Low TICKscore on a Rally Day is Short-term Bearish, Plus a Look at Standard & Poor’s Oscillator

Major market averages closed with modest gains Wednesday in choppy trading. Breadth settled 2:1 positive, but our TICKscore indicator settled at a neutral -2, reflecting an absence of institutional participation. Closing TICKscore readings of +5 or lower that have coincided with a 2:1 positive breadth session have typically led to a lower S&P 2-4 trading days later…

TICKscore <=+5 on 2:1+ Positive Breadth Session
12/10/08… ???
11/13/08… Lower S&P close two sessions later
11/07/08… Lower S&P close two sessions later
09/18/08… Lower S&P close three sessions later
06/25/08… Lower S&P close two sessions later
06/13/08… Lower S&P close two sessions later
12/21/07… Lower S&P close three sessions later
12/05/07… Lower S&P close four sessions later
10/31/07… Lower S&P close two sessions later
10/26/07… Lower S&P close two sessions later
10/23/07… Lower S&P close two sessions later
08/08/07… Lower S&P close two sessions later
07/12/07… Lower S&P close four sessions later
06/01/07… Lower S&P close two sessions later
04/20/07… Lower S&P close two sessions later
10/14/05… Lower S&P close two sessions later
08/11/05… Lower S&P close two sessions later
05/24/04… No lower close 2-4 trading days later
12/16/02… Lower S&P close two sessions later
11/21/02… Lower S&P close two sessions later
10/17/02… No lower close 2-4 trading days later
03/27/02… Lower S&P close three sessions later
02/11/02… Lower S&P close four sessions later
01/31/02… Lower S&P close two sessions later
11/13/01… Lower S&P close three sessions later
09/24/01… No lower close 2-4 trading days later
04/10/01… No lower close 2-4 trading days later
04/05/01… Lower S&P close two sessions later
03/30/01… Lower S&P close two sessions later
02/26/01… Lower S&P close two sessions later

Out of 29 occurrences, 25 led to a lower S&P close 2-4 trading days later. That 86% win rate is significantly greater than the 65% at-any-time odds for a lower S&P close 2-4 trading days later. So while the market closed higher Wednesday, institutional participation was noticeably lacking and the chances of a selloff remain above average.

From an intermediate-term perspective, it’s noteworthy that the S&P Trendline Oscillator ran up near the 7.0 level earlier this week. This is “the oscillator” made somewhat famous by Jim Cramer, although we’re not publishing the number provided by Standard and Poors. Rather, we obtained an early version of the formula Standard and Poors appears to have slightly tweaked. We have access to the official number as well, and after comparing our own calculation against what S&P provides, we’re confident that our reading is a very good estimate of the official reading. Here’s a look at a long-term chart of the oscillator going back to 1970. I wanted an extended history because we recently came close to a reading over 7.0, and from some earlier work on the indicator I know that readings over 7 tend to lead to further upside over the following month. Here’s a rundown of every instance since 1970 in which the oscillator closed over 7.0, along with the S&P500′s performance over the next month (twenty trading days)…

S&P Oscillator Closes Over 7.0
11/12/04… S&P500 +1.2% one month later
06/01/04… S&P500 +1.7% one month later
12/30/03… S&P500 +2.2% one month later
06/03/03… S&P500 +1.1% one month later
03/06/02… S&P500 -3.1% one month later
11/06/98… S&P500 +4.1% one month later
10/22/98… S&P500 +6.9% one month later
05/09/97… S&P500 +4.6% one month later
12/31/91… S&P500 -1.6% one month later
01/30/91… S&P500 +7.7% one month later
01/13/87… S&P500 +5.8% one month later
02/21/86… S&P500 +3.9% one month later
01/21/85… S&P500 +3.5% one month later
08/06/84… S&P500 +1.4% one month later
11/09/82… S&P500 -0.9% one month later
10/12/82… S&P500 +6.4% one month later
08/23/82… S&P500 +7.6% one month later
01/15/79… S&P500 -2.5% one month later
08/04/78… S&P500 -0.2% one month later
04/25/78… S&P500 +1.5% one month later
11/16/77… S&P500 -2.0% one month later
01/06/76… S&P500 +8.2% one month later
01/28/75… S&P500 +5.7% one month later
01/07/75… S&P500 +9.3% one month later
10/17/74… S&P500 +2.7% one month later
01/04/74… S&P500 -3.6% one month later
09/25/73… S&P500 +1.6% one month later
12/07/71… S&P500 +6.4% one month later
12/03/70… S&P500 +2.5% one month later
08/27/70… S&P500 +2.2% one month later

Over the last 30 occurrences, 23 led to a higher S&P close one month later. That 77% win rate compares favorably with the market’s 59% at-any-time odds of a higher S&P twenty trading days later. So what are the chances we’ll see a 7+ reading in the near future? Somewhere between ‘highly unlikely’ and ‘impossible’. One of the benefits of having the formula is that we can plug in hypothetical outcomes over the next few days to see where the oscillator would close. Even if we see very strong up days on Thursday and Friday, which appears unlikely, it still wouldn’t push the oscillator above the most recent high.

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

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