Underperformance by Banks, Equal Weight S&P on Reversal Day Has Short-term Negative Implications

The Nasdaq/NYSE Volume Ratio continues to move in the wrong direction. We
should be seeing a reduction in NASDAQ volume relative to NYSE volume as the
market trades lower - but we're not. This is due to a combination of light
institutional participation and stubbornly high speculative participation, and
it's bad news for anyone hoping for a sustainable bottom.

Thursday was another one of those 'recovery' days in which the market trades
sharply lower intraday before rebounding to finish with a solid gain at the
close. As I've noted previously, these types of recoveries often fail over the
short-term. Out of all nineteen occurrences since 1990 in which the Dow
Industrials rebounded from trading down over 100 points intraday to closing
with a gain of over 100 points, only two led to further gains over the next
two sessions...

Dow Down 100+ Intraday, Closes Up 100+
10/23/08... Dow ??? two days later
10/16/08... Dow +286 two days later
09/26/08... Dow -292 two days later
09/18/08... Dow -4 two days later
09/16/08... Dow -39 two days later
09/11/08... Dow -516 two days later
01/31/08... Dow -15 two days later
01/23/08... Dow -63 two days later
01/10/08... Dow -75 two days later
08/14/02... Dow +35 two days later
07/24/02... Dow +73 two days later
05/01/02... Dow -53 two days later
10/25/01... Dow -193 two days later
08/10/01... Dow -4 two days later
05/04/01... Dow -68 two days later
03/09/00... Dow -64 two days later
08/05/99... Dow -86 two days later
10/02/98... Dow -42 two days later
09/01/98... Dow -145 two days later
10/28/97... Dow -117 two days later

Interesting to note that the Equal Weight S&P500 closed lower Thursday despite
the 1%+ gain for the cap-weighted S&P500 (SPX). That's only happened one other
time since our database for the Equal Weight index began in late 2000. if we
relax the parameters and look for a 0.5% up day for the SPX and a lower Equal
Weighted close, we find a total of six occurrences. Still not many, but it's
noteworthy that the market traded lower, sometimes significantly lower, over
the next couple of days in every case...

S&P500 +0.5%, S&P Equal Weight Index Down
09/10/01... S&P500 -5.5% two sessions later
06/12/02... S&P500 -1.3% two sessions later
07/17/02... S&P500 -6.4% two sessions later
07/31/02... S&P500 -5.2% two sessions later
11/05/02... S&P500 -1.4% two sessions later
03/25/03... S&P500 -0.7% two sessions later
10/23/08... S&P500 ??? two sessions later

The banking sector underperformed Thursday, with the BKX settling down over 1%
after trading in negative territory for most of the session. When the S&P
closes up 1% or more and doubles the performance of the BKX, the S&P typically
reverses course and closes at a lower level within the next couple of days.
The last thirty occurrences are listed in the table below. Note that in 25
cases, or 83% of the time, the S&P closed below the setup day's settlement
within the next two sessions. That's significantly better than the S&P's 62%
at-any-time odds, indicating significant underperformance by the bank sector
on a solid up day has short-term bearish implications...

SPX Up 1%+, Doubles Performance of BKX
10/23/08... ???
10/20/08... Lower SPX close one session later
10/13/08... Lower SPX close one session later
06/13/08... Lower SPX close two sessions later
03/24/08... Lower SPX close two sessions later
02/13/08... Lower SPX close one session later
01/14/08... Lower SPX close one session later
10/31/07... Lower SPX close one session later
08/24/07... Lower SPX close one session later
08/22/07... Lower SPX close one session later
03/06/07... Lower SPX close one session later
05/25/06... Lower SPX close two sessions later
04/21/05... Lower SPX close one session later
11/12/03... Lower SPX close one session later
05/09/03... No lower close within two sessions
04/10/02... Lower SPX close one session later
10/03/01... Lower SPX close one session later
08/24/01... Lower SPX close one session later
07/25/01... No lower close within two sessions
06/05/01... Lower SPX close one session later
05/21/01... Lower SPX close one session later
04/25/01... No lower close within two sessions
04/19/01... Lower SPX close one session later
04/17/01... No lower close within two sessions
01/18/01... Lower SPX close one session later
12/27/00... Lower SPX close two sessions later
11/14/00... Lower SPX close two sessions later
08/07/00... Lower SPX close two sessions later
06/13/00... No lower close within two sessions
05/05/00... Lower SPX close one session later
04/07/00... Lower SPX close one session later

The Last Hour indicator surged over 340 points Thursday to close at a new high
for the year, continuing its steady uptrend that's been in effect most of this
year. Remember that this is not a positive sign for the stock market until its
retraced the entire move down from 2004 (see long-term chart).

Following is a reprint of my August 20th column in which I discussed this
indicator in more detail... "From a long-term perspective, it's noteworthy
that the Last Hour indicator pushed into new highs for the year Wednesday.
This has been one of few 'smart money' indicators that's withstood the test of
time. It measures the price change in the final hour of each session and
compares it to the price change in the first hour of trading. A positive
number indicates the market's final hour outperformed the first hour, while a
negative number indicates the final hour was weaker than the first hour. The
chart is a cumulative version of this daily number.

As I discussed in my August 12th, 2007 column when we finally began seeing the
Last Hour make one-month highs, "that's a red flag from a long-term
perspective. In general it's a bad sign to see the Last Hour start ticking
steadily higher after a prolonged downdraft. Note from the long-term chart
that the retracement period after a big decline in the Last Hour often relates
to some of the most severe selloffs of the last 30+ years. Typically, the
market isn't out of the woods until the Last Hour retraces the entire move
down, at which point stocks could be trading significantly lower than current
levels. This is 'big picture' stuff that could take a year or two to unfold,
but it's definitely something to consider..."

Note from the long-term chart that the Last Hour highlighted heavy
institutional selling beginning in late 2004 that continued right up through
the end of 2007. It's only been this past year that the pattern finally
reversed, as institutions began accumulating as the market weakened. But keep
in mind that this new phase of a 'higher Last Hour/lower stock price' pattern
is likely to remain in play for quite some time. If we assume the indicator
needs to retrace the entire move down before the stock market has put in a
long-term bottom, then the fact that we've only seen the indicator recoup
about a quarter of the move suggests there could be significantly more
downside in store over the next 2-3 years."

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

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