SPX 10-day Advance/Decline Thrust Tops 65

Interesting to note that S&P futures posted three separate unfilled upside gaps (low > previous day’s high) last week. That’s only the 7th time in the history of the S&P futures contract that it’s posted three unfilled upside gaps within seven sessions. Previous instances all led to further gains over the following month…

Three Unfilled Upside Gaps in Seven Sessions
10/14/11… S&P500 ??? one month later
03/05/10… S&P500 +4.5% one month later
10/14/09… S&P500 +0.8% one month later
10/17/02… S&P500 +2.7% one month later
10/29/99… S&P500 +2.5% one month later
04/05/99… S&P500 +1.9% one month later
12/26/96… S&P500 +0.7% one month later

Last week I mentioned the S&P’s consistent tendency to rise in the wake of seven consecutive lower closes for the S&P100 Volatility Index (VXO). I’ve since noticed that substituting VIX for VXO increased the sample size from 12 to 20 (since 1990), and the market again displayed a similar tendency to rally over the next forty trading days, with only one instance leading to more than a 1% drop…

VIX Down Seven Consecutive Sessions
10/12/11… S&P500 ??? two months later
03/25/11… S&P500 +0.3% two months later
07/12/10… S&P500 +1.2% two months later
03/04/10… S&P500 +5.7% two months later
02/18/10… S&P500 +7.7% two months later
11/20/09… S&P500 +4.8% two months later
10/13/09… S&P500 +2.1% two months later
04/10/07… S&P500 +4.8% two months later
08/17/06… S&P500 +5.3% two months later
05/24/05… S&P500 +2.8% two months later
12/23/04… S&P500 -2.2% two months later (*)
11/10/04… S&P500 +2.0% two months later
04/15/03… S&P500 +12.1% two months later
10/26/01… S&P500 +3.6% two months later
11/23/98… S&P500 +3.1% two months later
02/04/98… S&P500 +11.2% two months later
11/21/97… S&P500 -0.0% two months later
06/17/93… S&P500 +0.4% two months later
01/18/93… S&P500 +3.3% two months later
11/16/90… S&P500 -0.3% two months later
10/22/90… S&P500 +4.9% two months later

The 10-day Advance/Decline Thrust for the S&P500 closed over 65 Monday, generally a bullish longer-term indication. I was reminded of a study from Wayne Whaley in which he noted that an ADT10 over 66.25% had a strong track record at leading to a higher S&P one year later (see updated table below). We didn’t quite hit that level Monday, but if we had it would have been the third such occurrence this year alone. Previous occurrences on March 30th and July 1st are both well underwater, but there’s plenty of time left. Of the 29 closed signals since 1970, 93% led to a higher S&P one year later, with 18 instances leading to a 10%+ gain, while the maximum loss was 6.4%. The signals on 3/30 and 7/1 suggest the S&P will be back in the low 1300′s or higher around the end of Q1 and end of Q2 2012, or at least above current levels.

BREADTH THRUST (ADT10 > 66.25)

#   YEARMTDY   ADT10     FORWARD S&P PERFORMANCE (1YEAR)
1     19701204      67.92      8.50
2     19711208      66.41     22.64
3     19741014      66.49     22.74
4     19750110      67.74     30.77
5     19760106      67.48     12.28
6     19771115       66.83     -3.36
7     19780320      66.60     10.66
8     19780417      67.42      7.19
9     19780807      66.30      2.03
10   19790115      66.59     10.38
11   19820823      68.60     40.21
12   19821013      68.32     24.28
13   19840807      67.10     15.34
14   19850121      66.93     17.44
15   19870114      70.00     -6.38
16   19871218      67.85     10.89
17   19900511      69.61      6.74
18   19910206      67.01     15.57
19   19920102      67.72      4.42
20   19970505      66.67     34.37
21   20030604      67.65     13.82
22   20031014      67.00      5.13
23   20041105      67.56      4.63
24   20081205      67.94     26.14
25   20090323      68.76     42.68
26   20090721      66.75     12.05
27   20090916      70.11      5.23
28   20100720      66.39     22.45
29   20100914      68.31      4.62
30   20110330      68.17     -9.59 (open)
31   20110701      68.11     -10.36 (open)

I still see a number of issues that need to be addressed before such a move is likely to play out, some of which I outlined in last Wednesday’s column. To that list I would add that I’d like to see large traders in E-Mini S&P futures cover most, if not all of their unusually large short position. This group has generally been on the right side of the market over the last five years, so it’s not a positive sign to see them still short hundreds of thousands of ES contracts (the largest short position since 2007.)

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

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