Market Posts Higher Highs/Higher Lows w/ Negative Breadth, Plus a Look at All-Time Record % Gains

Despite a selloff in the bond market and another big rally in the banking
sector, stock indexes closed modestly lower Tuesday. Historically, the S&P is
about twice as likely to close higher when the bond market sells off sharply.
When it tries and fails, as was the case Tuesday, there's often another upside
try the following day. The table below lists the last thirty instances in
which the S&P posted a higher high, higher low but a lower close on the same
day that the TNX (yield on the 10-year) closed up 1% or more. Note that
downside potential is typically limited the following session. In only three
cases out of thirty did the S&P settle down more than 0.5% the next day, while
it gained more than 0.5% thirteen times...

S&P500 Higher Highs, Higher Lows, Lower Close, TNX +1%
10/14/08... S&P500 ??? next session
05/13/08... S&P500 +0.4% next session
04/02/08... S&P500 +0.1% next session
02/19/08... S&P500 +0.8% next session
01/30/08... S&P500 +1.7% next session
12/07/07... S&P500 +0.8% next session
05/17/07... S&P500 +0.7% next session
10/25/05... S&P500 -0.4% next session
06/10/05... S&P500 +0.2% next session
09/03/04... S&P500 +0.7% next session
08/23/04... S&P500 +0.1% next session
05/19/04... S&P500 +0.1% next session
05/13/04... S&P500 -0.1% next session
03/26/04... S&P500 +1.3% next session
01/20/04... S&P500 +0.8% next session
11/28/03... S&P500 +1.1% next session
10/30/03... S&P500 +0.4% next session
10/15/03... S&P500 +0.3% next session
08/20/03... S&P500 +0.3% next session
08/13/03... S&P500 +0.7% next session
07/28/03... S&P500 -0.7% next session (*)
07/24/03... S&P500 +1.7% next session
06/27/03... S&P500 -0.2% next session
04/11/03... s&P500 +2.0% next session
02/05/03... S&P500 -0.6% next session (*)
09/11/02... S&P500 -2.5% next session (*)
03/07/02... S&P500 +0.6% next session
02/26/02... S&P500 +0.1% next session
02/12/02... S&P500 +1.0% next session
11/20/01... S&P500 -0.5% next session
10/04/01... S&P500 +0.2% next session

Also noteworthy that breadth on the NASDAQ exchange settled better than 3:2 in
favor of declining issues despite the NDX posting a 'higher high' and 'higher
low'. Historically, the ability of the NDX to shrug off weak breadth
statistics and post what some call a 'rally day' has been a bullish sign
short-term. Each of the last thirty separate instances in which the NDX posted
a higher high and higher low on a day when the NASDAQ advance/decline ratio
closed below .66 is listed in the table below. Note that in 24 out of 30
cases, or 80% of the time, the Nasdaq closed at a higher level two sessions
later. That's significantly better than the 53% 'at-any-time' odds of a higher
NDX close two sessions later...

NDX Higher High & Higher Low Despite 3:2 Neg Breadth
10/14/08... NDX ??? two sessions later
08/07/08... NDX +3.3% two sessions later
06/17/08... NDX +0.5% two sessions later
03/19/08... NDX +5.8% two sessions later
02/28/08... NDX -3.4% two sessions later
02/21/08... NDX +1.1% two sessions later
10/30/07... NDX -0.5% two sessions later
09/24/07... NDX +1.5% two sessions later
07/16/07... NDX +0.5% two sessions later
05/17/07... NDX +1.4% two sessions later
05/14/07... NDX +0.2% two sessions later
11/09/06... NDX +1.6% two sessions later
10/20/06... NDX +0.3% two sessions later
08/09/06... NDX +0.1% two sessions later
07/27/06... NDX +2.1% two sessions later
04/03/06... NDX +1.5% two sessions later
10/20/05... NDX +2.3% two sessions later
07/21/05... NDX -0.5% two sessions later
05/12/05... NDX +1.8% two sessions later
04/08/05... NDX +0.2% two sessions later
01/13/05... NDX +1.8% two sessions later
10/19/04... NDX +2.2% two sessions later
10/13/04... NDX -0.2% two sessions later
10/07/04... NDX -1.2% two sessions later
09/08/04... NDX +2.6% two sessions later
05/07/04... NDX +1.1% two sessions later
03/02/04... NDX +0.6% two sessions later
02/12/04... NDX +0.4% two sessions later
01/22/04... NDX +1.5% two sessions later
08/22/03... NDX +0.4% two sessions later
07/22/03... NDX -0.3% two sessions later

Given the very positive NYSE TICK action on Monday, I'd be somewhat surprised
to see the S&P nosedive back under 900 in such short order, but with Friday's
high-volume selloff still on the board, we can't rule out the possibility. The
next couple of days will be telling in terms of whether there's been a real
shift in sentiment among institutions. It looks that way after Monday's
session, but to confirm that's true the S&P should be able to hold above 1003
heading into Thursday's close. That would represent the first time since early
August that the market has held up in the three days following a lopsided
positive breadth session, which would imply an underlying bid that's been
noticeably absent in recent months. That in turn would suggest we could see
the S&P test what could be significant trendline resistance in the 1075 area.

Have a look at this informative graphic from Macro-man's blog detailing the
twenty largest percentage gains on record for the S&P500. Monday's 11% move
represented the sixth largest rally, but what's particularly interesting is
that 17 out of the 20 largest gains occurred between 1929 and 1933. That's
food for thought from a long-term perspective. It will be particularly
noteworthy if we see another 7%+ up day at some point in the coming year. If
and when that does occur, it would suggest we're in another 1930's style
environment, which would certainly not be a positive sign. A cluster of
unusually large percentage gains reflects treacherous volatility and most
likely lower stock prices over the long haul. Consider that from 10/30/29,
when the first big percentage gain appeared, to 7/24/33, when the last big
percentage gain appeared, the S&P500 fell over 60%. And don't forget there
were fifteen other 7%+ up days during that roughly four-year period, most of
which proved to be selling opportunities.

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

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