Last Hour Indicator Hits Six-Month High as Stock Market Slumps

Friday’s rally marked only the second time in eighteen months that the S&P gained 1%+ on an ‘options expiration Friday’. This is traditionally not a positive sign for the following week. Here’s a look at each of the last thirty instances in which the S&P gained 1%+ on Expiration Friday, along with the S&P’s performance one week later…

S&P500 +1.0% on Expiration Friday
05/21/10… S&P500 ??? one week later
08/21/09… S&P500 +0.3% one week later
11/21/08… S&P500 +2.0% one week later (*)
09/19/08… S&P500 -3.4% one week later
04/18/08… S&P500 +0.5% one week later
03/20/08… S&P500 -1.1% one week later
12/21/07… S&P500 -1.1% one week later
08/17/07… S&P500 +2.3% one week later (*)
07/18/03… S&P500 +0.5% one week later
04/17/03… S&P500 +0.6% one week later
03/21/03… S&P500 -3.6% one week later
02/21/03… S&P500 -0.8% one week later
12/20/02… S&P500 -1.8% one week later
03/15/02… S&P500 -1.5% one week later
09/17/99… S&P500 -4.4% one week later
01/15/99… S&P500 -0.8% one week later
04/17/98… S&P500 -1.3% one week later
01/16/98… S&P500 -0.5% one week later
12/18/92… S&P500 -0.5% one week later
12/20/91… S&P500 +7.3% one week later (*)
02/15/91… S&P500 -0.5% one week later
01/18/91… S&P500 +1.2% one week later (*)
10/19/90… S&P500 -2.5% one week later
03/16/90… S&P500 -1.4% one week later
05/19/89… S&P500 +0.1% one week later
04/21/89… S&P500 +0.0% one week later
02/19/88… S&P500 +0.3% one week later
01/15/88… S&P500 -2.2% one week later
12/18/87… S&P500 -1.4% one week later
03/20/87… S&P500 -0.7% one week later
12/19/86… S&P500 -2.0% one week later

Note that the S&P was roughly twice as likely to trade lower the following week, with 19 out of the last 30 occurrences (63%) leading to a lower S&P one week later vs. 44% random odds for a lower SPX one week later in the same time frame. Only four occurrences saw the S&P gain 1% or more the following week, while thirteen occasions led to a drop of 1%+. In general, a big up move on Expiration Friday often means buying power is at or near a short-term exhaustion point.

Also interesting to note that Friday marked only the twelfth time that a 3:1+ positive breadth session coincided with a lower high for S&P futures. In each of the last eleven cases the S&P proceeded to post a subsequently lower close within the next four sessions…

3:1 Positive Breadth and Lower Highs for S&P Futures
05/21/10… ???
05/03/10… Lower S&P close one session later
02/01/10… Lower S&P close three sessions later
04/21/09… Lower S&P close one session later
02/24/09… Lower S&P close one session later
01/21/09… Lower S&P close one session later
12/02/08… Lower S&P close two sessions later
10/30/08… Lower S&P close four sessions later
09/30/08… Lower S&P close two sessions later
01/31/08… Lower S&P close two sessions later
01/28/08… Lower S&P close two sessions later
05/11/07… Lower S&P close one session later

Along with the sharp expansion in new 20-day lows (see 5/20 column) and the elevated put/call ratio (see other 5/20 column) during last Thursday’s session, the signals above suggest sellers are likely to gain the upper hand once again this coming week. A rally on Monday (as suggested by Friday’s high pre-closing TICK) could prove to be a short-term sell.

The elevated volume over the past three weeks has sent the 20-day moving average of NYSE volume to a one-year high as of Friday’s close, a potentially bullish indication looking out three months. The table below lists each of the last thirty occurrences in which the 20-day average of NYSE volume hit a one-year high (for the first time in at least three weeks). Note that in 25 out of 30 cases, or 83% of the time, the S&P was trading at a subsequently higher level three months later, significantly greater than the 63% at-any-time odds for a higher S&P three months later in the same period of time…

NYSE Volume 20-day Average at One-year High
05/21/10… S&P500 ??? three months later
03/16/09… S&P500 +24.6% three months later
08/01/07… S&P500 +3.3% three months later
05/24/06… S&P500 +3.5% three months later
01/31/06… S&P500 +2.3% three months later
10/07/05… S&P500 +6.5% three months later
04/15/05… S&P500 +7.0% three months later
03/18/05… S&P500 +1.2% three months later
01/28/04… S&P500 +1.1% three months later
07/17/02… S&P500 -11.3% three months later (*)
09/21/01… S&P500 +17.5% three months later
04/06/01… S&P500 +9.4% three months later
12/22/00… S&P500 -14.4% three months later (*)
10/24/00… S&P500 -4.0% three months later (*)
03/07/00… S&P500 +6.9% three months later
01/26/00… S&P500 +2.2% three months later
12/17/99… S&P500 -2.0% three months later
11/10/99… S&P500 +3.7% three months later
04/22/99… S&P500 +3.6% three months later
02/01/99… S&P500 +6.1% three months later
10/16/98… S&P500 +16.9% three months later
08/05/98… S&P500 +0.4% three months later
01/30/98… S&P500 +10.7% three months later
10/08/97… S&P500 +0.3% three months later
07/16/97… S&P500 +3.6% three months later
01/23/97… S&P500 -2.2% three months later
12/20/96… S&P500 +4.9% three months later
11/22/96… S&P500 +7.2% three months later
03/12/96… S&P500 +5.6% three months later
01/29/96… S&P500 +4.2% three months later
12/13/95… S&P500 +3.0% three months later
07/10/95… S&P500 +4.5% three months later

I’d feel a lot more confident about the setup above if two key longer-term indicators weren’t arguing otherwise. The Market Vane survey of commodity trading advisors came in below 50% bulls for the second week in a row, suggesting the potential for lower prices over the long haul. This group is invariably on the right side of the market (see long-term chart), so the longer this survey holds below 50% the better the chances of long-term weakness.  Also noteworthy is the fact that the Last Hour indicator hit a six-month high on Friday. The process of retracing the decline that started a little over a year ago could very well be underway. Recall that this is a long-term lead indicator, and the decline that began in late April of 2009 signaled that ‘smart money’ was selling into strength. This indicator can be tricky to interpret, so I’ve drawn in some lines on this longer-term chart to highlight the recent periods of accumulation and distribution over the last decade. It’s not until the indicator has retraced a previous period of distribution that the market is out of the woods. This happened in April 2009 when the Last Hour retraced the down move from 2005-2007, and it happened in October 2002 when the indicator retraced the steep decline in 2000. Currently the Last Hour has recouped about 35% of the decline from April 2009 to May 2010, suggesting more downside lies in store for stocks until the indicator rallies back to early 2009 levels.

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

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