Examining Today’s Uptick in Volatility + A Fond Farewell to Dr. Brett

Institutions aggressively bought a gap down open Thursday. TICKscore closed at +30, its highest reading in nearly three months, pushing the cumulative TICKscore line back into a pattern of higher highs. Cumulative TICK closed at +90,500, the second time in the last three days we’ve seen an unusually high reading. The active institutional participation bodes well for the market’s intermediate-term prospects, although I would note one short-term negative development. The S&P100 Volatility Index (VXO) closed up over 5% Thursday despite the S&P finishing with a modest gain. Historically, when volatility increases on a day when it ostensibly should decline, it’s had negative implications looking out 1-2 days. The last 30 occurrences are listed in the table below…

VXO +5% or more, S&P Closes Higher
04/22/10… S&P500 ???
03/10/10… S&P500 +0.4% two sessions later
03/13/09… S&P500 -0.4% one session later
09/26/08… S&P500 -8.8% one session later
09/12/08… S&P500 -4.7% one session later
08/10/07… S&P500 -0.1% one session later
07/05/07… S&P500 +0.4% two sessions later
09/27/06… S&P500 -0.1% two sessions later
11/23/05… S&P500 -0.6% two sessions later
09/01/05… S&P500 -0.3% one session later
12/20/04… S&P500 +1.3% two sessions later (*)
11/12/04… S&P500 -0.0% one session later
10/29/04… S&P500 +0.0% two sessions later
10/11/04… S&P500 -0.2% one session later
06/01/04… S&P500 -0.4% two sessions later
12/30/03… S&P500 -0.1% two sessions later
12/18/03… S&P500 -0.1% one session later
11/27/02… S&P500 -0.3% one session later
03/24/00… S&P500 -0.2% one session later
03/23/00… S&P500 -0.2% two sessions later
12/30/99… S&P500 -0.6% two sessions later
05/12/99… S&P500 -1.9% two sessions later
07/13/98… S&P500 +0.8% two sessions later
03/20/98… S&P500 -0.3% one session later
02/17/98… S&P500 +0.5% two sessions later
05/27/97… S&P500 -0.3% one session later
05/14/97… S&P500 -0.8% two sessions later
05/05/97… S&P500 -0.3% one session later
03/17/97… S&P500 -0.8% one session later
11/25/96… S&P500 -0.1% one session later
11/20/96… S&P500 -0.2% one session later

In 24 out of the last 30 occurrences, or 80% of the time, the S&P posted a subsequently lower close (below the setup day’s close) within the next two days, significantly above the 60% random chance for a lower S&P 1-2 days later in the same time frame. Note that even when this pattern did not lead to a lower SPX close within the next two days, upside potential was still limited to less than 1% two days later in all but one case.

On a personal note, I’d like to wish my friend Brett Steenbarger a wonderful journey in his new endeavor. TraderFeed was the first blog I read on a consistent basis and to this day it remains my unequivocal favorite. His work was the inspiration for countless studies published here, and will undoubtedly be the inspiration for many more. I feel like I’m losing a mentor, but I applaud the courage to break from a successful blog at the height of its popularity and fearlessly pursue what life has to offer. Best of luck, Brett!

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

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