‘Last Hour’ Continues to Retrace its Long-term Decline, a Bearish Sign from a Long-term Perspective

From a long-term perspective, it's noteworthy that the Last Hour indicator
pushed into new highs for the year Wednesday. This has been one of few 'smart
money' indicators that's withstood the test of time. It measures the price
change in the final hour of each session and compares it to the price change
in the first hour of trading. A positive number indicates the market's final
hour outperformed the first hour, while a negative number indicates the final
hour was weaker than the first hour. The chart is a cumulative version of this
daily number.

As I discussed in my August 12th, 2007 column when we finally began seeing the
Last Hour make one-month highs, "that's a red flag from a long-term
perspective. In general it's a bad sign to see the Last Hour start ticking
steadily higher after a prolonged downdraft. Note from the long-term chart
that the retracement period after a big decline in the Last Hour often relates
to some of the most severe selloffs of the last 30+ years. Typically, the
market isn't out of the woods until the Last Hour retraces the entire move
down, at which point stocks could be trading significantly lower than current
levels. This is 'big picture' stuff that could take a year or two to unfold,
but it's definitely something to consider..."

Note from the long-term chart that the Last Hour highlighted heavy
institutional selling beginning in late 2004 that continued right up through
the end of 2007. It's only been this past year that the pattern finally
reversed, as institutions began accumulating as the market weakened. But keep
in mind that this new phase of a 'higher Last Hour/lower stock price' pattern
is likely to remain in play for quite some time. If we assume the indicator
needs to retrace the entire move down before the stock market has put in a
long-term bottom, then the fact that we've only seen the indicator recoup
about a quarter of the move suggests there could be significantly more
downside in store over the next 2-3 years.

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

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