Nothing Positive About ‘Recovery Days’

There’s nothing positive about ‘recovery days’ like Tuesday, in which the
market rebounds from a steep decline to finish with what appears to be a solid
gain. Frequently, the late-day rally masks underlying selling pressure, and
Tuesday’s session was a classic in this regard. Market internals settled in
solidly negative territory despite the positive finish, indicating most stocks
failed to join the S&P’s late-day run for the green. TICKscore settled at a
low -69, Cumulative TICK at a similarly negative -95,000. Institutions were
much better sellers throughout Tuesday’s session, casting doubt on the chances
that the intraday rebound will stick. Additionally, breadth settled nearly 2:1
negative, a bearish sign for Wednesday’s session. It’s unusual to see anywhere
close to 2:1 negative breadth (0.50 advance/decline ratio) on a day when the
S&P500 settles higher. Historically, when the market has managed to rally on a
day with a closing advance/decline ratio of .60 or lower, it’s breadth that’s
the better tell, and the market will usually reverse course and trade lower
the following session. Out of 27 occurrences over the past two decades, the
S&P closed lower the following session 22 times. That 81% win rate is
significantly above the 47% at-any-time odds for a lower S&P close one day
later…

NYSE Adv/Dec Ratio <.60 on Up Day for S&P500
11/18/08 .54… S&P ??? next day
09/26/08 .50… S&P -8.8% next day
07/03/08 .53… S&P -0.8% next day
06/23/08 .51… S&P -0.3% next day
06/09/08 .55… S&P -0.2% next day
12/13/07 .51… S&P -1.4% next day
03/23/05 .28… S&P -0.1% next day
02/18/05 .58… S&P -1.5% next day
04/23/04 .53… S&P -0.5% next day
01/29/04 .59… S&P -0.3% next day
08/04/03 .56… S&P -1.8% next day
09/10/01 .58… S&P -4.9% next day
10/18/99 .57… S&P +0.6% next day
09/16/99 .44… S&P +1.3% next day
05/17/99 .54… S&P -0.5% next day
07/27/98 .46… S&P -1.5% next day
06/12/98 .59… S&P -2.0% next day
04/03/97 .58… S&P +1.0% next day
03/17/97 .51… S&P -0.8% next day
06/07/96 .37… S&P -0.2% next day
03/06/95 .54… S&P -0.7% next day
01/23/95 .59… S&P +0.0% next day
10/25/94 .57… S&P +0.2% next day
04/19/94 .50… S&P -0.1% next day
03/31/94 .49… S&P -1.5% next day
03/02/94 .56… S&P -0.4% next day
03/15/91 .55… S&P -0.4% next day
04/15/88 .58… S&P -0.2% next day

The Dow Industrials rebounded from a 170-point intraday selloff to finish up
150 points, but this type of price action is not typically conducive to
further short-term gains. Consider that today represented the 22nd instance
since 1990 in which the Dow Industrials rebounded from trading down over 100
points intraday to closing with a gain of over 100 points. While that might
sound like a bullish development, this type of action has usually led to a
resumption of the downtrend over the next couple of sessions…

Dow Down 100+ Intraday, Closes Up 100+
11/18/08… Dow ??? two days later
11/13/08… Dow -561 two days later
10/23/08… Dow -515 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

This tendency can also be seen in the S&P’s rebound from trading down over
1.5% intraday to finishing with a modest gain Tuesday. Historically, sellers
have typically regained the upper hand over the short-term following such
price action. The table below lists all instances since 1990 in which the
S&P500 traded down 1.5% or more intraday but ended with a gain of less than
1%. Note that out of 23 occurrences, 20 led to a lower S&P close within the
next two sessions…

S&P Down 1.5%+ Intraday, Closes Up Less Than 1%
11/18/08… ???
09/26/08… Lower SPX close one session later
09/05/08… Lower SPX close two sessions later
07/01/08… Lower SPX close one session later
03/13/08… Lower SPX close one session later
08/16/07… No lower close within two sessions
08/10/07… Lower SPX close one session later
06/08/06… Lower SPX close one session later
05/12/04… Lower SPX close one session later
03/20/03… Lower SPX close two sessions later
02/25/03… Lower SPX close one session later
10/23/02… Lower SPX close one session later
08/09/02… Lower SPX close one session later
07/30/02… Lower SPX close two sessions later
07/11/02… Lower SPX close one session later
06/24/02… Lower SPX close one session later
10/05/01… Lower SPX close one session later
03/01/01… Lower SPX close one session later
04/27/00… Lower SPX close one session later
01/05/00… No lower close within two sessions
05/12/99… Lower SPX close two sessions later
09/21/98… No lower close within two sessions
06/07/96… Lower SPX close one session later
03/31/94… Lower SPX close one session later

The relative weakness of the Equal Weight S&P500 compared to the standard cap-
weighted S&P was another negative development Tuesday. The Equal Weight index
barely managed a gain as small caps underperformed, closing up 0.2% vs a 1.0%
gain for the SPX. Historically, such underperformance has not been a positive
sign for the short-term. The last thirty instances in which the SPXEW
underperformed the SPX by at least 0.7% are listed in the table below, along
with the performance of the S&P over the next two sessions. Note that in 24
out of 30 cases, or 80% of the time, the S&P was trading at a lower level two
sessions later. That’s significantly greater than the 50% at-any-time odds for
a lower S&P close two days later…

SPX Outperforms Equal Weight S&P By >0.7%
11/18/08… S&P500 ??? two sessions later
11/10/08… S&P500 -7.3% two sessions later
10/23/08… S&P500 -6.5% two sessions later
10/02/08… S&P500 -5.2% two sessions later
09/22/08… S&P500 -1.8% two sessions later
07/24/08… S&P500 -1.5% two sessions later
03/17/08… S&P500 +1.7% two sessions later
10/03/05… S&P500 -2.5% two sessions later
03/25/03… S&P500 -0.7% two sessions later
12/04/02… S&P500 -0.6% two sessions later
11/08/02… S&P500 -1.3% two sessions later
11/07/02… S&P500 -2.9% two sessions later
11/05/02… S&P500 -1.4% two sessions later
10/16/02… S&P500 +2.8% two sessions later
10/09/02… S&P500 +7.5% two sessions later
10/01/02… S&P500 -3.4% two sessions later
07/31/02… S&P500 -5.2% two sessions later
07/26/02… S&P500 +5.9% two sessions later
07/17/02… S&P500 -6.4% two sessions later
07/02/02… S&P500 +4.3% two sessions later
06/12/02… S&P500 -1.3% two sessions later
05/08/02… S&P500 -3.1% two sessions later
09/26/01… S&P500 +3.4% two sessions later
09/17/01… S&P500 -2.2% two sessions later
09/10/01… S&P500 -5.5% two sessions later
03/27/01… S&P500 -2.9% two sessions later
03/13/01… S&P500 -2.0% two sessions later
01/18/01… S&P500 -0.4% two sessions later
01/03/01… S&P500 -3.7% two sessions later
12/05/00… S&P500 -2.4% two sessions later
11/14/00… S&P500 -0.8% two sessions later

In short, it looks the S&P’s tenuous grip on the 850 level will soon give way.
Given the massive institutional selling pressure we’ve seen in front of the
technical breakdown, with convincing new lows for both cumulative TICKscore
and cumulative breadth, there’s potential for an outsized move to unfold. In
this environment, with the VXO holding in the 70 range, that could mean a
crash. It could very well take such an extreme move to blow out a lot of the
speculators that have dominated trade over the last six months. That’s a
necessary first step before we can even begin to discuss a sustainable bottom.

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

 Print This Post