Volatility, Breadth and Equity Put/Call Ratios Provide Clues for the Short-term

The OEX Volatility Index (VXO) closed higher Friday despite a solid gain for the S&P and 3:1 positive breadth. 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 three led to an S&P up more than 0.5% the next day?

Breadth 2:1 Positive, VXO Up
04/24/09? S&P ??? next day
04/02/09? S&P +1.0% next day (*)
02/06/09? S&P +0.2% next day
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

The NYSE McClellan Oscillator is back in overbought territory (>150) as of Friday’s close. Should NYSE advancers outnumber declines by more than 350 issues on Monday, it would keep the McClellan over +150 for a second day in a row and trigger a short-term sell signal (see my April 2nd column for a recent track record).

The Nasdaq triggered a one-day sell at Friday’s close based on the deteriorating breadth in the Wednesday-Thursday time frame. Note from the chart of the the Nasdaq advance/decline ratio that it declined both Wednesday and Thursday as the NDX rallied. Historically, when the a/d ratio declines twice on consecutive up days and the NDX manages to push even higher the next day, it’s a sell signal for the following session. The last thirty times that the Nasdaq has closed higher two days on a declining advance/decline ratio (as occurred Thursday) and managed to settle higher the next session (as occurred Friday) are listed in the table below, along with the performance of the NDX the following session. Note that in 23 out of 30 cases, or 77% of the time, the NDX closed lower the following session, significantly above the 48% at-any-time odds for a lower NDX close one day later. Also noteworthy is that in only three cases out of thirty did the Nasdaq close up 0.5% or more, while it lost 0.5% or more seventeen times…

Naz Up Two, A/D Down Two + Higher Close Next Day
04/24/09… Nasdaq100 ??? next day
01/31/08… Nasdaq100 +0.8% next day (*)
10/31/07… Nasdaq100 -1.9% next day
07/06/07… Nasdaq100 +0.0% next day
05/31/07… Nasdaq100 +0.0% next day
05/09/07… Nasdaq100 -1.6% next day
09/15/06… Nasdaq100 -0.0% next day
08/18/06… Nasdaq100 -1.0% next day
01/11/06… Nasdaq100 -0.6% next day
11/25/05… Nasdaq100 -1.0% next day
11/07/05… Nasdaq100 -0.1% next day
07/13/05… Nasdaq100 +1.0% next day (*)
05/23/05… Nasdaq100 +0.3% next day
05/04/05… Nasdaq100 -0.1% next day
12/06/04… Nasdaq100 -1.9% next day
11/08/04… Nasdaq100 -0.0% next day
10/06/04… Nasdaq100 -1.3% next day
09/14/04… Nasdaq100 -1.3% next day
05/28/04… Nasdaq100 +0.2% next day
09/02/03… Nasdaq100 -0.1% next day
08/21/03… Nasdaq100 -0.8% next day
05/30/03… Nasdaq100 -1.1% next day
04/17/03… Nasdaq100 -0.2% next day
11/06/02… Nasdaq100 -3.8% next day
05/17/02… Nasdaq100 -2.5% next day
03/06/02… Nasdaq100 -0.9% next day
11/05/01… Nasdaq100 +2.9% next day (*)
10/08/01… Nasdaq100 -2.7% next day
05/02/01… Nasdaq100 -4.3% next day
08/24/00… Nasdaq100 -0.5% next day
03/27/00… Nasdaq100 -2.6% next day

Finally, the CBOE equity put/call ratio is pointing to a lower S&P (below Friday’s settlement) at Tuesday’s close. The reasoning is that on Thursday and Friday the S&P500 closed higher even as the 10-day moving average of the equity put/call ratio also moved higher. Historically, the ratio moving average moves inversely to the market, rising during bearish periods and falling during bullish periods. When the market pushes higher during what is traditionally a bearish period, as it did on Thursday and Friday, it generally means the rally is on shaky ground short-term. Each of the last thirty instances is noted in the table below, along with the S&P performance over the next two sessions…

CBOE Equity Put/Call 10d Avg Rising, S&P Closes Up Two
04/24/09… ???
04/02/09… No lower close two sessions later
02/12/09… Lower S&P500 close two sessions later
01/16/09… Lower S&P500 close two sessions later
09/12/08… Lower S&P500 close two sessions later
09/11/08… Lower S&P500 close two sessions later
09/08/08… Lower S&P500 close two sessions later
06/16/08… Lower S&P500 close two sessions later
06/13/08… Lower S&P500 close two sessions later
05/29/08… Lower S&P500 close two sessions later
04/07/08… Lower S&P500 close two sessions later
02/13/08… Lower S&P500 close two sessions later
02/12/08… Lower S&P500 close two sessions later
01/10/08… Lower S&P500 close two sessions later
12/24/07… Lower S&P500 close two sessions later
12/13/07… Lower S&P500 close two sessions later
10/23/07… Lower S&P500 close two sessions later
08/02/07… Lower S&P500 close two sessions later
05/30/07… No lower close two sessions later
05/04/07… No lower close two sessions later
05/03/07… No lower close two sessions later
05/02/07… No lower close two sessions later
03/12/07… Lower S&P500 close two sessions later
03/09/07… Lower S&P500 close two sessions later
02/14/07… No lower close two sessions later
01/31/07… No lower close two sessions later
12/05/06… Lower S&P500 close two sessions later
10/31/06… Lower S&P500 close two sessions later
10/26/06… Lower S&P500 close two sessions later
10/25/06… Lower S&P500 close two sessions later
10/04/06… Lower S&P500 close two sessions later

Note that in 23 out of 30 cases, or 77% of the time, the S&P closed lower two sessions later, significantly above the 50% at-any-time odds for a lower S&P two days later.

From an intermediate-term perspective, keep in mind that the one-week buy signal outlined in Thursday evening’s column was triggered Friday, so while it looks like we’ll see lower prices early this week, indications suggest the rally will resume later in the week.

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

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