A Longer-term Look at Volume

Stock indexes settled sharply lower Monday, although institutional selling pressure was once again mild. NYSE volume barely topped Friday’s already low level, TICKscore closed at -38 and Cumulative TICK at -96,000. Note that the 20-day moving average of the Cumulative TICK is still trending higher. That will most likely persist through end of the week as the extreme negative readings from early March fall off the average.

Breadth closed 7:1 in favor of declining issues Monday, sending the McClellan Oscillator back to neutral territory and closing out the (losing) sell signal triggered back on March 16th. The intermediate-term sell related to the depressed new high-low index also fell off the board Monday.

With S&P futures posting an unfilled downside gap, there’s one thing bulls wouldn’t want to see on Tuesday – another 1%+ down day. It’s not what I’m expecting, but it would have negative short-term implications if it does occur. Historically, a solid selloff immediately following a downside gap generally leads to a bit more follow-through over the next 1-4 sessions. Since 1990, there have been 144 sessions in which S&P futures left a downside gap unfilled. In only 18 cases, or 13% of the time did the S&Ps proceed to drop over 1% the following day. When this has occurred, there’s typically further downside in store, either immediately or after a short-term period of consolidation. Every instance since 1990 in which the front-month S&P contract closed down over 1% following an unfilled downside gap is listed in the table below. For this to occur Tuesday, June S&Ps would have to settle below 776.50…

S&P Futures -1% following Unfilled Downside Gap
03/03/09… Lower S&P close two sessions later
10/07/08… Lower S&P close one session later
05/21/08… Lower S&P close two sessions later
11/18/03… Lower S&P close two sessions later
01/21/03… Lower S&P close one session later
09/24/02… Lower S&P close four sessions later
07/22/02… Lower S&P close one session later
03/12/01… Lower S&P close two sessions later
02/20/01… Lower S&P close one session later
09/15/99… Lower S&P close four sessions later
07/30/99… Lower S&P close two sessions later
05/06/98… Lower S&P close one session later
10/24/97… Lower S&P close one session later
12/12/96… Lower S&P close two sessions later
05/09/94… Lower S&P close two sessions later
03/25/94… Lower S&P close two sessions later
10/10/90… Lower S&P close one session later
08/22/90… Lower S&P close one session later

Back on March 24th when the S&P was trading at 806, I discussed an intermediate-term bullish setup based on the statistical tools R-Squared and Linear Regression slope. At the time, I noted that the indicators suggested the market was in the midst of an unusually strong uptrend, one that wasn’t likely to fail without a fight. The S&P was higher two weeks later in the majority of cases, but the more significant fact was that downside potential was limited to 2% or less in each of the last thirty occurrences stretching back to 1991. This implies an area of intermediate-term support around SPX 790 that should be good through April 7th. With the S&P trading just below that level today, this tells us to expect the market to begin basing out shortly and start working its way higher heading into the first part of next week.

On Sunday, I noted that NYSE volume recently hit its lowest level in over a month. From a longer-term perspective, it’s equally true that this comes at a time when NYSE volume in general has been running at unusually high levels. Note from the long-term chart that the 20-day moving average of big board volume is trading at its highest level in over a year. That’s a generally bullish sign looking out a few months, as it reflects an environment in which institutional investors are unusually active. The table below lists each of the last thirty occurrences in which the 20-day average of NYSE volume hit a one-year high (for the first time in at least three weeks). Note that in 25 out of 30 cases, or 83% of the time, the S&P was trading at a subsequently higher level three months later. That’s significantly greater than the 63% at-any-time odds for a higher S&P three months later. This setup was recently triggered on March 16th when the S&P was trading at 753…

NYSE Volume 20-day Average at One-year High
03/16/09… S&P500 ??? three months later
08/01/07… S&P500 +3.3% three months later
05/24/06… S&P500 +3.5% three months later
01/31/06… S&P500 +2.3% three months later
10/07/05… S&P500 +6.5% three months later
04/15/05… S&P500 +7.0% three months later
03/18/05… S&P500 +1.2% three months later
01/28/04… S&P500 +1.1% three months later
07/17/02… S&P500 -11.3% three months later
09/21/01… S&P500 +17.5% three months later
04/06/01… S&P500 +9.4% three months later
12/22/00… S&P500 -14.4% three months later
10/24/00… S&P500 -4.0% three months later
03/07/00… S&P500 +6.9% three months later
01/26/00… S&P500 +2.2% three months later
12/17/99… S&P500 -2.0% three months later
11/10/99… S&P500 +3.7% three months later
04/22/99… S&P500 +3.6% three months later
02/01/99… S&P500 +6.1% three months later
10/16/98… S&P500 +16.9% three months later
08/05/98… S&P500 +0.4% three months later
01/30/98… S&P500 +10.7% three months later
10/08/97… S&P500 +0.3% three months later
07/16/97… S&P500 +3.6% three months later
01/23/97… S&P500 -2.2% three months later
12/20/96… S&P500 +4.9% three months later
11/22/96… S&P500 +7.2% three months later
03/12/96… S&P500 +5.6% three months later
01/29/96… S&P500 +4.2% three months later
12/13/95… S&P500 +3.0% three months later
07/10/95… S&P500 +4.5% three months later

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

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