McClellan Triggers Another Short-term Sell on a Bearish ‘Recovery Day’

There’s nothing positive about Wednesday’s ‘recovery’ session, with stocks rebounding from a morning loss to finish with solid gains at the close. The rebound left the market in technically overbought territory, and it’s looking increasingly vulnerable with today’s recovery. I’ve mentioned a number of times in recent months that these ‘down in the morning/up in the afternoon’ type of sessions have short-term negative implications, and today represented the tenth such session in just the last three months (as measured by our simple Dow formula below). That’s fairly remarkable when you consider that it took ten years to generate the ten signals prior to this year…

Dow Down 100+ Intraday, Closes Up 100+
12/03/08… Dow ??? two days later
11/26/08… Dow -577 two days later
11/18/08… Dow -872 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

Another negative development regarding Wednesday’s rebound is that it came on decreasing volume. When the S&P trades down over 1% intraday and then reverses to close higher on the session, it typically coincides with stepped-up volume. Wednesday’s session lacked that kind of institutional participation. The table below notes the last thirty instances in which the S&P traded in a similar manner – down 1% intraday, up at the close, all on lower NYSE volume. Note the definitive tendency for the S&P to post a subsequently lower close over the short-term. In 24 out of 30 occurrences stretching back to 1999, the S&P closed at a lower level 2-3 sessions later. That 80% win rate is significantly better than the 59% at-any-time odds of a lower S&P close 2-3 days later, which doesn’t bode well in terms of the market’s reaction to Friday’s employment report.

S&P -1% intraday, closes positive, volume down
12/03/08… S&P500 ???
11/25/08… S&P500 -4.8% three sessions later
09/26/08… S&P500 -3.9% two sessions later
09/11/08… S&P500 -4.5% two sessions later
09/05/08… S&P500 -1.4% two sessions later
02/22/08… S&P500 +2.0% three sessions later
12/13/07… S&P500 -2.9% two sessions later
11/02/07… S&P500 -2.3% three sessions later
08/10/07… S&P500 -1.9% two sessions later
07/28/04… S&P500 +1.0% three sessions later
08/04/03… S&P500 -1.6% two sessions later
07/01/03… S&P500 +2.3% three sessions later
10/18/02… S&P500 +1.3% three sessions later
09/16/02… S&P500 -2.4% two sessions later
09/09/02… S&P500 -1.8% three sessions later
08/26/02… S&P500 -3.2% two sessions later
08/09/02… S&P500 -2.7% two sessions later
07/03/02… S&P500 -0.1% three sessions later
06/27/02… S&P500 -2.2% two sessions later
06/24/02… S&P500 -1.9% two sessions later
05/01/02… S&P500 -1.2% two sessions later
10/05/01… S&P500 -1.4% two sessions later
09/10/01… S&P500 -5.5% two sessions later
08/16/01… S&P500 -0.9% two sessions later
08/10/01… S&P500 -0.3% two sessions later
05/04/01… S&P500 -0.4% two sessions later
02/22/00… S&P500 -1.4% three sessions later
10/18/99… S&P500 +2.4% three sessions later
10/01/99… S&P500 +3.3% three sessions later
09/16/99… S&P500 -0.8% three sessions later
05/17/99… S&P500 -0.1% three sessions later

Additionally, Friday’s lopsided 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 26 out of 30 cases, or 87% of the time, the S&P was at a lower level when the McClellan fell back under +100…

McClellan Over +150 Two Days Running
12/03/08… S&P500 ??? when McClellan <100
11/28/08… S&P500 -8.9% when McClellan <100
10/31/08… S&P500 -6.6% 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

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

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