Short-term Positive Implications from Back-to-back 10%+ Up Days for the VXO

Volume associated with declining issues accounted for 95% of total volume
Thursday, the second consecutive 90%+ down volume session. The last time we
saw a pair of 90% down volume days, on 10/6 & 10/7, the S&P fell a quick 100
points over the next three days before the market finally stabilized. During
that three-day period is when we began to see signs of real panic, as the
volatility index surged 10% on back-to-back days (10/9 & 10/10). Historically,
these 'panic attacks' have been reliable indications of a nearby bottom. In
the entire history of the VXO spanning nearly 23 years, there have been a
total of 25 instances in which the index gained 10% or more on back-to-back
sessions. In 23 out of 25 cases, or 92% of the time, the S&P was trading at a
higher level three or five trading days later. That's significantly greater
than the 67% at-any-time odds for a higher S&P three or five trading days
later. Also note that on the two occasions it failed to lead to a rally, the
S&P was down less than 1% five days later in both cases. In other words,
there's generally limited downside potential following such a quick, massive
surge in fear. That bodes well for the current market, given that we just
witnessed the second consecutive 10%+ gain for the VXO on Thursday...

VXO Rallies 10% Two Consecutive Sessions
11/06/08... OEX ???
10/10/08... OEX +1.6% three days later
07/27/07... OEX +0.4% three days later
06/07/07... OEX +0.1% three days later
11/27/06... OEX +1.1% three days later
07/13/06... OEX +0.9% five days later
06/13/06... OEX +2.2% three days later
04/14/05... OEX -0.2% five days later
08/06/04... OEX +0.9% three days later
03/11/04... OEX +0.3% three days later
01/27/03... OEX +1.5% five days later
03/12/01... OEX -0.6% five days later
10/12/00... OEX +1.1% three days later
05/03/00... OEX +0.3% three days later
10/13/99... OEX +1.2% five days later
01/12/99... OEX +1.5% five days later
10/01/98... OEX +0.3% three days later
12/11/97... OEX +1.3% three days later
03/31/97... OEX +0.6% five days later
07/23/96... OEX +1.7% three days later
01/10/96... OEX +0.4% three days later
11/04/93... OEX +0.5% three days later
02/07/91... OEX +2.3% three days later
08/06/90... OEX +1.6% three days later
10/19/87... OEX +10.3% three days later
09/12/86... OEX +0.4% three days later

Wednesday and Thursday were roughly the same in terms of downside volume
expressed as a percentage of total volume. But Thursday's was more lopsided
when considering the 'down/up volume ratio' which was 16:1 on Wednesday and
20:1 on Thursday. In my October 22nd column I posted a track record of the
S&P's performance following a 20:1 Down/Up Volume Ratio, meaning volume
associated with declining issues came in at 20x volume associated with
advancers. In 20 out of 30 cases, or 66% of the time, the S&P posted a higher
close the following session, compared with 52% at-any-time odds. That's not a
significant enough of an edge to put up on the board, but it's noteworthy that
in only two cases out of thirty did the S&P close down more than 1.5% the next
day, suggesting limited downside potential on Friday.

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

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