90%+ Up Volume Session Leaves VIX/VXO Short-term Oversold

Institutions remained better buyers Wednesday, with TICKscore closing at +40 and Cumulative TICK +70,000 as both indicators continue to make higher highs. NYSE TICK posted its highest intraday low in a month, barely breaking -1000. Volume associated with advancing issues accounted for 95% of total volume on the NYSE, sending the 20-day moving average of up volume back over 40% and closing out the intermediate-term buy signal triggered back on May 21st.

Wednesday represented the second 90%+ up volume session in the last five sessions. As discussed in this post prior to the holiday break, there have only been ten separate instances of two 90% up volume days within a one-week time frame, nine of which led to a higher market two weeks later. We now have two such clusters (5/27 & 6/2 and 5/21 & 5/27) in effect, something only seen at the March ’09 bottom.

Adam Warner from Daily Options Report had a good post recently on applying technical analysis to volatility indexes (see post), with the upshot being that short-term moving averages like a 10-day are most helpful when dealing with the VIX. He notes a favorite indicator is a VIX 10% above/below its 10-day moving average, which signals an oversold/overbought stock market. Our own research backs this up, although we did find that using a 15% threshold improved reliability. I bring this up because on Wednesday the VIX closed a bit more than 15% below its 10-day average, suggesting the market is short-term overbought. Here’s a look at the last 30 instances in which the VIX closed 15%+ below its 10-day moving average…

VIX 15% Below 10-day Moving Average
06/02/10… ???
05/27/10… Lower S&P close one session later
01/28/09… Lower S&P close one session later
12/19/08… Lower S&P close one session later
11/28/08… Lower S&P close one session later
11/26/08… Lower S&P close two sessions later
11/05/08… Lower S&P close one session later
11/04/08… Lower S&P close one session later
11/03/08… Lower S&P close two sessions later
07/22/08… Lower S&P close two sessions later
12/21/07… Lower S&P close three sessions later
09/27/07… Lower S&P close one session later
09/26/07… No lower close within next three sessions
09/25/07… No lower close within next three sessions
09/21/07… Lower S&P close one session later
09/20/07… Lower S&P close two sessions later
09/19/07… Lower S&P close one session later
09/18/07… Lower S&P close two sessions later
08/24/07… Lower S&P close one session later
08/23/07… Lower S&P close three sessions later
08/22/07… Lower S&P close one session later
03/21/07… Lower S&P close one session later
08/18/06… Lower S&P close one session later
06/30/06… No lower close within next three sessions
06/29/06… Lower S&P close one session later
06/21/06… Lower S&P close one session later
11/22/02… Lower S&P close two sessions later
11/21/02… Lower S&P close one session later
08/19/02… Lower S&P close one session later
08/16/02… No lower close within next three sessions
08/15/02… Lower S&P close one session later

You can see this pattern has done a respectable job at calling for short-term weakness, although accuracy hasn’t been quite strong enough to qualify as a statistically significant edge. However, when we run the same study and substitute VIX for VXO (the ‘old’ VIX), we find a higher level of accuracy…

VXO 15% Below 10-day Moving Average
06/02/10… ???
02/22/10… Lower S&P close one session later
02/19/10… Lower S&P close one session later
02/18/10… Lower S&P close three sessions later
01/28/09… Lower S&P close one session later
12/19/08… Lower S&P close one session later
12/22/08… Lower S&P close one session later
11/28/08… Lower S&P close one session later
11/26/08… Lower S&P close two sessions later
11/05/08… Lower S&P close one session later
11/04/08… Lower S&P close one session later
11/03/08… Lower S&P close two sessions later
10/21/08… Lower S&P close one session later
10/20/08… Lower S&P close one session later
07/22/08… Lower S&P close two sessions later
05/19/08… Lower S&P close one session later
12/26/07… Lower S&P close one session later
12/24/07… Lower S&P close two sessions later
12/21/07… Lower S&P close three sessions later
09/27/07… Lower S&P close one session later
09/26/07… No lower S&P close within three sessions
09/25/07… No lower S&P close within three sessions
09/24/07… Lower S&P close one session later
09/21/07… Lower S&P close one session later
09/20/07… Lower S&P close two sessions later
09/19/07… Lower S&P close one session later
09/18/07… Lower S&P close two sessions later
08/27/07… Lower S&P close one session later
08/24/07… Lower S&P close one session later
08/23/07… Lower S&P close three sessions later
08/22/07… Lower S&P close one session later

One reason for the increased accuracy is that there were more signals triggered by VXO than VIX in the last few years. When we look back over the next 30 signals triggered by VXO stretching back to 2000, accuracy drops a bit but is still interesting…

03/21/07… Lower S&P close one session later
03/12/07… Lower S&P close one session later
08/18/06… Lower S&P close one session later
07/26/06… Lower S&P close one session later
07/25/06… Lower S&P close one session later
07/03/06… Lower S&P close one session later
06/29/06… Lower S&P close one session later
06/21/06… Lower S&P close one session later
06/16/06… Lower S&P close one session later
06/15/06… Lower S&P close one session later
05/24/05… Lower S&P close one session later
05/23/05… Lower S&P close two sessions later
05/27/04… Lower S&P close one  session later
05/25/04… No lower S&P close within three sessions
04/05/04… Lower S&P close one session later
03/29/04… No lower S&P close within three sessions
11/22/02… Lower S&P close two  sessions later
11/21/02… Lower S&P close one session later
08/19/02… Lower S&P close one session later
08/16/02… No lower S&P close within three sessions
08/15/02… Lower S&P close one session later
07/31/02… Lower S&P close one session later
07/30/02… Lower S&P close two sessions later
07/29/02… Lower S&P close three  sessions later
10/03/01… Lower S&P close one session later
10/02/01… No lower S&P close within three sessions
10/01/01… No lower S&P close within three sessions
09/28/01… Lower S&P close one session later
03/03/00… Lower S&P close one session later
01/14/00… Lower S&P close one session later

While this could be looked upon as a signal that remains in effect up to three days, I think it’s best viewed as a one or two-day indication. Over the 60 signals highlighted above, the S&P closed lower one day later 40 times (67%) and posted a lower close (below the setup day’s close) within two days 49 times (82%). Both are significantly above random odds, suggesting we’ll see an SPX close back under 1098 Thursday or Friday.

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

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