Look-term Look at the TED Spread, Plus Higher Volatility on a Rally Day is Short-term Bearish

From Nobel Prize winner Paul Krugman... "The TED spread is the difference
between the interest rate banks charge each other on 3-month loans (3-month
LIBOR) and the interest rate on 3-month U.S. Treasury bills. It?s a measure of
financial jitters. If banks believe that their peers are solid, they should be
willing to lend each other money on almost the same terms as money lent to
Uncle Sam. When they start demanding a big interest rate premium, that?s a
sign of fear. After dipping a bit ? but not enough ? on news of the Fed?s new
policies, the TED spread has now shot up again in the wake of Bear Stearns.
Things are not going well." That was written in mid-March when the TED spread
was running at about 1.5%, quite high from a historical perspective. So how's
it looking now? Pull up this long-term chart and have a look. He writes today
in his blog... "I confidently predict that this slump will be nasty, brutish,
and long."

The percentage of program trading volume executed as principal, for member
firms' own accounts, remained subdued this past week at only 32.4% of total
program volume. We've yet to see a spike into the 40% neighborhood that
reflects active institutional trading, which is most unusual considering the
massive selloff over the past two weeks. As I noted back in my September 25th
column... "Institutional investors are simply not making a stand, and that's
bad news for those hoping last week marked a long-term bottom."

Despite breadth closing 2:1 positive, the OEX Volatility Index (VXO) held on
to a bit of its big intraday gain and settled higher Thursday. When volatility
increases in the face of a lopsided positive breadth session, the market
typically struggles to post more than modest gains the following session. Out
of the last 30 occurrences, only two led to an S&P up more than 0.5% the next
day, suggesting limited upside potential on Friday...

Breadth 2:1 Positive, VXO Up
10/16/08... S&P ??? next day
01/29/08... S&P -0.5% next day
08/08/07... S&P -3.0% next day
04/25/07... S&P -0.1% next day
10/16/06... S&P -0.4% next day
10/05/06... S&P -0.3% next day
06/30/06... S&P +0.8% next day (*)
01/04/06... S&P +0.0% next day
07/28/05... S&P -0.8% next day
06/16/05... S&P +0.5% next day
05/27/05... S&P -0.6% next day
12/28/04... S&P -0.0% next day
12/13/04... S&P +0.4% next day
11/12/04... S&P -0.0% next day
11/04/04... S&P +0.4% next day
03/05/04... S&P -0.8% next day
12/18/03... S&P -0.1% next day
10/27/03... S&P +1.5% next day (*)
10/13/03... S&P +0.4% next day
09/08/03... S&P -0.8% next day
09/02/03... S&P +0.4% next day
07/07/03... S&P +0.3% next day
06/04/03... S&P +0.4% next day
05/27/03... S&P +0.2% next day
05/06/03... S&P -0.5% next day
03/17/03... S&P +0.4% next day
11/27/02... S&P -0.3% next day
11/06/02... S&P -2.3% next day
03/06/02... S&P -0.5% next day
07/03/00... S&P -1.6% next day
10/29/99... S&P -0.7% next day

If the market bucks its tendency to trade flat-to-down, note that it would not
have positive implications. Recall from a study posted in my September 18th
column that when the S&P gains 1% or more on 'Expiration Friday', it typically
trades sideways-to-down over the following week.

Interesting to note that with breadth closing 2:1 positive on both the NYSE
and NASDAQ, upside volume (expressed as a percentage of total volume) was
higher on the NASDAQ. That's a subtle clue that speculators were the driving
force behind Thursday's rally, which is also reflected in the relatively high
Nasdaq/NYSE Volume Ratios seen recently. The last thirty times in which
breadth settled 2:1 positive on both exchanges and upside volume was greater
on the NASDAQ (in percentage terms) are listed in the table below. Note that
the S&P posted a subsequently lower close 2-3 sessions later in 23 out of 30
cases, or 77% of the time, compared with 59% at-any-time odds...

2:1 Pos Breadth Both Exchanges, Greater Upside Volume on NASDAQ
10/16/08... ???
10/13/08... Lower S&P close two sessions later
09/18/08... Lower S&P close three sessions later
08/28/08... Lower S&P close two sessions later
08/22/08... Lower S&P close two sessions later
08/08/08... Lower S&P close two sessions later
08/05/08... Lower S&P close two sessions later
07/16/08... No lower close 2-3 sessions later
05/12/08... No lower close 2-3 sessions later
05/01/08... Lower S&P close two sessions later
04/18/08... Lower S&P close two sessions later
03/24/08... Lower S&P close two sessions later
06/27/07... Lower S&P close two sessions later
01/24/07... Lower S&P close two sessions later
12/04/06... Lower S&P close three sessions later
11/06/06... Lower S&P close three sessions later
10/26/06... Lower S&P close two sessions later
10/12/06... No lower close 2-3 sessions later
10/05/06... Lower S&P close two sessions later
09/12/06... No lower close 2-3 sessions later
08/15/06... No lower close 2-3 sessions later
07/28/06... Lower S&P close two sessions later
06/21/06... Lower S&P close two sessions later
03/29/06... Lower S&P close two sessions later
03/01/06... Lower S&P close two sessions later
12/01/05... Lower S&P close two sessions later
10/31/05... No lower close 2-3 sessions later
07/19/05... Lower S&P close two sessions later
07/08/05... No lower close 2-3 sessions later
06/28/05... Lower S&P close two sessions later
05/26/05... Lower S&P close two sessions later

I'd add that when the NYSE saw a greater percentage of upside volume, the odds
of a lower S&P close 2-3 sessions later was a much lower 53%. If you're
looking for signs of a sustainable upside move over the short-term, you
generally want to see buying power focused on NYSE issues.

While the Dow Industrials rebounded from a steep 380-point intraday selloff to
finish up over 400 points, this type of price action is not typically
conducive to further gains short-term. Consider that today represented the
eighteenth time since 1990 that the Dow Industrials rebounded from trading
down over 100 points intraday to closing with a gain of over 100 points. While
that might sound like a bullish development, this type of action has usually
led to a resumption of the downtrend over the next couple of sessions...

Dow Down 100+ Intraday, Closes Up 100+
10/16/08... Dow ??? two days later
09/26/08... Dow -292 two days later
09/18/08... Dow -4 two days later
09/16/08... Dow -39 two days later
09/11/08... Dow -516 two days later
01/31/08... Dow -15 two days later
01/23/08... Dow -63 two days later
01/10/08... Dow -75 two days later
08/14/02... Dow +35 two days later
07/24/02... Dow +73 two days later
05/01/02... Dow -53 two days later
10/25/01... Dow -193 two days later
08/10/01... Dow -4 two days later
05/04/01... Dow -68 two days later
03/09/00... Dow -64 two days later
08/05/99... Dow -86 two days later
10/02/98... Dow -42 two days later
09/01/98... Dow -145 two days later
10/28/97... Dow -117 two days later

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

 Print This Post