Nearly Three Months of Below-Average Volatility

Bullish setups are in the process of falling off the board, leaving the market increasingly vulnerable given that institutional buying power appears to have peaked in early May and remains on the decline. As I mentioned back on May 18th… “Looking out beyond the next few days, it?s hard not to notice that the 20-day average of the Cumulative TICK topped out over a week ago and has been trending steadily lower since that time. With a long string of positive readings set to fall off the average over the next few weeks, it looks like the 20-day average will have a tough time taking out that early May top.” Given the strong correlation between the S&P500 and Cumulative TICK 20-day average, it’s not surprising that the S&P also ran into resistance around its early May top.

The NASDAQ/NYSE Volume Ratio remains on a sell after the surge in speculative activity that began about a month ago sent the 20-day moving average above 1.50. It appears that speculators stepped up when institutional interest began to wane earlier this month, which has negative implications from an intermediate-term perspective.

Interesting to note that Friday marked the 53rd consecutive session that the volatility index (VXO) has closed under its 20-day moving average. Historically, just 30 sessions under the 20-day average represents a fairly extreme situation. It’s only happened seven other times since the VXO began trading in 1986, each of which are listed in the table below along with the performance of the S&P by the time the VXO closed back over its 20-day average (and the total number of days spent below the average)…

VXO Under Its 20-day Moving Average Thirty Days in a Row
04/21/09… S&P500 +4.5% (open – 53 Days & Counting)
05/01/08… S&P500 -1.3% (43 days)
11/13/03… S&P500 -1.4% (31 days)
05/01/03… S&P500 +0.5% (41 days)
11/21/02… S&P500 -1.4% (36 days)
05/22/01… S&P500 -4.1% (35 days)
02/25/98… S&P500 -0.8% (35 days)
06/15/87… S&P500 +4.8% (63 days)

Note that we’ve exceeded all but the longest streak back in 1987, suggesting it won’t be long before the VXO closes back over its 20-day average and that the S&P’s upside potential is most likely limited until that occurs.

One interesting point from a seasonal point of view is that the session immediately following the Memorial Day break tends to usher in a flat-to-up market over the next few sessions. It’s not a tradable edge, however, with 20 out of 30 cases (67%) leading to a higher S&P three days later. That’s NOT significantly better than the 55% at-any-time odds for a higher S&P three sessions later. Still, it’s noteworthy that only 2 times out of 30, or 7% of the time, did the S&P end down 1%+. This time frame begins at Tuesday’s close and remains in effect until Friday’s close…

Three Sessions Following Post-Memorial Day Session
05/26/09… S&P500 ??? three sessions later
05/27/08… S&P500 +1.1% three sessions later
05/29/07… S&P500 +1.2% three sessions later
05/30/06… S&P500 +2.3% three sessions later
05/31/05… S&P500 +0.4% three sessions later
06/01/04… S&P500 +0.1% three sessions later
05/27/03… S&P500 +1.3% three sessions later
05/28/02… S&P500 -0.7% three sessions later
05/29/01… S&P500 -0.6% three sessions later
05/30/00… S&P500 +3.9% three sessions later
06/01/99… S&P500 +2.6% three sessions later
05/26/98… S&P500 -0.3% three sessions later
05/27/97… S&P500 -0.2% three sessions later
05/28/96… S&P500 -0.5% three sessions later
05/30/95… S&P500 +1.7% three sessions later
05/31/94… S&P500 +0.8% three sessions later
06/01/93… S&P500 -0.7% three sessions later
05/26/92… S&P500 +1.0% three sessions later
05/28/91… S&P500 +2.1% three sessions later
05/29/90… S&P500 +0.7% three sessions later
05/30/89… S&P500 +2.0% three sessions later
05/31/88… S&P500 +1.6% three sessions later
05/26/87… S&P500 +0.3% three sessions later
05/27/86… S&P500 +1.1% three sessions later
05/28/85… S&P500 +0.9% three sessions later
05/29/84… S&P500 +2.0% three sessions later
05/31/83… S&P500 +1.3% three sessions later
06/01/82… S&P500 -1.4% three sessions later (*)
05/26/81… S&P500 -0.1% three sessions later
05/27/80… S&P500 -1.3% three sessions later (*)
05/29/79… S&P500 -0.9% three sessions later

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

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