Big Picture Review

Stocks closed out the week on a surprisingly strong note, shrugging off a very low NYSE TICK reading last Wednesday and a weak price pattern on Thursday. The S&P finished out the week near its highs, so it doesn’t look like we’ll see the lower weekly high and low setup discussed this past Wednesday. While the decline in the Last Hour indicator over the past year suggests this rally will ultimately prove to be a selling opportunity, we don’t want to jump the gun. If the last occurrence in the 2005-2007 time frame is any indication, this trend of a declining Last Hour in the face of rising prices could continue another year or so before a major top is in place. For the time being, we continue to see longer-term bullish developments. Last month we saw a major cluster of 400+ new 52-week highs, a pattern that typically precedes further strength in the market over the next six months (at least). The table below lists every occurrence since 1970 in which new 52-week highs exceeded the 400 level on more than one occasion in a 20-day time frame (and the number of new highs had not exceeded 400 in the previous twenty trading days)…

Cluster of 400+ new 52-week highs
03/08/10… S&P500 ??? six months later
01/05/10… S&P500 ??? six months later
10/19/09… S&P500 ??? six months later
06/01/07… S&P500 -3.6% six months later
04/25/07… S&P500 +1.4% six months later
02/02/07… S&P500 +1.3% six months later
12/05/06… S&P500 +6.7% six months later
03/04/05… S&P500 -0.3% six months later
11/05/04… S&P500 +0.0% six months later
10/13/03… S&P500 +8.0% six months later
09/03/03… S&P500 +12.7% six months later
06/02/03… S&P500 +10.7% six months later
09/17/97… S&P500 +16.6% six months later
06/13/97… S&P500 +6.7% six months later
02/21/86… S&P500 +11.4% six months later
10/11/82… S&P500 +15.9% six months later

The recent clusters in January and again in March point towards higher prices heading into September. This is consistent with the S&P’s surge back over long-term trendline resistance, suggesting the emergence of another equity bubble as long as the S&P holds that line (see close-up).

Other longer-term indicators I continue to watch include the Market Vane survey of commodity trading advisors, the trend of the Cumulative TICKscore indicator and the 200-day average of up volume minus down volume, all of which remain bullish.

Friday marked the 38th consecutive session that the S&P500 closed above its 20-day moving average. Two more days and a longer-term buy signal will be activated. Historically, when the S&P holds above its 20-day average for two months (forty trading days), odds favor the uptrend persisting for at least another month. The table below lists each of the last thirty separate occurrences of this pattern…

SPX >20-day Average Forty Consecutive Sessions
05/07/09… S&P500 +3.6% one month later
05/15/07… S&P500 +1.0% one month later
01/22/04… S&P500 +0.0% one month later
03/24/98… S&P500 +2.3% one month later
06/17/97… S&P500 +4.7% one month later
05/05/95… S&P500 +3.0% one month later
02/09/95… S&P500 +2.0% one month later
09/08/94… S&P500 -4.4% one month later
12/14/92… S&P500 +0.0% one month later
03/14/91… S&P500 +1.9% one month later
10/28/88… S&P500 -3.6% one month later
03/02/87… S&P500 +2.2% one month later
03/25/86… S&P500 +3.0% one month later
12/05/85… S&P500 +3.3% one month later
06/17/80… S&P500 +3.1% one month later
02/21/75… S&P500 +0.9% one month later
04/29/71… S&P500 -5.0% one month later
01/20/71… S&P500 +4.0% one month later
10/24/68… S&P500 +3.8% one month later
09/24/65… S&P500 +2.2% one month later
01/27/64… S&P500 +0.8% one month later
09/24/63… S&P500 -0.5% one month later
05/06/63… S&P500 +1.7% one month later
08/27/62… S&P500 -4.4% one month later
11/30/61… S&P500 +0.3% one month later
02/02/61… S&P500 +2.1% one month later
05/22/57… S&P500 +0.6% one month later
07/21/55… S&P500 -1.9% one month later
12/30/54… S&P500 +0.7% one month later
05/21/54… S&P500 +0.2% one month later

Note that in 24 out of 30 occurrences, or 80% of the time, the S&P was trading at a higher level one month later. That’s  significantly greater than the 60% random chance for a higher S&P one month later in the same 66-year time span. This signal will go into effect as long as the S&P holds its 20-day average on Monday and Tuesday of this coming week.

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

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