Low Volume Points to Limited Upside Potential

Stocks closed sharply higher ahead of Friday’s employment report. NYSE TICK action was decent (not spectacular), with TICKscore settling at +20 and Cumulative TICK +62,000. But volume was noticeably light for a 4:1 positive breadth session, with NYSE volume hitting its lowest level in nearly two weeks. The table below lists the last thirty instances in which the S&P500 initially closed at a seven-day high and NYSE volume hit a seven-day low. Note the persistent theme of limited upside potential…

S&P500 at 7-day High, NYSE Volume at 7-day Low
11/05/09… S&P500 ??? two sessions later
10/09/09… S&P500 +0.2% two sessions later
08/13/09… S&P500 -3.3% two sessions later
07/24/09… S&P500 +0.0% two sessions later
06/29/09… S&P500 -0.4% two sessions later
06/12/09… S&P500 -3.6% two sessions later
03/17/09… S&P500 +0.8% two sessions later
02/09/09… S&P500 -4.2% two sessions later
11/26/08… S&P500 -8.1% two sessions later
10/30/08… S&P500 +1.3% two sessions later
08/06/08… S&P500 +0.6% two sessions later
04/04/08… S&P500 -0.4% two sessions later
03/24/08… S&P500 -0.7% two sessions later
01/28/08… S&P500 +0.1% two sessions later
12/24/07… S&P500 -1.3% two sessions later
12/10/07… S&P500 -1.9% two sessions later
10/29/07… S&P500 +0.6% two sessions later
09/27/07… S&P500 +1.0% two sessions later
09/13/07… S&P500 -0.5% two sessions later
08/24/07… S&P500 -3.2% two sessions later
07/02/07… S&P500 +0.4% two sessions later
05/07/07… S&P500 +0.2% two sessions later
04/05/07… S&P500 +0.3% two sessions later
03/23/07… S&P500 -0.5% two sessions later
02/02/07… S&P500 -0.0% two sessions later
01/12/07… S&P500 -0.0% two sessions later
11/22/06… S&P500 -1.7% two sessions later
07/03/06… S&P500 -0.5% two sessions later
05/25/06… S&P500 -1.0% two sessions later
05/05/06… S&P500 -0.1% two sessions later
11/23/05… S&P500 -0.6% two sessions later

The S&P managed a gain of more than 0.6% over the next two sessions only three times out of thirty, or 10% of the time. That’s significantly below the 33% random chance for a 0.6%+ gain over any two-day period. In 20 out of the last 30 occurrences, or 67% of the time, the S&P500 closed at a lower level two sessions later. That’s significantly above the 48% at-any-time odds for a lower S&P close two days later.

The BKX closed up 3% following yesterday’s FOMC announcement. It’s noteworthy that similar action over the past decade has generally represented a fakeout rather than the start of a sustained rally. Out of the 21 instances since 1998 in which the BKX closed up 1% or more immediately following a ‘Fed Day’, the sector typically struggled over the next week. Two-thirds of the time the BKX was lower five trading days later, and in only one case did the BKX manage a gain of more than 2%. It lost more than 2% ten times…

BKX +1% FOllowing FOMC Announcement Day
11/05/09… BKX ??? one week later
08/13/09… BKX +0.4% one week later
06/25/09… BKX -3.2% one week later
05/01/08… BKX -5.6% one week later
01/31/08… BKX -4.5% one week later
08/08/07… BKX -7.9% one week later
05/04/05… BKX -1.4% one week later
03/17/04… BKX -3.2% one week later
06/26/03… BKX -0.1% one week later
03/19/03… BKX -0.4% one week later
09/25/02… BKX +0.5% one week later
08/14/02… BKX +2.3% one week later (*)
06/27/02… BKX +0.4% one week later
05/08/02… BKX +1.5% one week later
01/31/02… BKX -6.5% one week later
06/28/01… BKX -2.1% one week later
05/16/01… BKX +1.4% one week later
03/22/00… BKX +1.7% one week later (*)
10/06/99… BKX -5.7% one week later
05/19/99… BKX -4.2% one week later
12/23/98… BKX -0.7% one week later
05/20/98… BKX -3.2% one week later

AAII came out with a high level of bears (55%) in its latest sentiment survey, but I would be cautious about interpreting that as immediately bullish. We’re in a very unusual period for this survey since the market top in 2007, with Bearish Consensus readings in excess of 50% fairly common (see long-term chart). In nine out of the past eleven instances in which the Bearish Consensus crossed above the 50% level, the S&P proceeded to post a subsequently lower close within the next two weeks.

I also see the TED spread creeping higher for the first time since March, currently at a two-month high, an indication that while the rally may not be over, it probably won’t be as easy as the last six months.

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

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