SPX R-Squared Crosses 90%

NYSE TICK closed at -876 Tuesday, an unusually low reading for what was a mild down day in the market. A quick check of the last few years (since the repeal of the uptick rule) reveals 45 sessions with a closing TICK less than -750. Almost all coincided with a solid down day for the market. On only 3 of those 45 occurrences did the S&P close down less than 0.5% – 8/13/10, 6/10/09 & 6/9/08. In each of those cases the market was lower one and two weeks later. Whether that occurs again remains to be seen. It would run contrary to some intermediate-term signals also triggered Tuesday, but it was indeed a very unusual TICK close.

The S&P made a customary higher high after Monday’s 92% up volume session. That puts the spotlight on today’s high of 1148.59. When the S&P manages not just one, but two consecutive higher highs immediately following a 90%+ up volume session, it rarely pays to fight that trend. In 27 out of the last 30 occurrences, or 90% of the time, the S&P closed above the first day’s high either the same day or the next (see table below). For this setup to go into effect on Wednesday, the S&P would need to exceed Tuesday’s high of 1148.59. Should that occur odds would favor a close above that level either Wednesday or Thursday.

Buy the S&P on the Second Higher High after 90%+ Up Volume
Buy 09/03/10 @ 1090.10… S&P close +1.3% same day
Buy 07/26/10 @ 1103.73… S&P close +1.0% same day
Buy 07/09/10 @ 1071.25… S&P close +0.6% same day
Buy 06/14/10 @ 1092.25… S&P close +2.1% next day
Buy 05/12/10 @ 1170.48… S&P close +0.1% same day
Buy 03/09/10 @ 1141.05… S&P close +0.4% next day
Buy 02/18/10 @ 1101.03… S&P close +0.5% same day
Buy 11/11/09 @ 1096.42… S&P close +0.2% same day
Buy 08/25/09 @ 1035.82… S&P close -0.7% next day
Buy 07/15/09 @ 905.84… S&P close +3.0% same day
Buy 05/20/09 @ 916.39… S&P close -3.1% next day
Buy 03/25/09 @ 823.65… S&P close +1.1% next day
Buy 03/19/09 @ 803.04… S&P close -4.3% next day
Buy 03/16/09 @ 758.29… S&P close +2.6% next day
Buy 03/12/09 @ 731.92… S&P close +2.6% same day
Buy 01/02/09 @ 910.32… S&P close +2.4% same day
Buy 11/26/08 @ 868.94… S&P close +2.2% same day
Buy 11/30/07 @ 1473.81… S&P close +0.5% same day
Buy 08/31/07 @ 1468.43… S&P close +0.4% same day
Buy 08/21/07 @ 1451.75… S&P close +0.9% next day
Buy 03/08/07 @ 1401.16… S&P close +0.1% same day
Buy 07/03/06 @ 1276.30… S&P close +0.3% same day
Buy 04/20/06 @ 1310.39… S&P close +0.1% same day
Buy 03/19/03 @ 866.94… S&P close +0.8% same day
Buy 01/06/03 @ 911.25… S&P close +2.0% same day
Buy 07/31/02 @ 909.81… S&P close +0.2% same day
Buy 11/02/87 @ 254.04… S&P close +0.7% same day
Buy 01/07/87 @ 253.99… S&P close +0.5% same day
Buy 08/24/82 @ 116.09… S&P close +1.3% next day
Buy 05/29/70 @ 75.44… S&P close +1.5% same day

We saw a pair of bullish intermediate-term signals triggered Wednesday, although I must admit I’m not particularly enthusiastic about either one. The two-week signal based on our version of Standard & Poors Oscillator has only been running at a 50% accuracy level over the past six signals, far below its historical norm. The signal based on the SPX R-Squared & Slope had to be modified from its original two-week outlook to a looser 1-3 week outlook to maintain an edge. It always makes me a bit uneasy when this type of modification is necessary, and the 1-3 week outlook is a bit too nebulous for my taste. Nonetheless, one could certainly argue that the combination of two unrelated intermediate-term indicators both triggering a buy is a positive sign.

R-squared values show the percentage of movement that can be explained by linear regression. When it reaches 90% or higher along with a positive slope, it’s usually a good indication that the rally has further to run over the intermediate-term. The last thirty occurrences of the SPX 14-day R-Squared crossing above 90% are noted in the table below, along with the S&P’s performance over the next 1-3 weeks…

SPX R-Squared Crosses 90%, Linear Regression Slope Positive
09/21/10… S&P500 ???
04/13/10… S&P500 +0.8% one week later
03/11/10… S&P500 +1.4% one week later
11/18/09… S&P500 +0.1% one week later
10/20/09… S&P500 +0.2% three weeks later
09/21/09… S&P500 +1.1% three weeks later
07/24/09… S&P500 +0.8% one week later
03/24/09… S&P500 +1.2% two weeks later
04/25/07… S&P500 +0.0% one week later
11/23/05… S&P500 +0.4% three weeks later
11/09/04… S&P500 +1.0% one week later
12/29/03… S&P500 +1.3% one week later
06/06/03… S&P500 +0.1% one week later
03/08/02… S&P500 +0.2% one week later
04/23/01… S&P500 +2.1% one week later
01/25/01… S&P500 +1.2% one week later
12/31/99… S&P500 -4.6% three weeks later (*)
11/18/99… S&P500 +0.6% two weeks later
07/02/98… S&P500 +1.6% one week later
03/20/98… S&P500 +2.1% two weeks later
02/27/98… S&P500 +0.6% one week later
02/10/98… S&P500 +1.3% one week later
06/19/97… S&P500 +2.1% two weeks later
01/20/97… S&P500 +1.3% two weeks later
11/13/96… S&P500 +1.8% one week later
09/19/96… S&P500 +0.4% one week later
05/21/96… S&P500 +0.8% two weeks later
04/29/96… S&P500 +1.1% two weeks later
01/29/96… S&P500 +2.8% one week later
12/08/95… S&P500 +0.5% three weeks later
09/12/95… S&P500 +1.3% one week later

In 29 out of the last 30 cases, or 97% of the time, the S&P closed at a higher level 1-3 weeks later, significantly above the 76% random odds of a higher SPX 1-3 weeks later in the same time frame.

High readings on the Standard & Poors Oscillator are usually bullish. Following a closing Oscillator over 7.0, the S&P is higher one week later two-thirds of the time, pretty impressive considering that 7+ readings always come at relatively high points on the daily chart. When the market does display its usual upside follow-through, it’s historically an intermediate-term bullish sign. The table below lists all 30 instances since 1970 in which the S&P closed higher one week after our version of the S&P Oscillator crossed over 7.0. Gains are not especially large, but the market generally has a consistent underlying bid.

S&P Oscillator Over 7.0, SPX Higher One Week Later
09/21/10… S&P ??? two weeks later
08/02/10… S&P -4.1% two weeks later
03/16/10… S&P +1.2% two weeks later
09/22/09… S&P -1.6% two weeks later
07/28/09… S&P +1.5% two weeks later
05/11/09… S&P +0.1% two weeks later
04/13/09… S&P -0.1% two weeks later
03/26/09… S&P +2.9% two weeks later
06/08/04… S&P +0.5% two weeks later
01/07/04… S&P +0.9% two weeks later
06/10/03… S&P +0.6% two weeks later
03/15/02… S&P -2.3% two weeks later
10/30/98… S&P +3.8% two weeks later
05/16/97… S&P +1.3% two weeks later
01/08/92… S&P +1.6% two weeks later
02/06/91… S&P +2.2% two weeks later
01/20/87… S&P +3.0% two weeks later
02/28/86… S&P +4.9% two weeks later
01/28/85… S&P -0.1% two weeks later
08/13/84… S&P +0.6% two weeks later
10/19/82… S&P +0.8% two weeks later
08/30/82… S&P +3.3% two weeks later
08/11/78… S&P +0.5% two weeks later
05/02/78… S&P +1.7% two weeks later
11/23/77… S&P -4.3% two weeks later
01/13/76… S&P +4.9% two weeks later
02/04/75… S&P +4.0% two weeks later
01/14/75… S&P +7.1% two weeks later
10/02/73… S&P +1.1% two weeks later
12/15/71… S&P +2.9% two weeks later
12/10/70… S&P +0.9% two weeks later

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

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