POMO vs. NYSE TICK

TICKscore closed at -20 Monday, sending cumulative TICKscore to another new low for the past month. NYSE TICK action remains unsupportive, with more time spent in extreme negative territory over the past month despite the market’s impressive gain. I’ve pointed out previously how unusual (unprecedented really) it is to see the market up big without a rising TICKscore. Some have pointed to the Fed’s permanent open market operations (POMO) as the potential source of the mystery buying, with large purchases of treasuries ostensibly sending money into riskier assets such as stocks. That could very well be the case, I don’t really have a better explanation. I do find it particularly interesting that the current cluster of POMO days began in mid-August and remains in effect, during which time our TICKscore indicator has been consistently flat-to-down. That’s in stark contrast to the last time we saw a cluster of POMO days between March and October 2009. Notice from this chart that TICKscore was very bullish in that time frame, with the cumulative version moving in a straight line to the upside the entire time. Institutions were active buyers along with the Fed. This time around the Fed’s once again steering money into higher-risk assets but institutional buyers are nowhere to be found. The old saying about not fighting the Fed probably applies to the current environment (as the last month can attest), but the fact that institutions are not joining the party is certainly cause for concern. For more on POMO, see this insightful post by Frank Hogelucht from TradingTheOdds.com.

With today’s selloff, the S&P500 has already posted a lower low on its weekly chart, setting up what could be the first lower weekly high and low since August. That’s a noteworthy pattern to monitor as the S&P is just coming off a series of five consecutive weeks with a higher high and higher low. That type of persistent move normally means buyers will be waiting to buy the first intermediate-term dip. The first distribution week (lower high, lower low) after such a long string of accumulation weeks has traditionally been a reliable buying opportunity. The table below lists each of the last thirty instances stretching back fifty years in which the S&P posted a lower weekly high and low after five weeks of higher highs & lows…

Lower Weekly High & Low After Five Weeks of Higher Highs & Lows
04/24/09… S&P500 +1.3% one week later
11/03/06… S&P500 +1.2% one week later
06/24/05… S&P500 +0.2% one week later
11/01/96… S&P500 +3.9% one week later
12/22/95… S&P500 +0.7% one week later
06/24/94… S&P500 +0.8% one week later
01/24/92… S&P500 -1.6% one week later
03/01/91… S&P500 +1.2% one week later
12/22/89… S&P500 +1.7% one week later
08/18/89… S&P500 +1.3% one week later
09/04/87… S&P500 +1.7% one week later
07/02/87… S&P500 +0.9% one week later
03/07/86… S&P500 +4.9% one week later
12/27/85… S&P500 +0.6% one week later
02/22/85… S&P500 +2.2% one week later
12/28/79… S&P500 -1.2% one week later
09/07/79… S&P500 +1.0% one week later
05/26/78… S&P500 +1.6% one week later
12/22/72… S&P500 +1.9% one week later
01/28/72… S&P500 +0.7% one week later
02/26/71… S&P500 +2.3% one week later
11/01/68… S&P500 +0.9% one week later
08/18/67… S&P500 -2.2% one week later
11/25/66… S&P500 -0.9% one week later
05/21/65… S&P500 -0.4% one week later
10/16/64… S&P500 +0.4% one week later
03/26/64… S&P500 +1.0% one week later
02/08/63… S&P500 +0.4% one week later
02/10/61… S&P500 +1.0% one week later
06/27/58… S&P500 +1.3% one week later

Note that in 25 out of 30 cases, or 83% of the time, the S&P posted a higher weekly close the following week, significantly better than the 56% at-any-time odds for a higher weekly close one week later in the same time frame. Even when wrong, losses were typically limited to 1.5%, reaffirming the notion that after such a long string of up weeks, buyers stand ready to pounce on the first down week. This signal will go into effect at Friday’s close as long as the S&P holds below 1157.

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

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