Mixed Indications from the SOX and NASDAQ100

The Philadelphia Semiconductor index (SOX) was the relative outperformer
throughout Monday's session. While the late-session slide nearly erased the
entire day's gain, it still managed a small up day despite 3:1 negative
breadth on the NASDAQ exchange. Since inception in 1994, there have been 24
separate instances in which the SOX initially closed higher on a day when
NASDAQ breadth settled at least 2:1 negative. Surprisingly, in 21 out of 24
cases, or 88% of the time, the SOX posted a subsequently lower close 2-4
trading days later. That's significantly greater than the 64% at-any-time odds
of a lower SOX close 2-4 trading days later...

NASDAQ Breadth 2:1 Negative, SOX Up
10/27/08... ???
06/24/08... Lower SOX close two sessions later
04/09/08... Lower SOX close two sessions later
12/18/06... Lower SOX close two sessions later
02/07/06... Lower SOX close three sessions later
10/20/05... Lower SOX close four sessions later
06/23/05... Lower SOX close two sessions later
05/06/04... No lower close 2-4 trading days later
03/09/04... Lower SOX close two sessions later
08/22/03... Lower SOX close two sessions later
08/01/03... Lower SOX close two sessions later
03/21/01... No lower close 2-4 trading days later
02/21/01... Lower SOX close two sessions later
11/09/00... Lower SOX close two sessions later
07/28/00... Lower SOX close two sessions later
08/03/99... Lower SOX close two sessions later
08/03/98... Lower SOX close two sessions later
07/27/98... Lower SOX close two sessions later
05/18/98... Lower SOX close two sessions later
12/11/96... Lower SOX close two sessions later
12/06/96... No lower close 2-4 trading days later
97/16/96... Lower SOX close four sessions later
04/08/96... Lower SOX close three sessions later
03/08/96... Lower SOX close two sessions later
09/27/95... Lower SOX close three sessions later

This tends to indicate that when strength in semiconductors fails to lead to a
broad-based rally in tech stocks, as was the case Monday, chip stocks
typically roll over and follow the market lower over the short-term.

That said, we're also seeing some positive indications short-term, suggesting
conditions are likely to remain choppy. NYSE volume declined for the second
day in a row despite another day of lopsided negative breadth (nearly 4:1).
That triggers another short-term buy setup identical to the one triggered at
Friday's close. Since 1990, we've never seen this pattern of declining volume
and 3:1+ negative breadth occur on back-to-back sessions. This continues to
suggest the potential for a close back above SPX 876 by Wednesday's close.

Despite the 3:1 negative breadth on the NASDAQ exchange, note that the
Nasdaq100 (NDX) posted both an 'inside day' and an NR10 day, meaning it was
the smallest range day of the last ten sessions. It's very unusual to see an
NR10 day coincide with 2:1+ negative breadth. There have only been ten
occurrences since 1990, all of which led to a flat-to-up Nasdaq three sessions
later...

Nasdaq NR10 Day & 2:1 Negative Breadth
10/27/08... Nasdaq ??? three sessions later
05/23/08... Nasdaq +3.1% three sessions later
08/11/06... Nasdaq +5.6% three sessions later
07/21/06... Nasdaq +2.5% three sessions later
10/18/05... Nasdaq +1.7% three sessions later
05/10/04... Nasdaq +1.4% three sessions later
04/06/04... Nasdaq +0.2% three sessions later
12/13/02... Nasdaq +0.8% three sessions later
09/05/02... Nasdaq +7.3% three sessions later
08/03/98... Nasdaq -0.2% three sessions later
01/21/92... Nasdaq +5.3% three sessions later

Also noteworthy was the fact that the Nasdaq100 posted an 'inside day',
meaning Monday's high was less than the previous day's high and Monday's low
was greater than the previous day's low. Normally you'll see a break of the
previous day's low on a 2:1 negative breadth session. Since 1990, there have
only been twelve cases in which the NDX posted an inside day on a 2:1 negative
breadth session. Again, there's been a tendency for the Nasdaq to trade higher
over the next few sessions...

Nasdaq Breadth 2:1 Negative & Inside Day
10/27/08... NDX ??? three sessions later
07/14/08... NDX +3.1% three sessions later
11/19/07... NDX +0.4% three sessions later
07/27/07... NDX -0.6% three sessions later
06/22/07... NDX +0.6% three sessions later
03/02/07... NDX +0.6% three sessions later
01/05/07... NDX +1.7% three sessions later
08/11/06... NDX +5.5% three sessions later
10/18/05... NDX +1.8% three sessions later
02/24/03... NDX +0.1% three sessions later
01/30/03... NDX -1.4% three sessions later
10/09/02... NDX +11.2% three sessions later
09/20/01... NDX +2.0% three sessions later

Still, we should keep in mind with both Nasdaq-related setups above that the
sample sizes are too small to be considered statistically significant. While
it looks like selling pressure is winding down, it's prudent to tread
cautiously given the market's recent tendency to punish contra-trend trading
setups. As far as Tuesday's session, that means shifting from a short-term
bullish bias to neutral on a close back over SPX 876, as it would fulfill the
statistically significant setups on the board. Should the S&P settle lower
again Tuesday on even lighter volume, a separate short-term buy setup would be
triggered, and I'd be inclined to hold through the Fed announcement on
Wednesday. Historically, three down days on successively lighter volume is a
two-day buy (see my September 24th column for a recent track record).

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

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