Short-term Negatives, Intermediate-term Positives

Stock indexes ended the week on an upbeat note thanks to persistent strength
in the small cap sector. Breadth settled better than 2:1 positive on the NYSE
and better than 3:1 positive on the NASDAQ, noteworthy considering the
Nasdaq100 barely managed a gain. There have only been five other instances
since 1990 in which the NDX gained less than 0.5% on a 2:1+ positive breadth
session, all of which led to a subsequently lower close within the next two
sessions.

There are other indications that the market is likely to pull back early this
coming week. Traditionally, 3:1+ positive breadth days on the NASDAQ signals
buying power is spent for the short-term. Over the last decade, there have
been 22 separate sessions in which advancing issues outnumbered declining
issues by more than a 3:1 margin on the NASDAQ exchange. Each instance is
noted in the table below, along with the performance of the NDX the following
day. Note that in only one case did the Nasdaq gain more than 0.5%, suggesting
limited upside potential on Monday...

Nasdaq Breadth 3:1 Positive
10/31/08... NDX ??? next day
10/13/08... NDX -4.5% next day
09/19/08... NDX -4.5% next day
07/16/08... NDX +0.5% next day
04/01/08... NDX -0.4% next day
03/18/08... NDX -2.6% next day
11/28/07... NDX +0.3% next day
11/23/07... NDX -2.0% next day
09/18/07... NDX +0.3% next day
08/29/07... NDX +0.5% next day
03/06/07... NDX -0.4% next day
10/12/06... NDX +0.5% next day
08/15/06... NDX +2.3% next day (*)
07/19/06... NDX -1.6% next day
06/29/06... NDX -0.7% next day
06/15/06... NDX -0.7% next day
03/12/04... NDX -2.2% next day
11/27/02... NDX -0.9% next day
10/15/02... NDX -4.2% next day
04/05/01... NDX -4.7% next day
01/03/01... NDX -2.7% next day
06/02/00... NDX -0.7% next day
04/18/00... NDX -3.6% next day

Additionally, as noted in Friday's intraday updates, the lopsided positive
breadth kept the NYSE McClellan Oscillator in overbought territory (>+150) for
a second consecutive session. That triggers a short-term sell that remains in
effect until the McClellan falls back to more average territory. The table
below lists every instance since 1995 in which the McClellan closed over +150
two consecutive sessions, along with the S&P's performance by the time the
McClellan fell back under +100. Note that in 24 out of 28 cases, or 86% of the
time, the S&P was at a lower level when the McClellan fell back under +100.

McClellan Over +150 Two Days Running
10/31/08... S&P500 ??? when McClellan <100
08/06/08... S&P500 -1.8% when McClellan <100
07/23/08... S&P500 -2.3% when McClellan <100
04/02/08... S&P500 -1.0% when McClellan <100
02/01/08... S&P500 -4.2% when McClellan <100
12/07/07... S&P500 -1.8% when McClellan <100
10/02/07... S&P500 -0.5% when McClellan <100
09/19/07... S&P500 -0.7% when McClellan <100
09/04/07... S&P500 -2.4% when McClellan <100
03/22/07... S&P500 -0.4% when McClellan <100
08/17/06... S&P500 +0.0% when McClellan <100
07/03/06... S&P500 -1.7% when McClellan <100
01/09/06... S&P500 -0.3% when McClellan <100
11/25/05... S&P500 -0.9% when McClellan <100
06/02/05... S&P500 -0.8% when McClellan <100
05/19/05... S&P500 -0.1% when McClellan <100
05/25/04... S&P500 +1.6% when McClellan <100(*)
09/03/03... S&P500 -0.3% when McClellan <100
04/23/03... S&P500 -2.2% when McClellan <100
11/04/02... S&P500 -1.5% when McClellan <100
08/16/02... S&P500 -1.2% when McClellan <100
12/29/00... S&P500 -1.9% when McClellan <100
01/10/00... S&P500 -1.3% when McClellan <100
11/01/99... S&P500 +1.4% when McClellan <100(*)
04/22/99... S&P500 -1.7% when McClellan <100
10/19/98... S&P500 +6.2% when McClellan <100(*)
09/29/98... S&P500 -7.5% when McClellan <100
05/05/97... S&P500 -0.1% when McClellan <100
08/05/96... S&P500 -0.0% when McClellan <100

Once the McClellan does close back under +100, we'll want to begin watching
for an entry on the long side. Friday marked the first time since early August
that the S&P has closed higher three days after a 3:1+ positive breadth
session, a sign that for once, sellers no longer overwhelmed buyers
immediately after a big rally. While I'm looking for lower prices short-term,
this suggests we could see a lack of follow-through on the downside and a
generally sideways-to-up trend heading into mid-November. The last thirty
times that the S&P has closed higher three days after a 3:1+ positive breadth
session are noted in the table below, beginning with the date of the lopsided
breadth session and the date three sessions later when the S&P closed higher.
Note that in 24 out of 30 cases, or 80% of the time, the S&P was trading
higher two weeks later. That's significantly better than the 58% at-any-time
odds for a higher S&P ten trading days later...

S&P500 Higher Three Days After 3:1 Positive Breadth
10/28/08-10/31/08 S&P up... S&P ??? two weeks later
08/05/08-08/08/08 S&P up... S&P -0.3% two weeks later
07/16/08-07/21/08 S&P up... S&P -0.9% two weeks later
04/16/08-04/21/08 S&P up... S&P +1.4% two weeks later
04/01/08-04/04/08 S&P up... S&P +1.5% two weeks later
03/18/08-03/24/08 S&P up... S&P +1.7% two weeks later
01/28/08-01/31/08 S&P up... S&P -2.2% two weeks later
11/28/07-12/03/07 S&P up... S&P -1.8% two weeks later
11/23/07-11/28/07 S&P up... S&P +1.2% two weeks later
10/05/07-10/10/07 S&P up... S&P -3.0% two weeks later
09/18/07-09/21/07 S&P up... S&P +2.1% two weeks later
08/31/07-09/06/07 S&P up... S&P +2.7% two weeks later
08/29/07-09/04/07 S&P up... S&P +2.0% two weeks later
08/22/07-08/27/07 S&P up... S&P +0.3% two weeks later
08/17/07-08/22/07 S&P up... S&P +1.0% two weeks later
07/02/07-07/06/07 S&P up... S&P +0.2% two weeks later
06/27/07-07/02/07 S&P up... S&P +2.0% two weeks later
06/13/07-06/18/07 S&P up... S&P -0.8% two weeks later
05/11/07-05/16/07 S&P up... S&P +1.1% two weeks later
05/02/07-05/07/07 S&P up... S&P +1.0% two weeks later
04/20/07-04/25/07 S&P up... S&P +1.1% two weeks later
03/21/07-03/26/07 S&P up... S&P +0.8% two weeks later
03/19/07-03/22/07 S&P up... S&P +0.6% two weeks later
03/06/07-03/09/07 S&P up... S&P +2.4% two weeks later
11/29/06-12/04/06 S&P up... S&P +0.9% two weeks later
10/12/06-10/17/06 S&P up... S&P +1.0% two weeks later
10/04/06-10/09/06 S&P up... S&P +2.0% two weeks later
09/12/06-09/15/06 S&P up... S&P +1.2% two weeks later
08/15/06-08/18/06 S&P up... S&P +0.7% two weeks later
07/24/06-07/27/06 S&P up... S&P +0.7% two weeks later
07/19/06-07/24/06 S&P up... S&P +0.8% two weeks later

See this link for a longer-term track record of this setup stretching back to
1995.

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

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