Tech Strength a Positive Sign for Friday, Bank Weakness Points to a Lower S&P Next Week

Stock indices rebounded from a steep morning selloff to finish with modest gains Thursday. TICKscore settled at -23, Cumulative TICK -57,500. The Dow 2-day RSI rebounded back over 2.0, closing out that short-term buy setup triggered Wednesday. We remain in the positive 2-day time frame following Wednesday’s ‘six lower lows’ for S&P futures, suggesting the potential for upside follow-through on Friday. Additionally, Thursday’s strength in the technology sector pushed the Nasdaq100 above its three-week ago close, a bullish sign short-term given that the S&P is still off more than 1% compared to its three-week ago close. Historically, this type of relative outperformance by the Nasdaq has been a short-term positive sign for the S&P. The last thirty instances in which the S&P was down over 1% compared to its three-week ago close and the NDX was higher are listed in the table below. Note that in all but two cases, the S&P closed at a subsequently higher level within the next few sessions (usually the next day). That 93% win rate is significantly above the 72% ‘at-any-time’ odds of a higher S&P close within the next three days…

SPX -1% vs. Three Weeks Ago, NDX Higher
01/15/09… ???
08/26/08… Higher S&P close one session later
06/13/08… Higher S&P close one session later
06/04/08… Higher S&P close one session later
05/27/08… Higher S&P close one session later
11/01/07… Higher S&P close one session later
10/30/07… Higher S&P close one session later
10/19/07… Higher S&P close one session later
07/26/07… No higher S&P close within three days
07/10/07… Higher S&P close one session later
06/20/07… Higher S&P close one session later
04/17/06… Higher S&P close one session later
04/12/06… Higher S&P close one session later
10/19/05… Higher S&P close three sessions later
10/27/04… Higher S&P close one session later
09/28/04… Higher S&P close one session later
05/21/04… Higher S&P close one session later
03/29/04… Higher S&P close one session later
07/24/03… Higher S&P close one session later
07/10/03… Higher S&P close one session later
07/03/03… Higher S&P close one session later
03/14/03… Higher S&P close one session later
03/04/03… Higher S&P close one session later
02/24/03… Higher S&P close one session later
02/19/03… Higher S&P close two sessions later
11/13/02… Higher S&P close one session later
10/11/02… Higher S&P close one session later
07/17/02… No higher S&P close within three days
12/13/01… Higher S&P close one session later
12/11/01… Higher S&P close one session later
10/31/01… Higher S&P close one session later

But looking beyond Friday, today’s price action tilts the odds in favor of a lower close within the next couple of sessions, suggesting upside follow-through on Friday could be followed by a resumption of the downtrend on Tuesday. Historically, when the S&P trades sharply lower intraday but manages to finish with a modest gain, sellers typically regain the upper hand within the next couple of sessions. The table below lists all instances since 1990 in which the S&P500 traded down 1.5% or more intraday but ended with a gain of less than 1%. Note that out of 26 occurrences, 22 led to a lower S&P close within the next two sessions. That 85% win rate is significantly greater than the 60% at-any-time odds of a lower S&P close within the next two days…

S&P Down 1.5%+ Intraday, Closes Up Less Than 1%
01/15/09… ???
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

Also suggesting the first part of next week could be a rough one for stocks is Thursday’s severe underperformance by the banking sector (BKX -8%). While the S&P managed to shrug it off thanks to strength in tech and small caps, it’s doubtful that trend will continue much beyond Friday. The S&P typically struggles over the next few sessions when it bucks the trend of a solid down day for the BKX. The table below lists the last thirty instances in which the S&P500 closed higher on a day when the Philadelphia Bank Index lost more than 1.5%…

S&P Closes Higher Despite 1.5%+ Selloff for BKX
01/15/09… S&P500 ??? three sessions later
06/30/08… S&P500 -1.3% three sessions later
06/23/08… S&P500 -2.6% three sessions later
06/09/08… S&P500 -1.6% three sessions later
05/28/08… S&P500 -0.4% three sessions later
05/16/08… S&P500 -2.4% three sessions later
05/08/08… S&P500 +0.4% three sessions later
04/04/08… S&P500 -1.2% three sessions later
03/03/08… S&P500 -2.0% three sessions later
12/12/07… S&P500 -2.7% three sessions later
04/02/07… S&P500 +1.4% three sessions later
03/06/07… S&P500 +0.5% three sessions later
10/05/01… S&P500 +0.9% three sessions later
01/09/01… S&P500 +1.4% three sessions later
11/15/00… S&P500 -3.4% three sessions later
10/04/00… S&P500 -2.3% three sessions later
06/30/00… S&P500 +0.1% three sessions later
06/21/00… S&P500 -1.6% three sessions later
06/15/00… S&P500 -0.2% three sessions later
05/16/00… S&P500 -4.0% three sessions later
04/27/00… S&P500 -1.3% three sessions later
04/07/00… S&P500 -3.2% three sessions later
02/17/00… S&P500 -2.0% three sessions later
02/14/00… S&P500 -0.1% three sessions later
02/10/00… S&P500 -1.0% three sessions later
01/10/00… S&P500 -0.5% three sessions later
12/16/99… S&P500 +1.0% three sessions later
11/03/99… S&P500 +1.6% three sessions later
09/27/99… S&P500 -0.1% three sessions later
08/25/99… S&P500 -4.2% three sessions later
07/21/99… S&P500 -2.3% three sessions later

Note that in only eight cases out of thirty, or 27% of the time, was the S&P trading at a higher level three sessions later. That’s significantly worse than the 54% at-any-time odds for a higher S&P three sessions later. The S&P gained more than 0.5% over the next three days in only five cases out of thirty, while it lost more than 0.5% a total of seventeen times.

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

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