Stock Market Closes out Month of February on a Downbeat Note

When the S&P500 closes lower on the final two trading days of a month, as just occurred at the end of last week, the market has a better-than-average chance of trading higher during the first 2-3 days of the next month. The table below lists each of the last thirty instances in which the S&P closed lower the last two sessions of the month. Note that in 26 out of 30 occurrences, or 87% of the time, the S&P posted a subsequently higher close (above Friday?s) 2-3 trading days later. That 87% win rate is significantly greater than the 63% at-any-time odds for a higher S&P close 2-3 sessions later?

S&P500 Closes Down Last Two Days of Month
02/27/09? S&P500 ???
01/30/09? S&P500 +1.5% two sessions later
04/30/08? S&P500 +2.0% two sessions later
02/29/08? S&P500 +0.2% three sessions later
06/29/07? S&P500 +1.4% two sessions later
04/30/07? S&P500 +0.9% two sessions later
12/29/06? S&P500 +0.0% two sessions later
08/31/06? S&P500 +0.7% two sessions later
03/31/06? S&P500 +0.9% two sessions later
12/30/05? S&P500 +2.0% two sessions later
06/30/05? S&P500 +1.2% two sessions later
11/30/04? S&P500 +1.4% two sessions later
04/30/04? S&P500 +1.1% two sessions later
06/30/03? S&P500 +2.0% two sessions later
03/31/03? S&P500 +3.9% two sessions later
09/30/02? S&P500 +1.6% two sessions later
08/30/02? S&P500 -4.0% three sessions later
10/31/01? S&P500 +2.6% two sessions later
02/28/01? S&P500 +0.1% three sessions later
11/30/99? S&P500 +1.5% two sessions later
08/31/99? S&P500 +2.8% three sessions later
07/30/99? S&P500 -1.8% three sessions later
04/30/99? S&P500 +0.9% three sessions later
03/31/99? S&P500 +2.7% two sessions later
02/26/99? S&P500 -0.9% three sessions later
12/31/98? S&P500 +1.3% two sessions later
08/31/98? S&P500 +3.4% two sessions later
08/29/97? S&P500 +3.2% two sessions later
03/31/97? S&P500 -0.9% three sessions later
02/28/97? S&P500 +0.0% two sessions later
12/31/96? S&P500 +1.0% two sessions later

The Nasdaq/NYSE Volume Ratio hit its lowest level of the year Friday at 1.09, a short-term positive sign as it implies relatively light speculative participation. Institutions were actively involved in Friday’s session on both the buy and sell side, leading to wide swings and heavy volume. Bank stocks continued to act as a drag on the major averages, but selling pressure was contained considering the 8%+ selloff in the BKX. TICKscore settled at -6, Cumulative TICK -12,000. Breadth closed 2:1 negative. New 52-week lows expanded but remain well below the 500+ level from February 20th even as the S&P made new lows. That’s a positive divergence as long as the number of new lows remains below 555. I’d also note a positive divergence working between the S&P and cumulative breadth, which is currently forming a series of higher lows in contrast to the lower lows for the S&P.

Principal program trading activity remains high (>40%), about the only positive thing you can say about the market from a longer-term perspective (see my January 25th column for details). Look back at times when principal program activity remained persistently above 40% (beginning of 2003, mid-2004 and throughout 2005) and note that breakdowns (violations of previous support) during these time frames were typically fakeouts from a longer-term perspective. That’s the one bit of good news regarding the S&P’s recent break into new lows – it may ultimately prove to be a fakeout. I’d have more confidence in that viewpoint if the 20-day moving average of the Nasdaq/NYSE Volume Ratio wasn’t so high, but if readings over the past seven days are any indication, this average could come back down to more average levels over the next 2-3 weeks. If it does, and that’s still a big ‘if’ at the moment, it could set the stage for an intermediate-term rally to take hold.

From a ‘big picture’ perspective, nothing has changed. All of the key indicators cited in our last big picture review remain decidedly bearish. While the elevated program activity suggests the S&P could bottom out in the next 2-3 weeks and stage a rally heading into mid-year, such a rally would probably represent a selling opportunity looking out to year-end.

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

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