Watching the NYSE Up Volume Average

In addition to the short-term buy signals outlined in today’s intraday update, a 1-day buy signal was triggered by today’s fifth consecutive higher high for the VXO (‘old VIX’). Five higher highs takes advantage of volatility’s mean reverting nature to signal when there’s a better than average chance for a drop in volatility (and a rally in stocks). The last 30 occurrences in which the VXO initially posted five consecutive higher highs are listed below along with the performance of the S&P500 the next session…

Five Consecutive Higher Highs for VXO
05/19/10… S&P500 ??? next session
09/15/08… S&P500 +1.8%  next session
09/05/08… S&P500 +2.1%  next session
05/27/08… S&P500 +0.4%  next session
01/02/08… S&P500 +0.0% next session
06/26/07… S&P500 +0.9% next session
06/08/07… S&P500 +0.1% next session
09/07/06… S&P500 +0.4% next session
05/12/06… S&P500 +0.3% next session
11/30/05… S&P500 +1.2% next session
05/13/05… S&P500 +1.0% next session
03/14/05… S&P500 -0.8% next session
01/24/05… S&P500 +0.4% next session
12/31/04… S&P500 -0.8% next session
12/08/04… S&P500 +0.5% next session
10/08/04… S&P500 +0.2% next session
04/30/04… S&P500 +0.9% next session
01/02/04… S&P500 +1.2% next session
03/12/03… S&P500 +3.5% next session
01/22/03… S&P500 +1.0% next session
04/26/02… S&P500 -1.0% next session
01/15/02… S&P500 -1.6% next session
09/04/01… S&P500 -0.1% next session
04/03/01… S&P500 -0.3% next session
03/22/01… S&P500 +2.0% next session
02/23/01… S&P500 +1.8% next session
10/12/00… S&P500 +3.3% next session
09/21/00… S&P500 -0.0% next session
04/14/00… S&P500 +3.3% next session
01/04/00… S&P500 +0.2% next session
04/15/99… S&P500 -0.3% next session

Note that in 22 out of the last 30 occurrences, or 73% of the time, the S&P500 closed higher the next session, significantly above the 52% random chance for a higher SPX close one day later in the same time frame.

Interesting to note the 20-day moving average of NYSE up volume closed below the 40% level Wednesday. Consistent readings below this level reflect a market in which buyers have been completely washed out. This usually sets the stage for a short-term rally until the moving average rises back over 40%. The table below lists each of the last thirty occurrences in which the 20-day average closed under 40% three days in a row, along with the date when it rose back over 40% and the performance of the S&P in this time frame…

Up Volume 20day Avg <40% Three Consecutive Days
03/09/09 – 03/11/09… S&P500 +6.6%
10/10/08 – 10/31/08… S&P500 +7.7%
07/16/08 – 07/17/08… S&P500 +1.2%
08/16/07 – 08/17/07… S&P500 +2.5%
02/13/03 – 02/18/03… S&P500 +4.1%
10/08/02 – 10/14/02… S&P500 +5.4%
07/18/02 – 07/29/02… S&P500 +2.4%
06/25/02 – 06/27/02… S&P500 +1.5%
09/19/01 – 10/02/01… S&P500 +3.5%
08/31/98 – 09/01/98… S&P500 +3.8%
08/17/98 – 08/18/98… S&P500 +1.6%
07/24/96 – 08/01/96… S&P500 +3.7%
12/09/94 – 12/14/94… S&P500 +1.8%
07/05/94 – 07/07/94… S&P500 +0.5%
04/15/94 – 04/25/94… S&P500 +1.5%
08/27/92 – 09/02/92… S&P500 +1.1%
12/10/91 – 12/16/91… S&P500 +1.7%
06/28/91 – 07/08/91… S&P500 +1.8%
01/09/91 – 01/17/91… S&P500 +5.3%
09/27/90 – 10/18/90… S&P500 +3.8%
08/07/90 – 08/31/90… S&P500 -3.7%
04/25/90 – 05/03/90… S&P500 +1.1%
01/29/90 – 02/07/90… S&P500 +2.6%
11/06/89 – 11/08/89… S&P500 +1.7%
11/16/88 – 11/29/88… S&P500 +2.7%
08/30/88 – 09/02/88… S&P500 +0.8%
05/25/88 – 05/26/88… S&P500 +0.3%
12/07/87 – 12/08/87… S&P500 +2.7%
10/20/87 – 11/05/87… S&P500 +7.5%
09/22/87 – 09/28/87… S&P500 +1.2%

Note that in 29 out of the last 30 occurrences, or 97% of the time, the S&P was trading at a higher level when the Up Volume 20-day average rebounded back over 40%. Sometimes it took just a few days, other times it was a number of weeks before it occurred. About half of the time the S&P posted a subsequently lower close at some point before the setup was fulfilled. Wednesday represented only the first session under 40%, so we still need to see two more days under 40% before this signal will be triggered. Should the market rally Thursday and advancing volume accounts for 70% or more of total NYSE volume, the 20-day average will rise back over 40% and put off any signal for at least a few more days.

Also keep an eye on the 200-day moving average of NYSE up volume minus down volume. It’s approaching the zero level for the first time since mid-2009. A drop under zero would put this indicator in bearish territory, but the level I’d focus on is around -20 million (-200 on the LT chart). That level has only been hit twice in the last decade (2000 and 2008) and both preceded major bear markets (see long-term chart).

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

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