Short-term Outlook:  25% Bearish  From Jan 12, 1134 SPX

Indicators - Updates and Extremes

Short-Term Indicator Score

There are any number of extremes we could discuss among our short-term indicators after Friday's drop through some widely-watched support levels.

Instead of going over a half-dozen of them, a good proxy is the short-term Score.  On Friday, it exceeded 80% for only the 11th time since 2000.

A week after the others, the S&P 500 was higher 8 out of 10 times, with an average return of nearly 4%.  The two failures were during the spectacular outliers after 9/11 and early October 2008.

The lesson from the other occurrences is clear - the broader market should bounce, and probably right away.  We've already seen a substantial bounce pre-market, so obviously that takes away some of the impact.

There have been 5 times the S&P gapped up at least +0.5% the next morning, as it's on track to do today.  All 5 tacked on more gains into the close, with all but one gaining an additional 1%.  After that, it was much more questionable.  For the record, here are those dates:  09/24/01, 02/28/07, 09/18/08, 11/21/08 and 10/29/09.

Any bounce will add an additional bit of oomph to Friday's (and December's...) low around 1090ish.  A bounce that then fails to hold this support for more than a day or two would be much more indicative of a larger change in trend.

Speaking of...

Large Drops From A High

That is only the 3rd time in history the S&P 500 suffered three consecutive 1% down days following a 52-week high.  After the others, the market rallied for a month then declined again, not hitting another new high for a couple of years (from 07/21/33) and the other time it continued to fall in the short-term then hit a new high a few months later (from 10/10/79).

But 1% moves aren't really good for context.  Sometimes 1% is average given the volatility of that time, and other times 1% is a huge move.  So let's look at this in a different way.

The table below shows the other times that the S&P 500 hit a 52-week high, then suffered a very large decline.  By "very large", we're talking about the largest 3-day loss in at least six months.  This is the kind of quick, scary decline that raises fear levels quickly and always makes investors wonder whether we've seen enough damage in sentiment to alter the long-term trend.

What we're looking at in the table is how long it took for the S&P 500 to bottom (and how much of a loss to get there) before embarking on a run to a new 52-week high.

The numbers confirm something we've looked at several times over the past 8 years - very large downside moves from high levels don't usually portend a bigger change in trend.  Tops are most often choppy affairs that are significantly less dramatic.  Not always, but usually.

From the table, we see that the median number of days it took to form an important bottom was barely longer than a week.  The average (median) drawdown was only -1.6%, though there were three losses greater than -10%.

The moves weren't usually a straight shot higher, though - it took an average of nearly 30 days to reach a new 52-week high.  The problem with that "Days 'Til New 52-Week High" column is the dispersion; there's a very high standard deviation among the precedents.

Bottom line, like the "top spotter" table we looked at last week, this move isn't necessarily indicative of a change in the long-term trend.