likely mean we’ll see
the S&P fall into new lows for the year sooner rather than later. The S&P is
down 0.3% since Monday’s close, when the McClellan closed in extreme oversold
territory. As I noted in my June 11th column, when the S&P is down more than
0.5% three days after the McClellan initially closes below -200, it usually
means further downside is in store over the following week. Not likely, but
something to keep in mind in case of any surprises.

Also, with the FOMC announcement on tap, this quote from my December 10th
column bears repeating… “Note that the VXO has had a clear tendency to close
below its opening print on an FOMC day. In only two cases out of the last
thirty did the VXO gain 5% or more, while it lost 5% or more twelve times.
This tendency remains consistent throughout all 121 FOMC announcements since
the beginning of 1993. Invariably, the VXO will trend sideways or head
convincingly lower off the open. In only seven cases since 1993, or about 6%
of the time, did the VXO close up 5% or more from its opening print. 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. Not surprisingly, these cases
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 +11.1%… 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