Two Consecutive Days of 2:1 Negative Breadth Suggests a Bottom is Nearby

TICKscore closed at a neutral -2 Tuesday, one day after recording its lowest
reading of the year on Monday at -64. Cumulative TICK settled at -21,000 after
hitting -105,500 on Monday. Note that the 20-day average is still trying to
hold its recent low, but we’ll need to see some positive readings in the days
ahead.

VIX-VXV Ratio closed at 1.10 on Monday, triggering a one-month buy setup. This
is based on a CBOE research paper that indicated when the value of the VIX was
10% greater than the value of the VXV, there was a statistically significant
tendency for a drop in volatility (and hence a rise in prices) over the
following month.

I spent Monday’s session in the hospital (and I may be out another day this
week), but there were a couple of short-term signals triggered Monday still
worth mentioning. For one, the Nasdaq100 managed to post an ‘inside day’
despite 2:1 negative breadth. That’s only occurred eleven times since 1990,
nine of which led to a higher NDX three sessions later…

Nasdaq Breadth 2:1 Negative & Inside Day
07/14/08… NDX ??? three sessions later
11/19/07… NDX +0.4% three sessions later
07/27/07… NDX -0.6% three sessions later
06/22/07… NDx +0.6% three sessions later
03/02/07… NDX +0.6% three sessions later
01/05/07… NDX +1.7% three sessions later
08/11/06… NDX +5.5% three sessions later
10/18/05… NDX +1.8% three sessions later
02/24/03… NDX +0.1% three sessions later
01/30/03… NDX -1.4% three sessions later
10/09/02… NDX +11.2% three sessions later
09/20/01… NDX +2.0% three sessions later

While the S&P closed at a fresh one-month low Monday, new 52-week lows
contracted. That usually leads to a higher S&P 2-3 trading days later (see my
July 9th column for a recent track record).

Also noteworthy is that Monday represented the second consecutive session that
the number of declining issues outpaced the number of advancers by more than a
2:1 margin on the NYSE, reflecting an extreme amount of selling pressure. From
a short-term perspective, this type of action is usually an indication that
sellers are at or near an ‘exhaustion point’, and the S&P typically bottoms
out and closes higher three or five trading days later. Every occurrence of
this setup since the beginning of 1999 is listed in the table below. Notice
that the S&P has closed at a higher level three or five trading days later in
34 out of 42 cases, or 81% of the time. Also note that the S&P ended down more
than 0.5% only three times, while it gained more than 0.5% twenty-four
times…

2:1 negative NYSE breadth two consecutive days
07/14/08… S&P ??? three days later
03/17/08… S&P +4.1% three days later
02/29/08… S&P +0.2% three days later
12/17/07… S&P +1.0% three days later
11/12/07… S&P +0.8% three days later
10/16/07… S&P -1.2% five days later (*)
08/28/07… S&P +2.9% three days later
08/15/07… S&P +2.8% three days later
07/27/07… S&P +0.5% three days later
06/25/07… S&P +0.5% three days later
06/06/07… S&P -0.1% five days later
03/05/07… S&P +2.0% three days later
07/13/06… S&P +0.6% five days later
06/13/06… S&P +2.3% three days later
05/12/06… S&P -1.9% five days later (*)
03/07/06… S&P +0.4% three days later
10/27/05… S&P +2.0% three days later
10/06/05… S&P -1.2% five days later (*)
09/20/05… S&P -0.5% five days later
08/05/05… S&P +0.2% three days later
05/13/05… S&P +2.7% three days later
04/14/05… S&P -0.2% five days later
03/22/05… S&P +0.2% three days later
01/04/05… S&P -0.4% five days later
07/26/04… S&P +1.5% three days later
05/07/04… S&P -0.3% five days later
04/29/04… S&P +0.5% three days later
04/14/04… S&P +0.7% three days later
03/11/04… S&P +0.4% three days later
07/17/03… S&P +0.7% three days later
01/27/03… S&P +1.5% five days later
10/07/02… S&P +2.4% three days later
09/24/02… S&P +1.0% three days later
08/05/02… S&P +8.5% three days later
07/19/02… S&P +0.6% five days later
10/30/01… S&P +2.6% three days later
09/20/01… S&P +2.8% three days later
03/22/01… S&P +5.8% three days later
10/18/00… S&P +4.0% three days later
10/12/00… S&P +1.5% three days later
11/23/99… S&P +0.3% five days later
10/13/99… S&P +0.3% five days later
01/13/99… S&P +1.3% three days later

With the S&P down 1% from Monday’s close, this suggests good odds the market
will bottom out and trade higher heading into the end of the week.

Volatility triggered a buy Tuesday, as the VXO closed more than 10% above its
10-day average for a third day in a row. This normally leads to a higher S&P
by the time the VXO closes less than 10% above its 10-day average (see my June
10th column for a track record).

Tuesday’s outperformance by the NASDAQ also triggered a short-term buy. When
the S&P500 closes down 1% or more, the Nasdaq100 (NDX) typically suffers a
similarly large loss given the large number of high beta stocks that comprise
the index. But when the NDX manages to hold firm on a solid down day for the
S&P, it suggests a limited amount selling pressure and/or a short-term
rotation into tech stocks. Typically, the market is trading higher three
sessions later. Each instance since 1990 in which the S&P closed down 1%+ and
the NDX lost less than 0.5% is noted in the table below, along with the S&P’s
performance three sessions later…

S&P500 Drops 1%+, Nasdaq Down Less than 0.5%
07/15/08… S&P500 ??? three days later
05/23/08… S&P500 +1.6% three days later
06/13/06… S&P500 +2.3% three days later
05/12/05… S&P500 +1.2% three days later
03/09/05… S&P500 -0.0% three days later
04/16/03… S&P500 +3.6% three days later
01/22/03… S&P500 -3.5% three days later
10/09/02… S&P500 +8.3% three days later
09/24/02… S&P500 +1.0% three days later
04/29/02… S&P500 +1.8% three days later
03/06/00… S&P500 +0.8% three days later
02/16/00… S&P500 -2.6% three days later
05/27/99… S&P500 +1.1% three days later
01/14/99… S&P500 +3.7% three days later
07/09/97… S&P500 +1.2% three days later
03/13/97… S&P500 +0.0% three days later
04/10/96… S&P500 +1.4% three days later
02/20/96… S&P500 +2.9% three days later
01/10/96… S&P500 +0.2% three days later
06/24/94… S&P500 +1.1% three days later
04/01/91… S&P500 +2.3% three days later
01/09/91… S&P500 +0.3% three days later
01/02/91… S&P500 -3.4% three days later
07/05/90… S&P500 +0.2% three days later

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

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