Market Swinging from Negative to Positive Extremes, Suggesting Choppy Conditions in Store

Advancing issues outnumbered decliners by more than a 3:1 margin on the NYSE, the fourth 3:1 positive breadth session in the last five days. That’s sent the Cumulative Breadth line cleanly above its early November high, indicating most stocks are performing better than the benchmark average. Cumulative TICK settled at +107,000, the fourth consecutive 100,000+ reading. Notice from this longer-term chart of the Cumulative Adjusted TICK that NYSE TICK action has swung from extremely negative in late November to its current extremely positive position (the big downswing in July ’07 was due to the elimination of the uptick rule). Similar action can be seen among breadth-based indicators. After posting the lowest reading ever recorded last October, we’re now seeing the polar opposite as the NYSE McClellan Oscillator closed at a record high +386. Again, the market is swinging from one extreme to the other. Last October, the extreme negative reading preceded choppy, sideways action over the next few weeks, and I wouldn’t be surprised to see similar action following today’s positive extreme.

With the S&P posting its fifth higher high on Tuesday, it’s noteworthy that in recent years, five consecutive higher highs and a higher close has often led to a lower S&P close 3-4 trading days later. The last thirty occurrences are listed in the table below. Note that in 23 cases, or 77% of the time, the S&P was trading lower 3-4 sessions later, well above the 54% at-any-time odds of a lower S&P 3-4 days later…

Five Higher Highs and S&P Closes Higher
01/06/09… ???
05/16/08… Lower S&P close three sessions later
08/24/07… Lower S&P close three sessions later
07/03/07… Lower S&P close four sessions later
06/04/07… Lower S&P close three sessions later
03/21/07… Lower S&P close four sessions later
02/06/07… Lower S&P close three sessions later
01/16/07… Lower S&P close three sessions later
10/26/06… Lower S&P close three sessions later
08/18/06… Lower S&P close three sessions later
07/28/06… Lower S&P close three sessions later
04/20/06… Lower S&P close three sessions later
03/14/06… No lower close 3-4 sessions later
02/22/06… Lower S&P close four sessions later
01/30/06… Lower S&P close three sessions later
01/09/06… Lower S&P close three sessions later
11/23/05… Lower S&P close three sessions later
06/16/05… No lower close 3-4 sessions later
05/23/05… No lower close 3-4 sessions later
03/07/05… Lower S&P close three sessions later
12/15/04… Lower S&P close three sessions later
11/01/04… No lower close 3-4 sessions later
10/04/04… Lower S&P close three sessions later
08/02/04… Lower S&P close three sessions later
05/27/04… Lower S&P close four sessions later
04/01/04… No lower close 3-4 sessions later
01/21/04… Lower S&P close four sessions later
01/05/04… Lower S&P close four sessions later
12/23/03… No lower close 3-4 sessions later
12/01/03… Lower S&P close three sessions later
10/31/03… No lower close 3-4 sessions later

The New High-Low Index triggered an intermediate-term sell signal Tuesday as the S&P is now up over 5% from its two-week ago close and the High-Low Index remains well south of the 80% level. Historically, a 5%+ up move without a correspondingly high Index reading has typically led to a challenging time for stocks over the next two weeks. The table below lists each of the last thirty separate instances in which the S&P500 was up 5% from its ten-day ago close and the New High-Low Index was under 80%, along with the performance of the S&P500 two weeks later. Note the general theme of limited upside potential. In 21 out of 30 cases, or 70% of the time, the S&P was trading at a lower level two weeks later, significantly greater than the 47% at-any-time odds of a lower S&P two weeks later…

S&P500 +5% Over Two Weeks, New High-Low Index <80%
01/06/09… S&P500 ??? two weeks later
12/15/08… S&P500 +2.5% two weeks later
12/05/08… S&P500 +1.4% two weeks later
11/07/08… S&P500 -14.1% two weeks later
11/04/08… S&P500 -14.6% two weeks later
08/11/08… S&P500 -3.0% two weeks later
04/28/08… S&P500 +0.5% two weeks later
04/03/08… S&P500 -0.3% two weeks later
04/01/08… S&P500 -2.6% two weeks later
12/10/07… S&P500 -1.3% two weeks later
12/06/07… S&P500 -3.1% two weeks later
03/18/03… S&P500 -0.9% two weeks later
01/06/03… S&P500 -4.5% two weeks later
11/27/02… S&P500 -4.0% two weeks later
11/25/02… S&P500 -3.1% two weeks later
10/28/02… S&P500 -1.6% two weeks later
08/27/02… S&P500 -2.7% two weeks later
08/15/02… S&P500 -1.3% two weeks later
11/13/01… S&P500 -0.9% two weeks later
10/10/01… S&P500 +0.4% two weeks later
10/04/01… S&P500 -0.1% two weeks later
04/18/01… S&P500 +2.3% two weeks later
10/31/00… S&P500 -3.3% two weeks later
06/09/00… S&P500 -1.1% two weeks later
06/07/00… S&P500 +0.5% two weeks later
05/01/00… S&P500 -1.1% two weeks later
03/21/00… S&P500 +0.1% two weeks later
03/16/00… S&P500 +2.0% two weeks later
11/16/99… S&P500 -1.5% two weeks later
11/03/99… S&P500 +4.1% two weeks later
08/24/99… S&P500 -1.4% two weeks later

On the plus side, the recent string of lopsided positive breadth readings has pushed the Standard & Poors Oscillator to a very high 8.0 as of Tuesday’s close, the highest reading in years. As I discussed in my December 10th column, readings over 7.0 reflect an unusually persistent uptrend, and the S&P has a good record of closing at a higher level one month later. This implies weakness over the next 1-2 weeks could prove to be a buying opportunity heading into early February.

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

 Print This Post