Market Oversold, But No Convincing Evidence of a Short-term Bottom

Institutional selling pressure was off the charts Wednesday, with our
TICKscore indicator closing at -142, its lowest reading in years. Cumulative
TICK settled at a similarly extreme -171,500. New 52-week lows on the NYSE
surged to over 1,100 issues Wednesday, exceeding the late-October peak.
Declining issues outnumbered advancers by a massive 15:1 ratio, with downside
volume accounting for over 97% of total volume on both the NYSE and NASDAQ.

Another way of looking at volume internals is to directly compare up volume
vs. down volume (see current chart of up/down and down/up volume ratios). For
instance, volume associated with declining issues outpaced 'up volume' by a
massive 58:1 margin Wednesday. A recent track record of the S&P's performance
following a 20:1+ down/up volume session can be found in my November 12th
column. While the market has a tendency to rally the next day, it's not a
statistically significant edge. And given the extreme nature of today's
reading, not just 20:1 but over 50:1, caution should be exercised. In the last
fifty years, there have only been six days in which down volume outpaced up
volume by a 50:1 margin. Half of the time the market was lower three sessions
later, with one of those instances occurring just prior to the '87 crash.

I'd also note that besides the banking sector, which received the bulk of the
press as it staggered to an 11% loss, small caps also continued to
underperform Wednesday. The Russell fell 8% vs a 6% drop for the S&P, and it's
therefore not surprising to see that the Equal Weight S&P significantly
underperformed the SPX by more than 0.7%. That triggers another two-day sell
setup identical to the one triggered at Tuesday's close.

Wednesday's massively lopsided breadth did send the NYSE McClellan Oscillator
deep into oversold territory (below -200), more often than not a sign that the
market is at or near a short-term bottom. However, I'd note that this setup's
effectiveness has been steadily deteriorating over the past couple of years.
Over the last 30 occurrences, only 21 led to a higher S&P close three sessions
later. That 70% win rate is no longer significantly greater than the 55% at-
any-time odds for a higher S&P three sessions later. So while the market is
oversold, I'm not seeing convincing evidence of even a short-term bottom.

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

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