A Spark of Fear

Another relatively tame close masked aggressive institutional selling beneath the surface. TICKscore settled at -64, Cumulative TICK -107,000. Breadth closed 2:1 negative for the third consecutive session. The relentless selling seems to have finally sparked a bit of fear among speculators. Note that the Nasdaq/NYSE Volume Ratio closed at its lowest level of the month at 1.36, and that the CBOE Equity Put/Call Ratio closed above .90, the second time in the last three days we’ve seen a reading over .90. As I recently noted in my January 14th column, three straight readings over .90 has typically led to a rally over the next couple of days given the heightened level of fear. We didn’t quite see three readings over .90 this week, but it was close.

Semiconductors underperformed in a big way Thursday, nearly tripling the percentage loss for the Nasdaq100. It missed by the slimmest of margins (.07%), but this type of extreme underperformance by the SOX has generally been a short-term negative sign. See my December 18th column for details.

While the SOX action hints at the potential for another lower close, it’s hard not to look for a short-term rally to unfold given the combination of technically oversold conditions and the spark of fear mentioned earlier. The 2-day RSI for the S&P500 settled right on the 2.0 mark Thursday, triggering a short-term buy signal. The table below lists each of the last thirty instances in which the S&P’s 2-day RSI closed at or below 2.0, along with the performance of the S&P500 by the time the RSI rose back over 2.0 and the number of days elapsed…

S&P500 2-day RSI Closes <=2.0
02/19/09… S&P500 ??? when 2day RSI >2
10/08/08… S&P500 +1.9% when 2day RSI >2 (three sessions)
01/22/08… S&P500 +2.1% when 2day RSI >2 (one session)
01/04/08… S&P500 +0.3% when 2day RSI >2 (one session)
02/27/07… S&P500 +0.6% when 2day RSI >2 (one session)
06/13/06… S&P500 +0.5% when 2day RSI >2 (one session)
06/27/05… S&P500 +0.9% when 2day RSI >2 (one session)
01/04/05… S&P500 -0.0% when 2day RSI >2 (two sessions)
08/06/04… S&P500 +0.1% when 2day RSI >2 (one session)
03/11/04… S&P500 +1.3% when 2day RSI >2 (one session)
01/22/03… S&P500 +1.0% when 2day RSI >2 (one session)
09/19/02… S&P500 +0.3% when 2day RSI >2 (one session)
09/03/02… S&P500 +1.8% when 2day RSI >2 (one session)
07/22/02… S&P500 +3.0% when 2day RSI >2 (two sessions)
04/26/02… S&P500 +0.1% when 2day RSI >2 (two sessions)
09/20/01… S&P500 +2.0% when 2day RSI >2 (two sessions)
09/07/01… S&P500 +0.6% when 2day RSI >2 (one session)
06/15/01… S&P500 -0.1% when 2day RSI >2 (two sessions)
02/09/01… S&P500 +1.2% when 2day RSI >2 (one session)
11/10/00… S&P500 +1.3% when 2day RSI >2 (two sessions)
10/11/00… S&P500 +0.8% when 2day RSI >2 (two sessions)
09/18/00… S&P500 +1.1% when 2day RSI >2 (one session)
04/14/00… S&P500 +3.3% when 2day RSI >2 (one session)
01/24/00… S&P500 +0.6% when 2day RSI >2 (one session)
10/15/99… S&P500 +0.5% when 2day RSI >2 (one session)
08/04/99… S&P500 +0.6% when 2day RSI >2 (one session)
05/25/99… S&P500 +1.6% when 2day RSI >2 (one session)
04/19/99… S&P500 +1.3% when 2day RSI >2 (one session)
08/31/98… S&P500 +3.8% when 2day RSI >2 (one session)
07/23/98… S&P500 +0.1% when 2day RSI >2 (one session)
01/09/98… S&P500 +1.2% when 2day RSI >2 (one session)

Note that in 27 out of 30 cases, or 90% of the time, the S&P posted a subsequently higher close one or two sessions later. That’s significantly greater than the 65% at-any-time odds of a higher close within the next two days. Also note that the worst loss in 29 out of the last 30 cases was only 0.1%, suggesting limited downside potential over the short-term.

Another short-term positive sign was the contraction in new 52-week lows on Thursday despite the S&P falling to a fresh two-month low. Historically, new 52-week lows will expand roughly 9 out of 10 times when the S&P hits a one-month low. When this doesn’t occur, it’s generally a positive sign for the short-term. The table below lists each of the last thirty occurrences, along with the performance of the S&P500 over the next 2-3 trading days. Note that in 27 out of 30 cases, the drop in new lows ultimately led to a higher S&P two or three sessions later. That 90% win rate is significantly better than the 63% at-any-time odds of a higher SPX close 2-3 sessions later…

S&P500 Hits One-Month Low on a Drop in New 52-week Lows
02/19/09… S&P500 ???
01/21/09… S&P500 -0.4% three sessions later
11/21/08… S&P500 +7.2% two sessions later
10/09/08… S&P500 +10.3% two sessions later
10/07/08… S&P500 -9.7% three sessions later
09/17/08… S&P500 +8.5% two sessions later
07/14/08… S&P500 +1.4% two sessions later
06/19/08… S&P500 -2.1% three sessions later
06/12/08… S&P500 +1.5% two sessions later
06/03/08… S&P500 +1.9% two sessions later
05/27/08… S&P500 +0.9% two sessions later
01/23/08… S&P500 +1.2% three sessions later
01/07/08… S&P500 +0.3% three sessions later
11/21/07… S&P500 +0.8% three sessions later
11/09/07… S&P500 +1.9% two sessions later
07/31/07… S&P500 +1.2% two sessions later
07/27/07… S&P500 +0.5% three sessions later
06/08/07… S&P500 +0.5% three sessions later
06/14/06… S&P500 +1.8% two sessions later
05/18/06… S&P500 +0.0% two sessions later
01/03/06… S&P500 +0.4% two sessions later
08/30/05… S&P500 +1.1% two sessions later
08/24/05… S&P500 +0.2% three sessions later
04/18/05… S&P500 +1.2% three sessions later
08/13/04… S&P500 +1.6% two sessions later
07/23/04… S&P500 +0.8% two sessions later
07/15/04… S&P500 +0.2% three sessions later
09/29/03… S&P500 +1.2% two sessions later
08/05/03… S&P500 +0.9% two sessions later
12/31/02… S&P500 +3.3% two sessions later
10/10/02… S&P500 +4.7% two sessions later

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

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