Who’s Buying?

S&P futures gapped above the previous day’s intraday high for the second day in a row Tuesday, a pattern that usually has positive implications for the following session.  The last thirty times the front-month S&Ps opened above the previous day’s high on two consecutive sessions are listed in the table below, along with the S&P’s performance the following session. Note that in 24 out of the last 30 occurrences, or 80% of the time, the S&P500 closed higher the next day, significantly above the 55% at-any-time odds for a higher S&P close one day later…

S&P Futures Open >Previous Session’s High Two Days
07/21/09… S&P500 ??? next day
07/15/09… S&P500 +0.9% next day
06/01/09… S&P500 +0.4% next day
05/07/09… S&P500 +2.4% next day
03/16/09… S&P500 +3.2% next day
12/31/08… S&P500 +3.2% next day
11/25/08… S&P500 +3.5% next day
10/14/08… S&P500 -9.0% next day
05/14/08… S&P500 +1.1% next day
04/16/08… S&P500 +0.1% next day
04/02/08… S&P500 +0.1% next day
03/19/08… S&P500 +2.4% next day
01/25/08… S&P500 +1.8% next day
12/24/07… S&P500 +0.1% next day
10/29/07… S&P500 -0.7% next day
09/27/07… S&P500 -0.3% next day
09/19/07… S&P500 -0.7% next day
08/23/07… S&P500 +1.2% next day
06/01/07… S&P500 +0.2% next day
04/17/07… S&P500 +0.1% next day
04/16/07… S&P500 +0.2% next day
03/09/07… S&P500 +0.3% next day
08/16/06… S&P500 +0.2% next day
08/15/06… S&P500 +0.8% next day
06/30/06… S&P500 +0.8% next day
05/26/06… S&P500 -1.6% next day
12/27/05… S&P500 +0.1% next day
11/18/05… S&P500 +0.5% next day
02/01/05… S&P500 +0.3% next day
10/04/04… S&P500 -0.1% next day
05/19/04… S&P500 +0.1% next day

This bullish one-day setup is going up against a large number of bearish setups, most of which will fall off the board on Wednesday. New 20-day highs outnumbered new 20-day lows by nearly a 10:1 margin, keeping the raw 20-day High-Low Index over 90% and suggesting the market remains short-term overextended. Also, VXO posted a seventh consecutive session of lower highs, historically a good indication of an impending short-term top for the S&P. Out of 26 separate occurrences since the VXO began trading, 25 led to a lower S&P close within the next five sessions. That 96% win rate is significantly above the 73% at-any-time odds of a lower S&P close within five days…

VXO Posts Seven Consecutive Lower Highs
07/21/09… ???
11/04/08… Lower S&P close one session later
08/27/07… Lower S&P close one session later
04/10/07… Lower S&P close one session later
08/21/06… Lower S&P close two sessions later
05/24/05… Lower S&P close one session later
08/27/04… Lower S&P close one session later
03/02/04… Lower S&P close four sessions later
10/09/03… Lower S&P close one session later
04/15/03… Lower S&P close one session later
10/02/01… No lower close within five sessions
08/02/01… Lower S&P close one session later
04/19/01… Lower S&P close one session later
12/05/97… Lower S&P close one session later
11/06/95… Lower S&P close one session later
11/11/92… Lower S&P close three sessions later
09/03/92… Lower S&P close one session later
11/19/90… Lower S&P close one session later
10/22/90… Lower S&P close one session later
02/07/89… Lower S&P close one session later
08/02/88… Lower S&P close two sessions later
07/18/88… Lower S&P close one session later
07/15/87… Lower S&P close four sessions later
02/03/87… Lower S&P close five sessions later
12/23/86… Lower S&P close three sessions later
08/18/86… Lower S&P close one session later
04/21/86… Lower S&P close one session later

From my June 10th column…

“Speculative-fueled rallies invariably end badly – see my June 4th commentary for a recent discussion – but the kind of NASDAQ/NYSE Volume Ratio that was registered Tuesday suggests we could be in the early stages of a speculative frenzy. If true, we should see two things…the Nasdaq/NYSE Volume Ratio should remain generally above 1.50 on a daily basis, and the NDX/SPX ratio should continue to trend higher as high-beta stocks continue to outperform blue chips. The latter was a particularly good indication when it began making lower lows for the first time in months at the end of March 2000, signaling a pop in the speculative bubble.”

I would note that since that column, the NDX/SPX ratio has remained in a bullish trend of higher highs, and the Nasdaq/NYSE Volume Ratio has held above 1.50. We ARE in a speculative bubble – just look at average NYSE volume on a long-term chart and compare it with average NASDAQ volume on its long-term chart. Then consider that all of this lopsided NASDAQ volume is occurring amidst a backdrop of a skeptical smart money crowd. Market Vane hasn’t registered a single week with a majority of bullish CTA’s in over a year. Along similar lines, the put/call open interest ratio for index options closed at a five-year low Monday. In bullish markets, put open interest in index options will generally run 1.3 times call open interest – you can see from the long-term chart that when the ratio is below 1.3, it’s been a warning sign from a longer-term perspective. It dropped under this level at the beginning of 2008 and has remained mostly below that level ever since. What’s particularly interesting about the current environment is that despite the new highs for the S&P, the put/call open interest ratio for index options is moving in the opposite direction, in effect becoming even more bearish. If institutions were backing this move, I would expect the ratio to be moving the other way, challenging and/or breaking above 1.3. Instead we’re at multi-year lows.

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

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