Uptick in Volatility a Short-term Negative, Plus a Long-term Look at NASDAQ Volume

Despite lopsided positive breadth and bullish NYSE TICK action (TICKscore +51, Cumulative TICK +121,000), the market couldn’t maintain any traction on the upside and settled with modest losses Monday. The OEX Volatility Index (VXO) closed higher, which is noteworthy given that advancers outpaced decliners by nearly a 2:1 margin. When volatility increases in the face of a lopsided positive breadth session, the market typically struggles to post more than modest gains the following session. Out of the last 30 occurrences, only two led to an S&P up more than 0.5% the next day…

Breadth 2:1 Positive, VXO Up
11/28/08… S&P -8.9% next day
10/16/08… S&P -0.6% next day
01/29/08… S&P -0.5% next day
08/08/07… S&P -3.0% next day
04/25/07… S&P -0.1% next day
10/16/06… S&P -0.4% next day
10/05/06… S&P -0.3% next day
06/30/06… S&P +0.8% next day (*)
01/04/06… S&P +0.0% next day
07/28/05… S&P -0.8% next day
06/16/05… S&P +0.5% next day
05/27/05… S&P -0.6% next day
12/28/04… S&P -0.0% next day
12/13/04… S&P +0.4% next day
11/12/04… S&P -0.0% next day
11/04/04… S&P +0.4% next day
03/05/04… S&P -0.8% next day
12/18/03… S&P -0.1% next day
10/27/03… S&P +1.5% next day (*)
10/13/03… S&P +0.4% next day
09/08/03… S&P -0.8% next day
09/02/03… S&P +0.4% next day
07/07/03… S&P +0.3% next day
06/04/03… S&P +0.4% next day
05/27/03… S&P +0.2% next day
05/06/03… S&P -0.5% next day
03/17/03… S&P +0.4% next day
11/27/02… S&P -0.3% next day
11/06/02… S&P -2.3% next day
03/06/02… S&P -0.5% next day

A 2:1 positive breadth session on the NYSE typically coincides with a strong up day for the stock market, although that wasn’t the case Monday. When the S&P500 can’t manage to gain more than 0.5% on a day when advancing issues outnumber declining issues by more than a 2:1 margin, it’s a sign of a tired market. Typically, the S&P will close flat-to-down the following session. The last thirty instances are listed in the table below. Again, note the tendency for limited upside potential, with only two cases leading to a gain of more than 0.5% the next session…

Breadth 2:1 Positive, S&P Up <0.5%
09/27/07… S&P500 -0.3% next day
06/01/07… S&P500 +0.2% next day
05/25/07… S&P500 +0.2% next day
03/15/07… S&P500 -0.4% next day
02/01/07… S&P500 +0.2% next day
01/19/07… S&P500 -0.5% next day
12/26/06… S&P500 +0.7% next day (*)
10/26/06… S&P500 -0.9% next day
10/25/06… S&P500 +0.5% next day
10/16/06… S&P500 -0.4% next day
10/05/06… S&P500 -0.3% next day
09/13/06… S&P500 -0.1% next day
08/29/06… S&P500 +0.0% next day
08/28/06… S&P500 +0.2% next day
06/30/06… S&P500 +0.8% next day (*)
01/24/06… S&P500 -0.2% next day
01/09/06… S&P500 -0.0% next day
01/04/06… S&P500 +0.0% next day
07/22/05… S&P500 -0.4% next day
07/20/05… S&P500 -0.7% next day
06/16/05… S&P500 +0.5% next day
05/27/05… S&P500 -0.6% next day
01/26/05… S&P500 +0.0% next day
12/15/04… S&P500 -0.2% next day
11/24/04… S&P500 +0.1% next day
10/21/04… S&P500 -1.0% next day
10/15/04… S&P500 +0.5% next day
09/16/04… S&P500 +0.4% next day
08/31/04… S&P500 +0.2% next day
08/27/04… S&P500 -0.8% next day

Technically, Monday just missed qualifying as a true 2:1 positive breadth session as the adv/dec ratio settled at 1.99. Still, it’s close enough that I believe the market is likely to follow the script outlined by the setups above as far as Tuesday’s session is concerned.

Back in mid-October I posted a ‘big picture’ review with five key longer-term indicators that were all in bearish territory. Four of those indicators remain bearish, but one has moved back into more average territory – the NASDAQ/NYSE Volume Ratio. That’s certainly not enough of a reason to turn bullish, but digging a little deeper I noticed something interesting. The ratio is well off its highs because NASDAQ volume in particular has really plunged over the past two months, much more so than NYSE volume. Note from the chart that the 20-day moving average of NASDAQ volume hit its lowest level in over a year at the end of 2008, a rare occurrence. Looking back at previous instances when the 20-day average hit a one-year low (for the first time in a month or more), we can see that this has generally preceded bullish times for the NASDAQ over the next 3-6 months…

NASDAQ Volume 20day Avg at One-Year Low
12/30/08… Nasdaq ??? three months later, ??? in six months
08/26/04… Nasdaq +11.8% three months later, +12.7% in six months
02/26/03… Nasdaq +15.6% three months later, +33.4% in six months
12/31/02… Nasdaq +2.6% three months later, +20.2% in six months
09/13/02… Nasdaq +5.9% three months later, +1.1% in six months
09/09/96… Nasdaq +13.2% three months later, +14.0% in six months
08/27/92… Nasdaq +14.1% three months later, +17.6% in six months
09/10/90… Nasdaq -4.6% three months later, +19.7% in six months
08/24/88… Nasdaq -2.3% three months later, +6.9% in six months
05/16/88… Nasdaq +1.4% three months later, +2.5% in six months
06/15/84… Nasdaq +6.9% three months later, +1.3% in six months
06/14/82… Nasdaq +5.6% three months later, +37.2% in six months
09/21/81… Nasdaq +5.8% three months later, -8.8% in six months

A dozen cases in roughly thirty years isn’t a particularly large sample, but the general tendency for the market to rally off of unusually low NASDAQ volume does make sense. It signals that speculative participants (weak hands) have been blown out, at least temporarily. It’s no wonder that in virtually every one of the above cases, the NASDAQ had been trending lower in the 1-2 months preceding the one-year low in volume. NASDAQ volume doesn’t hit a low when the market is surging. It only happens when enough speculators give up and throw in the towel, which appears to have occurred at the end of 2008. That’s one of the first longer-term bullish developments I’ve uncovered in quite some time.

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

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