89% Declining Issues

The Last Hour indicator gained 200 points Monday given the weak first hour performance (recall that the indicator is calculated by comparing the market’s performance during the first and last hour of the trading day). Note from the long-term chart that this lead indicator has now retraced approximately 85% of the 2005-2007 selloff. Another 700 or so points and this indicator will have completed the retracement.

Monday’s extremely lopsided negative breadth sent the NYSE McClellan Oscillator back under +100, closing out the short-term sell setup triggered April 13th and leaving little on the board short-term.

Noteworthy that the number of declining issues on the NYSE accounted for nearly 90% of total issues traded. This would have been unheard of a couple of years ago. Consider that in the 40+ years between 1965 and June 2007, there were only 8 sessions in which declining issues accounted for over 85% of total issues traded. That’s an average of about 1 every 5 years (see long-term chart). Yet in under two years, we’ve now seen 25 such sessions between June 2007 and the present. That’s an average of over 1 a month! All 33 instances are listed in the table below, along with the S&P500′s performance over the next 1, 3 and 5 trading days…

85%+ Declining Issues
04/20/09…
03/30/09… S&P +1.3%, +6.0%, +6.1%
03/05/09… S&P +0.1%, +5.4%, +10.0%
03/02/09… S&P -0.6%, -2.6%, -3.5%
02/17/09… S&P -0.1%, -2.4%, -2.0%
01/20/09… S&P +4.4%, +3.3%, +5.0%
01/14/09… S&P +0.1%, -4.4%, -1.8%
12/01/08… S&P +4.0%, +3.6%, +11.5%
11/20/08… S&P +6.3%, +14.0%, +19.1%
11/19/08… S&P -6.7%, +5.6%, +10.1%
11/12/08… S&P +6.9%, -0.2%, -5.4%
10/15/08… S&P +4.3%, +8.5%, -1.2%
10/09/08… S&P -1.2%, +9.7%, +4.0%
10/07/08… S&P -1.1%, -9.7%, +0.2%
10/06/08… S&P -5.7%, -13.9%, -5.1%
09/29/08… S&P +5.4%, +0.7%, -4.5%
09/17/08… S&P +4.3%, +4.4%, +2.6%
09/15/08… S&P +1.8%, +1.2%, +1.2%
09/09/08… S&P +0.6%, +2.2%, -0.9%
03/06/08… S&P -0.8%, +1.3%, +0.9%
11/07/07… S&P -0.1%, -2.5%, -0.3%
08/14/07… S&P -1.4%, +1.4%, +1.4%
07/26/07… S&P -1.6%, -1.9%, -0.7%
07/24/07… S&P +0.5%, -3.5%, -3.7%
06/07/07… S&P +1.1%, +0.2%, +2.2%
05/10/04… S&P +0.8%, +0.9%, -0.3%
05/07/04… S&P -1.1%, -0.1%, -0.3%
10/27/97… S&P +5.1%, +3.1%, +7.1%
10/26/87… S&P +2.4%, +7.5%, +12.3%
10/19/87… S&P +5.2%, +10.3%, +1.2%
10/16/87… S&P -20.5%, -8.7%, -12.3%
10/10/79… S&P -0.2%, -1.8%, -1.8%
10/09/79… S&P -1.3%, -2.0%, -3.2%
08/29/66… S&P +1.8%, +4.3%, +3.3%

Note that the market’s short-term performance has been fairly erratic following these types of massively lopsided sessions. Looking out one week later, the S&P has been just as likely to trade higher or lower. The same can be said of sessions in which advancing issues accounted for over 85% of total issues traded. Since June 2007, there have been 15 such sessions. Between June 1965 and June 2007, there was ONE.

I bring this up today because a research paper from Barclays points to leveraged ETF’s and their daily rebalancing as a primary driver of the ‘herding’ effect seen the last couple of years. The data above seems to back up this point, as most of the popular leveraged ETF’s didn’t begin trading until 2007, right about the time we began to see massively lopsided breadth days on a regular basis.

Adam Warner over at Daily Options Report pulled out a few key paragraphs from a WSJ article that referenced the Barclays paper…

…say the [leveraged] fund’s net assets grow by $10 million during the day, to $110 million. The fund must raise its swap exposure from $200 million to $220 million to honor its 2-for-1 investment objective. That is $20 million in extra buy orders, all coming into the market after 3:30 p.m., typically in the final 10 minutes.

An inverse fund also must buy on a day when the market is up; since the value of its hedge has gone down, the fund must increase its exposure to keep its leverage ratio constant. Thus, all these ETFs buy in lockstep in the last few minutes of an up day for their index — and sell in a swarm at the end of a down day.

Further amplifying the ETFs’ actions: Every day, trading desks at big banks and brokerage firms blast out customized spreadsheets to favored clients. These tools, linked to live data feeds, predict whether the leveraged ETFs will be buying or selling as 4 p.m. approaches. That enables hedge funds and other big investors to trade ahead of the ETFs.

Of course, there is some debate as to how much leveraged ETF’s are really affecting the intraday action. One could point to the removal of the uptick rule in 2007 as another reason for the sudden jump in herding activity, although this wouldn’t explain the jump in the number of lopsided positive breadth days. One thing’s clear – all of this is probably good news for our intraday Volume Alert strategy, which attempts to exploit these increasingly common one-sided trading days. EOD subscribers can still view the Volume Alert updates on a one-day delayed basis via this link.

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

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