Gauging Investor Sentiment through Lower Lows

Buying a day w/ lower lows continues its impressive winning streak, with S&P futures closing higher the next day in 20 out of the last 22 occurrences. If you’re wondering if that’s a record, it is, at least over the last twenty years. This chart looks at the S&P’s next-day performance since 1990 only after S&P futures posted a lower low.  If the S&P closes higher the next day, it’s scored a +1, if it closes lower it’s scored a -1. The line on the chart is a running summation of all scores over the last forty trading days. Notice it just surged to its highest level on record, signaling an unprecedented level of aggressiveness as buyers literally buy every dip. This action is consistent with the unusually low equity put/call ratio, which you’ll recall is at levels not seen on a consistent basis since 1999. Early indications of a bubble forming have only been reinforced by more recent data.

On a short-term basis, new 20-day highs contracted while new 20-day lows expanded even as S&P futures opened and held above Friday’s close. When today’s S&P low is greater than yesterday’s close and 20-day highs fail to expand, the market usually enters into a sideways-to-down trend over the next two sessions.  The last thirty occurrences are listed below…

S&P Futures Low > Prev day’s close, New 20-day Highs Contract
05/03/10… S&P futures ??? two sessions later
02/01/10… S&P futures +0.9% two sessions later
12/24/09… S&P futures -0.0% two sessions later
12/22/09… S&P futures +0.8% two sessions later
08/25/09… S&P futures +0.3% two sessions later
05/08/09… S&P futures -1.9% two sessions later
03/04/09… S&P futures -2.9% two sessions later
12/02/08… S&P futures -0.2% two sessions later
11/07/08… S&P futures -4.6% two sessions later
10/13/08… S&P futures -11.2% two sessions later
09/30/08… S&P futures -3.7% two sessions later
05/30/08… S&P futures -1.6% two sessions later
12/24/07… S&P futures -1.1% two sessions later
11/27/07… S&P futures +3.2% two sessions later
11/23/07… S&P futures -1.1% two sessions later
09/13/07… S&P futures -0.6% two sessions later
08/13/07… S&P futures -2.8% two sessions later
05/25/07… S&P futures +1.1% two sessions later
02/28/07… S&P futures -1.6% two sessions later
11/16/06… S&P futures +0.0% two sessions later
09/01/06… S&P futures -0.8% two sessions later
06/20/06… S&P futures +0.3% two sessions later
05/02/06… S&P futures -0.1% two sessions later
02/08/06… S&P futures +0.0% two sessions later
01/23/06… S&P futures +0.1% two sessions later
08/25/05… S&P futures +0.1% two sessions later
08/09/05… S&P futures +0.3% two sessions later
07/01/05… S&P futures -0.1% two sessions later
03/01/05… S&P futures -0.0% two sessions later
02/23/05… S&P futures +1.6% two sessions later
01/25/05… S&P futures +0.4% two sessions later

While the chances of a higher or lower S&P two days later has been about even, note that the market’s average loss of 1.8% more than doubled the 0.7% average gain. That leads to a fairly consistent negative equity curve, illustrating how difficult it’s been making money on the long side after S&P futures gap higher and 20-day highs fail to expand.

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

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