Low-Volume Selloffs are Short-term Bullish

Major averages settled down over 3% Tuesday on better than 2:1 negative
breadth, but it's noteworthy that the S&P500 posted both a higher high and
higher low. That's unusual considering that breadth on the NYSE closed better
than 2:1 in favor of decliners. This combination of a higher high/higher low
and lopsided negative breadth has only occurred ten other times since 1990...

SPX Higher High & Higher Low Despite 2:1 Neg Breadth
10/21/08... S&P500 ??? three sessions later
07/02/08... S&P500 +1.0% three sessions later
03/19/08... S&P500 +4.2% three sessions later
02/21/08... S&P500 +2.9% three sessions later
07/16/07... S&P500 +0.2% three sessions later
07/20/06... S&P500 +1.6% three sessions later
10/26/05... S&P500 +1.3% three sessions later
10/20/05... S&P500 +1.6% three sessions later
10/02/02... S&P500 -5.2% three sessions later
08/06/99... S&P500 +0.1% three sessions later
09/09/98... S&P500 +2.3% three sessions later

The persistently light volume is probably the single most telling indicator
for the short-term, as it indicates a lack of conviction among stock market
participants. This usually translates into choppy, rather than trendy market
conditions. Yesterday I pointed to the potential for lower prices short-term
in part because of the light volume. After today's selloff on even lighter
volume, we should look for a close above today's settlement in the Thursday-
Friday time frame. One of the primary reasons is that breadth on the big board
settled better than 2:1 in favor of declining issues. This isn't the type of
session that normally coincides with a three-week or better low in volume.
When this has occurred, the market has displayed a consistent ability to
bottom out over the short-term and close at a higher level 2-3 trading days
later.

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 at
least a three-week low (as occurred today.) 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 1989, 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 955 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, indicating limited downside
potential over the short-term...

NYSE Breadth 2:1 Negative, Volume at Three-Week Low
10/21/08... S&P500 ???
09/23/08... S&P500 +1.8% two sessions later
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

I'd also note that the 20-day moving average of the Cumulative TICK continues
to trend higher, and will most likely continue to do so for the time being as
some of the big negative readings from late September/early October are no
longer included in the average. This reinforces the potential for short-term
strength, keeping in mind that from a longer-term perspective there are a
number of 'big picture' negatives in play, emphasized by today's high 1.84
closing NASDAQ/NYSE Volume Ratio. See my October 15th column for a recent
discussion.

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

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