Why Tuesday’s ‘Recovery Day’ May Not Be a Positive Sign for the Short-term

Over 600 issues hit new 52-week lows Tuesday, triggering the three-week buy
setup discussed in my June 29th column. But on a short-term basis, market
internals remained negative despite the afternoon rebound. NYSE TICK action
continued to reflect better selling pressure beneath the surface. TICKscore
settled at -14, cumulative TICK -29,500. The NYSE advance/decline ratio closed
below .80 for the second day in a row as the S&P has rallied, a feat hardly
ever seen. Most stocks are not bottoming along with the market, calling into
question the sustainability of today’s recovery.

One problem with Tuesday’s ‘recovery’ is that it came on the heels of a small
up day on Monday. That may not seem like much of a distinction, but these
types of recovery days typically occur as the market is headed straight down.
Even then, they’re not particularly good indicators of further strength short-
term. Take days in which the S&P500 trades down at least 1.5% intraday before
recovering to finish the session in the plus column. There have been a total
of 29 such sessions since 1990, 22 of which came on the heels of a down day
the previous session. Of those 22 occurrences, 11 led to a higher S&P two
sessions later, meaning the recovery day saw immediate follow-through only
half the time. The record is even worse when the recovery day followed a
higher close (as was the case Tuesday). Out of 7 occurrences, only one led to
a higher S&P two sessions later…

07/01/08… S&P500 ??? two sessions later
05/12/04… S&P500 -0.2% two sessions later
03/20/03… S&P500 -1.3% two sessions later
08/09/02… S&P500 -2.7% two sessions later
07/30/02… S&P500 -2.0% two sessions later
10/25/01… S&P500 -2.0% two sessions later
05/12/99… S&P500 -1.9% two sessions later
09/21/98… S&P500 +4.1% two sessions later

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

 Print This Post