Short-term Positive, Longer-term Bearish Implications of the Dropoff in NYSE Volume

TICKscore closed at -23 Tuesday, Cumulative TICK -63,500. While there's still
better selling pressure, the level of intensity continues to ease from the
extreme levels seen over the past two weeks. Recall that we saw Cumulative
TICK readings in excess of -100,000 on 9/9, 9/15 & 9/17, indicating the really
heavy selling was conducted in that six-day period. Since then we've still
seen better sellers, but momentum is waning, opening up the potential for a
short-term bounce.

Big board volume was down again Tuesday as only 1.1 billion shares traded
hands. That marks a three-week low for NYSE volume, a short-term bullish sign
as it coincides with Tuesday's 2:1 negative breadth session. Similar to the
SPY volume setup discussed Monday, today's three-week low for NYSE volume
points to a likely short-term bounce heading into the Thursday-Friday time
frame. The table below lists the last thirty occurrences in which breadth on
the NYSE came in 2:1 or better in favor of declining issues and big board
volume hit a three-week or better low. Following the date is the performance
of the S&P500 over the next 2-3 trading days. Note that in 25 out of 30 cases
stretching back to 1987, the S&P500 closed at a higher level 2-3 trading days
later, suggesting good odds we'll see the S&P close back over today's
settlement of 1188 in the Thursday-Friday time frame. Also noteworthy is that
even on the five occasions this setup was proved wrong, the largest loss
amounted to a small 0.6% drop for the S&P...

NYSE Breadth 2:1 Negative, Volume at Three-Week Low
09/23/08... S&P500 ???
08/25/08... S&P500 +1.2% two sessions later
08/18/08... S&P500 -0.1% three sessions later
07/28/08... S&P500 +4.0% two sessions later
08/27/07... S&P500 -0.6% three sessions later
03/27/07... S&P500 -0.5% three sessions later
06/19/06... S&P500 +1.0% two sessions later
04/08/05... S&P500 +0.6% two sessions later
11/11/02... S&P500 +0.7% two sessions later
08/02/02... S&P500 +1.5% three sessions later
05/06/02... S&P500 +3.4% two sessions later
03/25/02... S&P500 +1.1% two sessions later
07/26/99... S&P500 +1.3% two sessions later
02/12/99... S&P500 +0.6% three sessions later
09/17/98... S&P500 +0.5% two sessions later
08/10/98... S&P500 +0.1% two sessions later
05/18/98... S&P500 +1.2% two sessions later
07/05/96... S&P500 -0.2% three sessions later
11/11/94... S&P500 +0.6% two sessions later
05/09/94... S&P500 +0.3% three sessions later
03/21/94... S&P500 -0.0% two sessions later
04/29/91... S&P500 +1.8% two sessions later
02/26/91... S&P500 +1.2% two sessions later
02/20/91... S&P500 +0.1% two sessions later
12/17/90... S&P500 +1.3% two sessions later
08/30/90... S&P500 +1.4% two sessions later
08/10/90... S&P500 +1.2% two sessions later
07/05/90... S&P500 +1.1% two sessions later
02/12/90... S&P500 +0.6% two sessions later
11/20/89... S&P500 +0.8% two sessions later
09/25/89... S&P500 +0.3% two sessions later

This chart highlights every 80%+ down volume session since the May top. Note
that from May until late July, the S&P consistently closed at a lower level
with every successive 80% down volume session. There was a one-month break
from late July to late August, at which point the S&P began to once again
close at successively lower levels with every 80%+ down volume day. I'd note
that we look to be at another 'break' in the selling, as Monday's session was
the first in over a month that coincided with a higher S&P close compared to
the last 80%+ down volume day on September 17th.

How long the break lasts is debatable. The S&P looks like it could post an
'inside down week', a pattern that typically leads to a higher weekly close
the following week (see my August 30th column from last year). From a longer-
term perspective, the persistently elevated NASDAQ/NYSE Volume Ratio has
bearish implications. The 20-day moving average remains in territory generally
associated with longer-term market tops, which argues against much more than
an intermediate-term bounce. Perhaps more significant is the length of time
that the 20-day average has held above the 1.50 level. It's been nearly five
months now, indicating speculative participation remains stubbornly high,
while institutional participation remains light. That's not a healthy
combination. There's only been one other time in history we've seen NASDAQ
volume maintain such a commanding lead over NYSE volume - December 1999
through June 2001, the peak of the speculative bubble. The market didn't
bottom until the 20-day average of the Nasdaq/NYSE Volume Ratio had made a
full round trip back to 1.0 in August of 2002 (see long-term chart).

Back in 2000, it was the excessively heavy NASDAQ volume that caused this
ratio to remain elevated for such an extended period. Presently, the cause
appears to be a combination of steady NASDAQ volume and a significant decline
in big board volume. Recall from my September 2nd column that the 20-day
moving average of NYSE volume recently hit a 5-year low, something never
before seen in the last fifty years. Readings that low will keep the Volume
Ratio elevated for an extended period, but history suggests the current level
of the Nasdaq/NYSE Volume Ratio won't last. Eventually, it's likely to begin
trending back towards its 1.25 average, which means speculative participation
will drop off significantly (due to a severe or protracted decline) and/or
institutional participation will pick up considerably (again, most likely due
to much lower stock prices). This scenario also jibes with the long-term
bearish implications of the Last Hour indicator, recently discussed in my
August 20th column.

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

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