Looking to the Standard and Poors Oscillator for Signs of a Runaway Market
By
Rennie on Thursday, July 23rd, 2009 at 2:10 am
With the S&P managing to shrug off a number of short-term bearish setups over the last few days, we have to respect the possibility that the market’s in a runaway mode. Speculators are clearly the ones in the drivers’ seat, but it’s readily apparent that institutions are not stepping in and selling. NYSE TICK action reveals a notable absence of heavy sell programs even when the market is vulnerable, signaling a lack of interest in selling at these levels. We’ll want to keep an eye on the Cumulative TICKscore chart for signs of institutional distribution, but so far there’s been little-to-none. Left unchecked, speculators will drive the market straight up, similar to late 1999/early 2000, the only other period in which the market rallied sharply despite an extremely elevated Nasdaq/NYSE Volume Ratio. That rally ultimately led to the top for the Nasdaq, but there were months of upside before the market cracked.
One indicator suggests we could be nearing a time of similar upside. Our version of Standard & Poors Oscillator closed at a very high 9.9 today. Tuesday was the first session since May that we’ve seen an Oscillator reading over 7.0, which from an intermediate-term perspective puts the spotlight on the S&P’s performance over the next few days. The reasoning is that readings over 7 are rare. Contrary to what you might expect, unusually high readings more often than not lead to higher prices over the intermediate-term. This is not an overbought/oversold oscillator – you want to trade on the same side as the indicator, long when it’s over zero and short when it’s under zero. This is why unusually high readings are generally not bearish. They merely reflect an unusually strong trend. Two-thirds of the time, the S&P is trading at an even higher level one week later, which is pretty impressive considering that 7+ readings always come at relatively high points on the daily chart. What’s especially impressive is the performance of the S&P when it IS higher one week later (in other words, when there’s immediate follow-through). The table below lists all 29 instances since 1965 in which the S&P closed higher one week after the Standard & Poors Oscillator crossed over 7.0. Note the market’s consistently solid performance over the intermediate-term. Gains are not especially large, but the market generally has a consistent underlying bid.
S&P Oscillator Over 7.0, SPX Higher One Week Later
05/11/09… S&P +0.1% two weeks later
04/13/09… S&P -0.1% two weeks later
03/26/09… S&P +2.8% two weeks later
06/08/04… S&P +0.5% two weeks later
01/07/04… S&P +0.9% two weeks later
06/10/03… S&P +0.6% two weeks later
03/15/02… S&P -2.3% two weeks later
10/30/98… S&P +3.8% two weeks later
05/16/97… S&P +1.3% two weeks later
01/08/92… S&P +1.6% two weeks later
02/06/91… S&P +2.2% two weeks later
01/20/87… S&P +3.0% two weeks later
02/28/86… S&P +4.9% two weeks later
01/28/85… S&P -0.1% two weeks later
08/13/84… S&P +0.6% two weeks later
10/19/82… S&P +0.8% two weeks later
08/30/82… S&P +3.3% two weeks later
08/11/78… S&P +0.5% two weeks later
05/02/78… S&P +1.7% two weeks later
11/23/77… S&P -4.3% two weeks later
01/13/76… S&P +4.9% two weeks later
02/04/75… S&P +4.0% two weeks later
01/14/75… S&P +7.1% two weeks later
10/02/73… S&P +1.1% two weeks later
12/15/71… S&P +2.9% two weeks later
12/10/70… S&P +0.9% two weeks later
09/03/70… S&P -0.9% two weeks later
04/17/68… S&P +0.6% two weeks later
01/20/67… S&P +1.2% two weeks later
In 24 out of 29 occurrences, the S&P was higher two weeks later. That 83% win rate is significantly above the 56% at-any-time odds for a higher S&P ten trading days later. For this setup to go into effect, the S&P needs to close above Tuesday’s settlement of 954 next Tuesday (July 28th). If it does, odds would favor higher prices heading into the second week of August.
Also noteworthy that the Oscillator nearly closed over 10.0 on Wednesday, which would have made only the tenth time in forty years this indicator has hit such extreme levels. It could still top 10.0 in the next few days if we see one more strong session. The following is an updated reprint of my March 24th column, when the Oscillator closed over 10 for the first time in over twenty years…
There have only been nine other instances in the last forty years in which the Standard & Poors Oscillator closed over 10.0. Each of those instances is listed in the table below, along with the S&P500’s performance over the subsequent one, two and three-month time frames. While the sample size is small, the market’s consistently strong performance is nonetheless noteworthy considering the S&P’s overbought status at the time of the signal. In all nine cases, the S&P500 was higher one, two and three months later…
S&P Oscillator Closes Over 10.0
03/23/09… S&P +3.3%, +10.4%, +10.7%
01/06/92… S&P +1.1%, +2.8%, +1.1%
02/06/91… S&P +4.7%, +2.3%, +3.8%
01/15/87… S&P +4.6%, +9.1%, +12.9%
10/13/82… S&P +2.9%, +1.3%, +6.0%
08/25/82… S&P +4.6%, +17.2%, +16.6%
01/08/76… S&P +6.3%, +7.2%, +9.2%
02/03/75… S&P +6.5%, +6.9%, +15.5%
01/10/75… S&P +8.1%, +17.8%, +13.7%
Not to draw too much from only nine occurrences, but each of those share a key characteristic – from the trigger date, the market essentially never looked back. The largest drawdown (on a closing basis) was less than 2.5% in every case looking out as far as three months.
Looking to the Standard and Poors Oscillator for Signs of a Runaway Market
By Rennie on Thursday, July 23rd, 2009 at 2:10 amWith the S&P managing to shrug off a number of short-term bearish setups over the last few days, we have to respect the possibility that the market’s in a runaway mode. Speculators are clearly the ones in the drivers’ seat, but it’s readily apparent that institutions are not stepping in and selling. NYSE TICK action reveals a notable absence of heavy sell programs even when the market is vulnerable, signaling a lack of interest in selling at these levels. We’ll want to keep an eye on the Cumulative TICKscore chart for signs of institutional distribution, but so far there’s been little-to-none. Left unchecked, speculators will drive the market straight up, similar to late 1999/early 2000, the only other period in which the market rallied sharply despite an extremely elevated Nasdaq/NYSE Volume Ratio. That rally ultimately led to the top for the Nasdaq, but there were months of upside before the market cracked.
One indicator suggests we could be nearing a time of similar upside. Our version of Standard & Poors Oscillator closed at a very high 9.9 today. Tuesday was the first session since May that we’ve seen an Oscillator reading over 7.0, which from an intermediate-term perspective puts the spotlight on the S&P’s performance over the next few days. The reasoning is that readings over 7 are rare. Contrary to what you might expect, unusually high readings more often than not lead to higher prices over the intermediate-term. This is not an overbought/oversold oscillator – you want to trade on the same side as the indicator, long when it’s over zero and short when it’s under zero. This is why unusually high readings are generally not bearish. They merely reflect an unusually strong trend. Two-thirds of the time, the S&P is trading at an even higher level one week later, which is pretty impressive considering that 7+ readings always come at relatively high points on the daily chart. What’s especially impressive is the performance of the S&P when it IS higher one week later (in other words, when there’s immediate follow-through). The table below lists all 29 instances since 1965 in which the S&P closed higher one week after the Standard & Poors Oscillator crossed over 7.0. Note the market’s consistently solid performance over the intermediate-term. Gains are not especially large, but the market generally has a consistent underlying bid.
S&P Oscillator Over 7.0, SPX Higher One Week Later
05/11/09… S&P +0.1% two weeks later
04/13/09… S&P -0.1% two weeks later
03/26/09… S&P +2.8% two weeks later
06/08/04… S&P +0.5% two weeks later
01/07/04… S&P +0.9% two weeks later
06/10/03… S&P +0.6% two weeks later
03/15/02… S&P -2.3% two weeks later
10/30/98… S&P +3.8% two weeks later
05/16/97… S&P +1.3% two weeks later
01/08/92… S&P +1.6% two weeks later
02/06/91… S&P +2.2% two weeks later
01/20/87… S&P +3.0% two weeks later
02/28/86… S&P +4.9% two weeks later
01/28/85… S&P -0.1% two weeks later
08/13/84… S&P +0.6% two weeks later
10/19/82… S&P +0.8% two weeks later
08/30/82… S&P +3.3% two weeks later
08/11/78… S&P +0.5% two weeks later
05/02/78… S&P +1.7% two weeks later
11/23/77… S&P -4.3% two weeks later
01/13/76… S&P +4.9% two weeks later
02/04/75… S&P +4.0% two weeks later
01/14/75… S&P +7.1% two weeks later
10/02/73… S&P +1.1% two weeks later
12/15/71… S&P +2.9% two weeks later
12/10/70… S&P +0.9% two weeks later
09/03/70… S&P -0.9% two weeks later
04/17/68… S&P +0.6% two weeks later
01/20/67… S&P +1.2% two weeks later
In 24 out of 29 occurrences, the S&P was higher two weeks later. That 83% win rate is significantly above the 56% at-any-time odds for a higher S&P ten trading days later. For this setup to go into effect, the S&P needs to close above Tuesday’s settlement of 954 next Tuesday (July 28th). If it does, odds would favor higher prices heading into the second week of August.
Also noteworthy that the Oscillator nearly closed over 10.0 on Wednesday, which would have made only the tenth time in forty years this indicator has hit such extreme levels. It could still top 10.0 in the next few days if we see one more strong session. The following is an updated reprint of my March 24th column, when the Oscillator closed over 10 for the first time in over twenty years…