Nine Consecutive Lower Lows for VIX & VXO

One of the more noteworthy developments last week was the persistent decline in volatility. For only the second time in the last five years, the OEX Volatility Index (VXO) posted nine consecutive lower lows as of Friday’s close. This type of definitive drop in volatility has usually led to a flat-to-up market over the intermediate-term. Just looking for eight consecutive days of lower lows only turns up 10 occurrences since 1986…

Eight Lower Lows for VXO
06/17/10… S&P500 ???
07/20/09… S&P500 +5.4% two weeks later, +3.0% one month later
06/21/05… S&P500 -1.5% two weeks later, +1.8% one month later
04/16/03… S&P500 +4.1% two weeks later, +7.6% one month later
11/23/01… S&P500 +0.7% two weeks later, -0.5% one month later
10/03/01… S&P500 +0.5% two weeks later, -1.2% one month later
11/19/90… S&P500 +2.2% two weeks later, +3.4% one month later
06/20/89… S&P500 -0.2% two weeks later, +4.5% one month later
12/23/87… S&P500 -3.9% two weeks later, -2.6% one month later
12/24/86… S&P500 +4.9% two weeks later, +9.5% one month later
10/23/86… S&P500 +2.8% two weeks later, +1.2% one month later

The most noteworthy point is the overall theme of limited downside potential over the next month. The S&P was up 3% or more one month later in 5 out of 10 occurrences and was never down more than 3%.

This past Tuesday the market triggered an intermediate-term bullish signal by posting a strong 2%+ up day after a series of higher highs and higher lows (apologies for not posting this at the time, somehow I missed it initially). It’s the strong gain after three higher lows that’s particularly bullish. Looking at the market’s intermediate-term performance when a 2%+ up day appears after three higher highs or higher lows (but not necessarily both), it’s interesting to note the market performed much better when the 2% up day followed three higher lows. It seems that the absence of sellers, as reflected by the three higher lows, is more significant than the presence of buyers. There have been 28 occurrences of this pattern since 1965, all of which are listed below along with the S&P’s performance over the next two weeks…

S&P500 2% Up Day After Three Days of Higher Lows
06/15/10… S&P500 ??? two weeks later
11/09/09… S&P500 +1.2% two weeks later
07/23/09… S&P500 +2.1% two weeks later
03/17/09… S&P500 +2.5% two weeks later
03/12/09… S&P500 +10.9% two weeks later
12/05/08… S&P500 +1.4% two weeks later
11/04/08… S&P500 -14.6% two weeks later (*)
10/17/02… S&P500 +0.8% two weeks later
03/01/02… S&P500 +3.0% two weeks later
04/10/01… S&P500 +5.2% two weeks later
12/23/98… S&P500 +3.8% two weeks later
11/23/98… S&P500 -0.6% two weeks later
10/15/98… S&P500 +3.7% two weeks later
02/02/98… S&P500 +2.2% two weeks later
05/05/97… S&P500 +0.4% two weeks later
12/30/91… S&P500 +1.3% two weeks later
02/11/91… S&P500 -1.6% two weeks later
05/11/90… S&P500 +0.7% two weeks later
01/04/88… S&P500 -1.6% two weeks later
12/18/87… S&P500 +3.8% two weeks later
04/21/87… S&P500 +0.8% two weeks later
03/11/86… S&P500 +1.3% two weeks later
10/11/82… S&P500 -0.9% two weeks later
10/07/82… S&P500 +8.0% two weeks later
10/06/82… S&P500 +10.5% two weeks later
08/02/78… S&P500 +1.7% two weeks later
08/16/71… S&P500 +0.8% two weeks later
08/24/70… S&P500 +2.5% two weeks later
04/01/68… S&P500 +4.7% two weeks later

When a big rally has come after a series of higher lows, it has not been a good time to turn bearish. In 23 out of 28 occurrences, or 82% of the time, the S&P was higher two weeks later. That’s significantly above the 56% at-any-time odds for a higher S&P two weeks later. Equally noteworthy is that the S&P was down more than 2% two weeks later only once, while it was up more than 2% two weeks later thirteen times. This indicates the S&P is likely to still be trading north of SPX 1115 at the end of June, consistent with the recent string  of higher lows for the NDX (see this June 18th column) and the cluster of 90%+ up volume days (see this June 15th column).

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

 Print This Post