Volatility Overbought, Stock Market (Still) Oversold
By
Rennie on Tuesday, November 3rd, 2009 at 1:42 am
A modest bounce masked further institutional selling beneath the surface. TICKscore closed at -31, Cumulative TICK -28,000, keeping the 20-day moving average in a downtrend. The Nasdaq100 posted a fifth consecutive day of lower highs while semiconductors (SOX) posted a ninth straight lower high. Since inception, there have only been nine other instances of the SOX posting nine consecutive lower highs…
SOX Nine Lower Highs
11/02/09… SOX ???
10/08/08… SOX -8.8% one week later
01/10/08… SOX -3.5% one week later
07/14/06… SOX -5.9% one week later
05/18/06… SOX -2.4% one week later
09/24/02… SOX -9.9% two weeks later
09/05/02… SOX -8.3% two weeks later
09/21/01… SOX -1.9% one week later
07/28/00… SOX -3.8% one week later
03/17/96… SOX +4.8% two weeks later
Despite oversold conditions, note that in 8 out of 9 cases the SOX was even lower one or two weeks later. When the downtrend has been this strong, weakness has usually persisted over the next 1-2 weeks.
Short-term outlook is mixed. The CBOE equity put/call ratio spiked more than 25% above its 10-day moving average last Friday, reflecting a spark of fear. There’s often some downside follow-through after an initial spike. The table below highlights the last thirty instances in which the S&P500 closed higher immediately following a session in which the CBOE equity put/call ratio spiked more than 25% above its 10-day moving average…
Equity Put/Call Ratio 25% >10-day Avg, SPX Up Next Day
11/02/09… ???
10/05/09… no lower SPX close next 1-3 sessions
06/18/09… Lower S&P close two sessions later
01/13/09… Lower S&P close one session later
01/08/09… Lower S&P close one session later
11/07/08… Lower S&P close one session later
09/16/08… Lower S&P close one session later
09/10/08… Lower S&P close three sessions later
01/09/08… Lower S&P close two sessions later
12/05/07… no lower SPX close next 1-3 sessions
10/17/07… Lower S&P close one session later
07/25/07… Lower S&P close one session later
07/19/07… Lower S&P close one session later
03/29/07… Lower S&P close one session later
02/28/07… Lower S&P close one session later
10/04/06… Lower S&P close two sessions later
04/27/06… Lower S&P close two sessions later
12/28/05… Lower S&P close one session later
12/21/05… Lower S&P close three sessions later
11/16/05… no lower SPX close next 1-3 sessions
10/14/05… Lower S&P close two sessions later
08/29/05… Lower S&P close one session later
06/17/05… Lower S&P close one session later
06/01/05… Lower S&P close two sessions later
04/18/05… Lower S&P close two sessions later
04/07/05… Lower S&P close one session later
04/04/05… no lower SPX close next 1-3 sessions
03/17/05… Lower S&P close one session later
02/25/05… Lower S&P close one session later
02/10/05… no lower SPX close next 1-3 sessions
01/10/05… Lower S&P close one session later
The overall accuracy is decent at 83% but not significantly better than the 68% at-any-time odds for a lower S&P close within the next three days. Still, with the market persistently oversold (a potentially negative sign), I would tend to overweight sell signals.
Arguing for a bounce, the Nasdaq Volatility Index (VXN) closed over its upper bollinger band for the second day in a row. Historically, this has been a good indication that the Nasdaq will close flat-to-higher the following session as volatility falls out of technically overbought territory. We only have historical data on the VXN since the beginning of 2001, but since that time we’ve seen a total of 28 separate instances in which the VXN closed over its upper band two days running. All of these occurrences are noted in the table below, along with the performance of the Nasdaq100 the following session…
VXN Over Its Upper Band Two Consecutive Sessions
11/02/09… Nasdaq100 ??? next session
10/02/09… Nasdaq100 +0.8% next session
09/01/09… Nasdaq100 -0.1% next session
10/07/08… Nasdaq100 +0.1% next session
06/09/08… Nasdaq100 -0.4% next session
03/17/08… Nasdaq100 +4.4% next session
11/09/07… Nasdaq100 -2.6% next session (*)
10/22/07… Nasdaq100 +2.2% next session
10/16/07… Nasdaq100 +1.3% next session
08/01/07… Nasdaq100 +1.1% next session
07/27/07… Nasdaq100 +0.9% next session
02/28/07… Nasdaq100 -0.5% next session
07/14/06… Nasdaq100 +0.4% next session
05/18/06… Nasdaq100 +0.9% next session
05/15/06… Nasdaq100 -0.7% next session
04/12/06… Nasdaq100 +0.4% next session
01/23/06… Nasdaq100 +0.6% next session
01/18/06… Nasdaq100 +0.8% next session
01/10/06… Nasdaq100 +0.8% next session
08/08/05… Nasdaq100 +0.7% next session
04/18/05… Nasdaq100 +0.8% next session
07/26/04… Nasdaq100 +1.7% next session
04/30/04… Nasdaq100 +1.0% next session
03/11/04… Nasdaq100 +2.1% next session
11/18/03… Nasdaq100 +1.0% next session
06/09/03… Nasdaq100 +1.5% next session
06/11/02… Nasdaq100 +2.0% next session
05/06/02… Nasdaq100 -0.2% next session
09/07/01… Nasdaq100 +0.8% next session
Note that in 22 out of 28 cases, the Nasdaq proceeded to close higher the following session. That 79% win rate is significantly above the 53% random chance for a higher NDX close. Only one signal led to a loss of 1% or more the next session, while ten signals led to a gain of 1%+ the next day.
The VXN setup looks pretty solid, but I see two potential problems. One, the Nasdaq closed higher Monday. It’s not a particularly good sign to see overbought volatility and a higher close. There have been 18 sessions since 2001 in which the VXN was over its upper bollinger band and the NDX finished higher. In 14 out of 18 cases, the NDX posted a subsequently lower close within the next two days. Secondly, I see that the VIX triggered an identical setup Monday, and a check of VIX-based signals reveals some fairly mixed performance. The last thirty occurrences of a VIX over its upper bollinger band two days running are listed below…
VIX Over Its Upper Band Two Consecutive Sessions
11/02/09… S&P500 ??? next session
10/02/09… S&P500 +1.5% next session
09/02/09… S&P500 +0.9% next session
10/07/08… S&P500 -1.1% next session
09/16/08… S&P500 -4.7% next session
07/14/08… S&P500 -1.1% next session
06/09/08… S&P500 -0.2% next session
03/17/08… S&P500 +4.2% next session
11/12/07… S&P500 +2.9% next session
07/27/07… S&P500 +1.0% next session
06/07/07… S&P500 +1.1% next session
03/05/07… S&P500 +1.6% next session
02/28/07… S&P500 -0.3% next session
06/13/06… S&P500 +0.5% next session
05/18/06… S&P500 +0.4% next session
05/15/06… S&P500 -0.2% next session
01/23/06… S&P500 +0.2% next session
10/06/05… S&P500 +0.4% next session
08/06/04… S&P500 +0.1% next session
05/10/04… S&P500 +0.8% next session
03/11/04… S&P500 +1.3% next session
11/18/03… S&P500 +0.8% next session
09/25/03… S&P500 -0.6% next session
08/04/03… S&P500 -1.8% next session
01/27/03… S&P500 +1.3% next session
07/23/02… S&P500 +5.7% next session
07/16/02… S&P500 +0.6% next session
07/11/02… S&P500 -0.6% next session
06/04/02… S&P500 +0.9% next session
04/29/02… S&P500 +1.1% next session
02/05/02… S&P500 -0.6% next session
In 20 out of the last 30 occurrences, or 67% of the time, the S&P closed higher one day later. That’s not significantly better than the 53% at-any-time odds.
Volatility Overbought, Stock Market (Still) Oversold
By Rennie on Tuesday, November 3rd, 2009 at 1:42 amA modest bounce masked further institutional selling beneath the surface. TICKscore closed at -31, Cumulative TICK -28,000, keeping the 20-day moving average in a downtrend. The Nasdaq100 posted a fifth consecutive day of lower highs while semiconductors (SOX) posted a ninth straight lower high. Since inception, there have only been nine other instances of the SOX posting nine consecutive lower highs…
SOX Nine Lower Highs
11/02/09… SOX ???
10/08/08… SOX -8.8% one week later
01/10/08… SOX -3.5% one week later
07/14/06… SOX -5.9% one week later
05/18/06… SOX -2.4% one week later
09/24/02… SOX -9.9% two weeks later
09/05/02… SOX -8.3% two weeks later
09/21/01… SOX -1.9% one week later
07/28/00… SOX -3.8% one week later
03/17/96… SOX +4.8% two weeks later
Despite oversold conditions, note that in 8 out of 9 cases the SOX was even lower one or two weeks later. When the downtrend has been this strong, weakness has usually persisted over the next 1-2 weeks.
Short-term outlook is mixed. The CBOE equity put/call ratio spiked more than 25% above its 10-day moving average last Friday, reflecting a spark of fear. There’s often some downside follow-through after an initial spike. The table below highlights the last thirty instances in which the S&P500 closed higher immediately following a session in which the CBOE equity put/call ratio spiked more than 25% above its 10-day moving average…
Equity Put/Call Ratio 25% >10-day Avg, SPX Up Next Day
11/02/09… ???
10/05/09… no lower SPX close next 1-3 sessions
06/18/09… Lower S&P close two sessions later
01/13/09… Lower S&P close one session later
01/08/09… Lower S&P close one session later
11/07/08… Lower S&P close one session later
09/16/08… Lower S&P close one session later
09/10/08… Lower S&P close three sessions later
01/09/08… Lower S&P close two sessions later
12/05/07… no lower SPX close next 1-3 sessions
10/17/07… Lower S&P close one session later
07/25/07… Lower S&P close one session later
07/19/07… Lower S&P close one session later
03/29/07… Lower S&P close one session later
02/28/07… Lower S&P close one session later
10/04/06… Lower S&P close two sessions later
04/27/06… Lower S&P close two sessions later
12/28/05… Lower S&P close one session later
12/21/05… Lower S&P close three sessions later
11/16/05… no lower SPX close next 1-3 sessions
10/14/05… Lower S&P close two sessions later
08/29/05… Lower S&P close one session later
06/17/05… Lower S&P close one session later
06/01/05… Lower S&P close two sessions later
04/18/05… Lower S&P close two sessions later
04/07/05… Lower S&P close one session later
04/04/05… no lower SPX close next 1-3 sessions
03/17/05… Lower S&P close one session later
02/25/05… Lower S&P close one session later
02/10/05… no lower SPX close next 1-3 sessions
01/10/05… Lower S&P close one session later
The overall accuracy is decent at 83% but not significantly better than the 68% at-any-time odds for a lower S&P close within the next three days. Still, with the market persistently oversold (a potentially negative sign), I would tend to overweight sell signals.
Arguing for a bounce, the Nasdaq Volatility Index (VXN) closed over its upper bollinger band for the second day in a row. Historically, this has been a good indication that the Nasdaq will close flat-to-higher the following session as volatility falls out of technically overbought territory. We only have historical data on the VXN since the beginning of 2001, but since that time we’ve seen a total of 28 separate instances in which the VXN closed over its upper band two days running. All of these occurrences are noted in the table below, along with the performance of the Nasdaq100 the following session…
VXN Over Its Upper Band Two Consecutive Sessions
11/02/09… Nasdaq100 ??? next session
10/02/09… Nasdaq100 +0.8% next session
09/01/09… Nasdaq100 -0.1% next session
10/07/08… Nasdaq100 +0.1% next session
06/09/08… Nasdaq100 -0.4% next session
03/17/08… Nasdaq100 +4.4% next session
11/09/07… Nasdaq100 -2.6% next session (*)
10/22/07… Nasdaq100 +2.2% next session
10/16/07… Nasdaq100 +1.3% next session
08/01/07… Nasdaq100 +1.1% next session
07/27/07… Nasdaq100 +0.9% next session
02/28/07… Nasdaq100 -0.5% next session
07/14/06… Nasdaq100 +0.4% next session
05/18/06… Nasdaq100 +0.9% next session
05/15/06… Nasdaq100 -0.7% next session
04/12/06… Nasdaq100 +0.4% next session
01/23/06… Nasdaq100 +0.6% next session
01/18/06… Nasdaq100 +0.8% next session
01/10/06… Nasdaq100 +0.8% next session
08/08/05… Nasdaq100 +0.7% next session
04/18/05… Nasdaq100 +0.8% next session
07/26/04… Nasdaq100 +1.7% next session
04/30/04… Nasdaq100 +1.0% next session
03/11/04… Nasdaq100 +2.1% next session
11/18/03… Nasdaq100 +1.0% next session
06/09/03… Nasdaq100 +1.5% next session
06/11/02… Nasdaq100 +2.0% next session
05/06/02… Nasdaq100 -0.2% next session
09/07/01… Nasdaq100 +0.8% next session
Note that in 22 out of 28 cases, the Nasdaq proceeded to close higher the following session. That 79% win rate is significantly above the 53% random chance for a higher NDX close. Only one signal led to a loss of 1% or more the next session, while ten signals led to a gain of 1%+ the next day.
The VXN setup looks pretty solid, but I see two potential problems. One, the Nasdaq closed higher Monday. It’s not a particularly good sign to see overbought volatility and a higher close. There have been 18 sessions since 2001 in which the VXN was over its upper bollinger band and the NDX finished higher. In 14 out of 18 cases, the NDX posted a subsequently lower close within the next two days. Secondly, I see that the VIX triggered an identical setup Monday, and a check of VIX-based signals reveals some fairly mixed performance. The last thirty occurrences of a VIX over its upper bollinger band two days running are listed below…
VIX Over Its Upper Band Two Consecutive Sessions
11/02/09… S&P500 ??? next session
10/02/09… S&P500 +1.5% next session
09/02/09… S&P500 +0.9% next session
10/07/08… S&P500 -1.1% next session
09/16/08… S&P500 -4.7% next session
07/14/08… S&P500 -1.1% next session
06/09/08… S&P500 -0.2% next session
03/17/08… S&P500 +4.2% next session
11/12/07… S&P500 +2.9% next session
07/27/07… S&P500 +1.0% next session
06/07/07… S&P500 +1.1% next session
03/05/07… S&P500 +1.6% next session
02/28/07… S&P500 -0.3% next session
06/13/06… S&P500 +0.5% next session
05/18/06… S&P500 +0.4% next session
05/15/06… S&P500 -0.2% next session
01/23/06… S&P500 +0.2% next session
10/06/05… S&P500 +0.4% next session
08/06/04… S&P500 +0.1% next session
05/10/04… S&P500 +0.8% next session
03/11/04… S&P500 +1.3% next session
11/18/03… S&P500 +0.8% next session
09/25/03… S&P500 -0.6% next session
08/04/03… S&P500 -1.8% next session
01/27/03… S&P500 +1.3% next session
07/23/02… S&P500 +5.7% next session
07/16/02… S&P500 +0.6% next session
07/11/02… S&P500 -0.6% next session
06/04/02… S&P500 +0.9% next session
04/29/02… S&P500 +1.1% next session
02/05/02… S&P500 -0.6% next session
In 20 out of the last 30 occurrences, or 67% of the time, the S&P closed higher one day later. That’s not significantly better than the 53% at-any-time odds.