Second 90% Up Volume Session of the Month Provides Little Edge

From my October 14th column discussing the twenty largest percentage gains 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."

With the FOMC announcement on tap, here's a look at the performance of the
S&P100 Volatility Index (VXO) from open to close during each of the last
thirty regularly scheduled Fed days...

Volatility Performance on FOMC Announcement Day
10/29/08... VXO ??? from open to close
09/16/08... VXO -9.9% from open to close
08/05/08... VXO -9.0% from open to close
06/25/08... VXO -2.4% from open to close
04/30/08... VXO +2.1% from open to close
03/18/08... VXO -13.0% from open to close
01/30/08... VXO -4.1% from open to close
12/11/07... VXO +12.0% from open to close (*)
10/31/07... VXO -13.3% from open to close
09/18/07... VXO -22.3% from open to close
08/07/07... VXO -6.2% from open to close
06/28/07... VXO -3.0% from open to close
05/09/07... VXO -8.6% from open to close
03/21/07... VXO -12.0% from open to close
01/31/07... VXO -8.4% from open to close
12/12/06... VXO -3.3% from open to close
10/25/06... VXO -1.6% from open to close
09/20/06... VXO -1.4% from open to close
08/08/06... VXO -2.0% from open to close
06/29/06... VXO -17.5% from open to close
05/10/06... VXO -1.9% from open to close
03/28/06... VXO +0.6% from open to close
01/31/06... VOX +1.4% from open to close
12/13/05... VXO -9.3% from open to close
11/01/05... VXO -2.7% from open to close
09/20/05... VXO +6.0% from open to close (*)
08/09/05... VXO -3.3% from open to close
06/30/05... VXO +1.3% from open to close
05/03/05... VXO -1.6% from open to close
03/22/05... VXO +5.9% from open to close (*)
02/02/05... VXO -5.2% from open to close

Note that in only three cases out of the last thirty did the VXO gain 5% or
more, while it lost 5% or more twelve times. This tendency remains consistent
throughout all 130 FOMC announcements since the beginning of 1993. Invariably,
the VXO will trend sideways or head convincingly lower off the open. Rarely
has the VXO managed any substantial gains because the market has already
priced in the potential for stepped-up volatility prior to the actual Fed
announcement. It's only when the VXO gains 5% or more (from the open) that it
reflects a market caught off guard by the Fed's announcement. Not
surprisingly, these cases typically led to a rough period for stocks over the
next two months. All eight occurrences are listed in the table below...

VXO +5% or More from Open on Fed Day
12/11/07... VXO +12.0%... S&P -9.9% two months later
09/20/05... VXO +6.0%... S&P +0.6% two months later
03/22/05... VXO +5.9%... S&P +1.2% two months later
01/28/04... VXO +12.1%... S&P -1.7% two months later
10/03/00... VXO +4.6%... S&P -5.9% two months later
02/05/97... VXO +4.9%... S&P -2.6% two months later
02/04/94... VXO +42.8%... S&P -4.6% two months later
09/21/93... VXO +8.3%... S&P +3.0% two months later

Volume associated with advancing issues accounted for over 90% of total volume
on the NYSE. These '90% up volume' days have little predictive power, as the
stock market is just as likely to trade higher or lower in the days & weeks
that follow. One interesting point is that this is only the thirteenth time on
record that we've seen two 90% up volume days within a one-month time span. In
eleven out of twelve cases, the S&P was higher one month later...

Two 90% Up Volume Days in One Month
10/28/08... S&P500 ??? one month later
04/01/08... S&P500 +1.5% one month later
11/28/07... S&P500 +0.5% one month later
11/23/07... S&P500 +3.0% one month later
09/18/07... S&P500 +1.2% one month later
08/31/07... S&P500 +5.0% one month later
08/29/07... S&P500 +4.6% one month later
03/21/07... S&P500 +2.5% one month later
07/19/06... S&P500 +2.8% one month later
06/29/06... S&P500 +0.5% one month later
07/29/02... S&P500 +5.5% one month later
10/29/87... S&P500 -1.8% one month later
08/20/82... S&P500 +8.4% one month later

Does this mean I believe the market will be higher this time next month? No.
The sample size is too small to be considered statistically significant, and
I'd need to see a lot more confirmation from more established indicators. For
instance, one intermediate-term bullish setup I watch for is a higher S&P500
three days after a 3:1+ positive breadth session. We haven't seen such a
pattern since early August, as all recent lopsided positive breadth sessions
have seen zero follow-through. This will be something to watch for again with
today's 4:1 positive breadth.

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

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