Clues from the Latest Program Trading Statistics

The latest program trading report for the week ending January 16th reveals that 40.5% of total program volume was executed as principal, for member firms’ own accounts. That marks the second consecutive week that this figure has remained above the 40% level after it surged to 41.7% during the week ending January 9th. Long-time subscribers know that this statistic can be very useful in determining the amount of institutional interest in the market. The 40% level has been a key level throughout the past decade (see long-term chart). Notice that when we see spikes into this range as the market is skidding lower, the selloff typically comes to a halt soon thereafter. In virtually every case, the S&P is trading at a similar level or higher six months later. As a means of illustration, here’s a rundown of every instance over the last decade (as far back as our database extends) in which principal program activity accounted for 40%+ of total program volume on a down week for the S&P…

Principal Program % >40% on Down Week for S&P
01/09/09 SPX 890… S&P ??? six months later
06/23/06 SPX 1244… S&P +13.3% six months later
03/24/05 SPX 1171… S&P +6.0% six months later
07/02/04 SPX 1125… S&P +6.1% six months later
05/07/04 SPX 1098… S&P -0.3% six months later
04/16/04 SPX 1134… S&P -0.3% six months later
11/21/03 SPX 1035… S&P +6.1% six months later
09/12/03 SPX 1018… S&P +12.4% six months later
08/08/03 SPX 977… S&P +16.8% six months later
04/11/03 SPX 868… S&P +14.8% six months later
12/27/02 SPX 875… S&P +12.9% six months later
03/16/01 SPX 1150… S&P -1.5% six months later
10/09/98 SPX 984… S&P +30.3% six months later
08/28/98 SPX 1027… S&P +19.8% six months later

Just as telling as the market’s generally strong performance is the notable absence of such signals between the beginning of 1999 to the beginning of 2003 and again throughout all of the 2007-2008 period. Institutional investors appear to get aggressive with their own program trading only during relatively low-risk periods, usually after a major selloff has already taken place. For the first time in over two years, this indicator suggests we’re at one of those points once again. This jibes with the unusually light NASDAQ volume seen at the beginning of the year, which also points to a higher stock market around the middle of ’09 (see my January 5th column). I’ll have more on this in my next ‘big picture’ review, tentatively scheduled for Monday.

NYSE TICK action was positive throughout Friday’s session despite the mixed breadth stats. TICKscore settled at +43, Cumulative TICK +45,775. The S&P500 rebounded from a 2%+ deficit to finish slightly higher on the day, which isn’t a particularly positive sign for the short-term. Typically when the S&P bounces back from a solid selloff to finish with only modest gains, it turns and closes at a subsequently lower level within the next couple of sessions…

S&P Down 1.5%+ Intraday, Closes Up Less Than 1%
01/23/09?
01/15/09? Lower SPX close two sessions later
12/12/08? Lower SPX close one session later
11/25/08? No lower close within two sessions
11/18/08? Lower SPX close one session later
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

We still have a few short-term bullish setups that will stay on the board until Monday’s close, so it looks like we could see further strength on Monday followed by a resumption of the downtrend heading into midweek. Shares of General Electric plunged over 10% on Friday. As I noted in my January 13th column, when the S&P manages to close higher in the face of a 3%+ decline in shares of GE, the market generally struggles over the next few sessions. This tends to reinforce the notion that a rally on Monday will be met with another wave of selling pressure heading into the middle of the week.

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

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