Short-term Outlook (1-5 Days):  Neutral  From Apr 23, 1215 SPX

Go to:  Top  |  Short-term Outlook  |  Int-term Outlook  |  Equity Updates  |  Indicator Summary  |  Commodity Updates

Go to:  Top  |  Short-term Outlook  |  Int-term Outlook  |  Equity Updates  |  Indicator Summary  |  Commodity Updates

Equity Indicators - Updates and Extremes

Up Issues Ratio

One of the more useful types of analyses we've discussed over the years involves outstanding thrusts in breadth, prices and even sentiment, especially when coming from extreme overbought or oversold conditions.

Yesterday could be considered one of those thrusts, given that we were seeing extremely negative breadth readings for several days in a row (more than 2 declining stocks for every 1 advancer), then we flipped the switch and got an extremely positive one.

Since 1940, there has never been a time when we saw four or more straight days with an Up Issues Ratio under 30%, then a thrust above 90%, so we're going to have to relax the parameters some.

So let's look at every time the Ratio was at least less than 33% for four straight days, then shot at least above 80%.  Typically, buying into that initial breadth spike was a mistake, in terms of causing some short-term indigestion.  Over the next five days, you would have suffered an average drawdown of -4.1% as prices deflated from the initial euphoria.

In the intermediate-term, though, the thrust was relatively near several important lows.  So let's just wait a week, buy the S&P, and hold it for three months.  This is how that would have turned out:

It did pretty well.  The 2009 trade was a big outlier, but even still the risk/reward was skewed to the upside over the next few months.

To get more instances, let's reduce the upside thrust to an Up Issues Ratio of 67% or greater.  Then we get 15 occurrences.

Surprisingly, the ramifications weren't much changed.  Waiting a week, then buying and holding for three months, led to 13 winners out of the 15 trades and an average return of +7.0%.  The maximum loss averaged -4.5% while the maximum gain averaged +10.6%.

Like several of the other studies we've discussed over the past few days, this one suggests likely short-term weakness and high volatility, but then a much larger chance for a rebound in the intermediate-term.

Gap From A Low

We can look at yesterday's thrust in another way, this time by price.  Yesterday I mentioned that we were seeing only the 7th gap of +4% or more in the S&P 500 futures since their inception.  Each of the other 6 filled their gap (by trading below the previous day's close), usually sooner rather than later.

But maybe yesterday was unusual in that we saw big gap up, never traded even close to Friday's close...and this was all coming off of a multi-month low.

Since the S&P futures began trading in 1982, there have been a handful of times we've seen similar scenarios.  What we're looking for are any time they closed at a two-month low, then gapped up so much that the day's low was at least 1% above the prior day's close.  That shows an exceptional burst of buying interest.

Out of the 11 precedents, it took an average of 20 trading days before the gap was filled (in our current instance, that would mean the S&P would have to drop below Friday's close of 1107).

All but two of them were closed within two months.  After 9/11 and again at the March 2009 bottom, we saw this price pattern and prices didn't look back anytime soon.

Once again, this seems to support the idea that the type of volatility we've seen over the past few days does not normally lead to a rocket-ride back to new highs, but rather a shorter-term period of back-and-forth before any major low is most likely to set in.

Go to:  Top  |  Short-term Outlook  |  Int-term Outlook  |  Equity Updates  |  Indicator Summary  |  Commodity Updates