Low-Volume Selloff Suggests a Bottom Nearby, But Weak Bank Sector Indicates Selling Not Complete

Program trading volume executed as principal for member firms' own accounts,
fell to 31.8% of total program trading volume during the week ending October
17th. It's remarkable that program trading actually declined since the first
week of October despite the market's plunge. Institutional participation is
conspicuously absent, which is consistent with indicators such as the
Nasdaq/NYSE Volume Ratio in that they both suggest we're not near a major
bottom.

New 52-week lows continued to increase Friday on both the NYSE and NASDAQ but
remain below the extreme levels seen earlier this month. That leaves open the
possibility of a positive divergence, although it's difficult to get too
excited about the market's prospects with the VXO ("old VIX") holding in the
80 area. Friday marked the 17th consecutive session that the VXO closed above
50. The only other comparable time frame is the period following the '87
crash, when the VXO settled above 50 for eighteen straight days. It wouldn't
be for another two months, and three consecutive VXO closes back under the 40%
level, before the market finally began to settle down.

Volume was down across the board Friday, one of few bright spots given that it
coincided with a 4:1 negative breadth day. That triggers a 1-3 day buy setup,
given that lopsided negative breadth days on light volume typically precede
some sort of short-term bounce. In the table below are the last thirty
instances in which we've seen NYSE volume decline on a 3:1 or better negative
breadth day. Note that in 28 out of 30 cases, or 93% of the time, the S&P
posted a subsequently higher close within three trading days, significantly
better than the 72% at-any-time odds...

NYSE Decliners 3:1 over Advancers, NYSE Volume Down
10/24/08... ???
10/15/08... Higher SPX close one session later
10/09/08... Higher SPX close two sessions later
10/07/08... Higher SPX close four sessions later (*)
09/22/08... Higher SPX close three sessions later
09/17/08... Higher SPX close one session later
09/09/08... Higher SPX close one session later
08/25/08... Higher SPX close one session later
07/24/08... Higher SPX close one session later
04/11/08... Higher SPX close two sessions later
03/10/08... Higher SPX close one session later
03/06/08... Higher SPX close three sessions later
02/14/08... Higher SPX close one session later
12/14/07... Higher SPX close five sessions later (*)
11/19/07... Higher SPX close one session later
11/15/07... Higher SPX close one session later
11/05/07... Higher SPX close one session later
05/10/07... Higher SPX close one session later
03/02/07... Higher SPX close two sessions later
01/05/07... Higher SPX close one session later
04/07/06... Higher SPX close one session later
08/05/05... Higher SPX close two sessions later
07/17/03... Higher SPX close one session later
06/23/03... Higher SPX close one session later
03/24/03... Higher SPX close one session later
03/10/03... Higher SPX close three sessions later
01/27/03... Higher SPX close one session later
10/09/02... Higher SPX close one session later
10/07/02... Higher SPX close one session later
09/19/02... Higher SPX close one session later
08/05/02... Higher SPX close one session later

However, I'd label the short-term outlook as mixed given the persistent
weakness in the banking sector. Despite a solid down day for the bond market,
bank stocks remained under pressure throughout Friday's session. Historically,
a 2%+ down day for the BKX does not typically coincide with a rally in the
ten-year yield (drop in treasury futures). When the bank sector and the bond
market both post a solid down day, it's generally a short-term negative sign
for the stock market. The table below lists each of the last thirty instances
in which the BKX fell 2% or more and the TNX gained 1% or more in the same
session. Note that in 26 out of 30 cases, or 87% of the time, the S&P posted a
subsequently lower close 1-2 days later. That's significantly higher than the
61% at-any-time odds of a lower SPX close (below today's settlement) within
two days...

Bank Index -2%, Bonds Down (TNX +1%)
10/24/08... ???
10/09/08... Lower SPX close one session later
10/08/08... Lower SPX close one session later
10/07/08... Lower SPX close one session later
09/22/08... Lower SPX close one session later
07/11/08... Lower SPX close one session later
06/09/08... Lower SPX close one session later
05/21/08... Lower SPX close two sessions later
05/13/08... No lower SPX close within two sessions
03/27/08... Lower SPX close one session later
02/14/08... Lower SPX close two sessions later
02/04/08... Lower SPX close one session later
12/14/07... Lower SPX close one session later
05/07/04... Lower SPX close one session later
04/13/04... Lower SPX close one session later
06/20/02... Lower SPX close one session later
09/20/01... Lower SPX close one session later
01/12/01... No lower SPX close within two sessions
06/21/00... Lower SPX close one session later
04/27/00... Lower SPX close one session later
02/09/00... Lower SPX close two sessions later
01/18/00... Lower SPX close two sessions later
01/03/00... Lower SPX close one session later
11/29/99... Lower SPX close one session later
11/17/99... No lower SPX close within two sessions
09/27/99... Lower SPX close one session later
08/30/99... Lower SPX close one session later
08/06/99... Lower SPX close one session later
07/29/99... Lower SPX close one session later
05/27/99... No lower SPX close within two sessions
05/14/99... Lower SPX close two sessions later

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

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