More Weakness Ahead?
Can you wait two whole months?
Editor's Note: The folowing article is courtesy Renny Yang of Markettels.com. We offer this perspective as food for thought and in the interest of seeing all sides.
"When volume associated with declining issues accounts for over 90% of total big board volume, it's been a harbinger of longer-term market bottoms. Wednesday's sharp selloff produced the first 90% down volume session in over a year. While it doesn't necessarily mean we're directly on a major low, it does suggest a major low isn't far off.
See a recent chart of 90% down volume days (highlighted by the red vertical lines) at http://www.markettells.com/mv/nydecvol.gif
Odds are strong that the S&P will be trading at a higher level two months (forty trading days) after a 90% down volume session. Out of 20 total occurrences since 1987, only once was the S&P trading significantly lower two months later. In every other case, the market was either flat or significantly higher...
Down Volume on the NYSE 90% or more of Total Volume
10/05/05 DnVol 90%... SPX ??? two months later
03/22/04 DnVol 91%... SPX -0.4% two months later
03/24/03 DnVol 94%... SPX +6.4% two months later
03/10/03 DnVol 94%... SPX +15.7% two months later
09/03/02 DnVol 92%... SPX +0.5% two months later
04/03/01 DnVol 90%... SPX +13.5% two months later
03/12/01 DnVol 90%... SPX +6.9% two months later
04/14/00 DnVol 92%... SPX +8.3% two months later
08/31/98 DnVol 96%... SPX +11.3% two months later
08/27/98 DnVol 94%... SPX +2.7% two months later
08/04/98 DnVol 91%... SPX -5.1% two months later (*)
01/09/98 DnVol 94%... SPX +14.7% two months later
10/27/97 DnVol 98%... SPX +7.1% two months later
08/23/90 DnVol 95%... SPX +1.8% two months later
01/12/90 DnVol 90%... SPX -0.4% two months later
10/13/89 DnVol 95%... SPX +4.5% two months later
04/14/88 DnVol 95%... SPX +4.4% two months later
01/08/88 DnVol 92%... SPX +9.9% two months later
11/30/87 DnVol 95%... SPX +8.3% two months later
10/26/87 DnVol 98%... SPX +9.8% two months later
10/19/87 DnVol 99%... SPX +7.9% two months later
The notion of higher prices over the coming months is further bolstered by the positive seasonal cycles heading into the end of the year, and by the unusually high levels of investor pessimism seen by such indicators as the high public short ratio and low Nasdaq/NYSE volume ratio.
Public Short Ratio - http://www.markettells.com/mv/publiclt.gif
Nasdaq/NYSE volume ratio - http://www.markettells.com/mv/ndnyvollt2.gif
From a shorter-term perspective, another noteworthy point concerning Wednesday's session was the drop-off in Nasdaq volume. A session in which declining issues outnumber advancers by over a 4:1 margin is not typically the kind of session to see a decrease in volume. When breadth is this lopsided, it's typically a very active session as sellers overwhelm buyers, causing a spike in volume. But when volume is noticeably absent on such a lopsided session, and actually comes in below the prior day's volume, it suggests weak hands were responsible for the majority of the selling pressure. Historically, this setup has been a reliable buy signal with a three-day horizon. It's occurred fourteen times over the past decade, and in every case but two the Nasdaq closed at a higher level three sessions later...
Nasdaq Breadth 3:1 Negative on Lower Volume
10/05/05... Nasdaq100 ???
05/17/04... Nasdaq100 +1.2% three days later
10/22/03... Nasdaq100 -0.7% three days later
07/17/03... Nasdaq100 +0.1% three days later
06/23/03... Nasdaq100 +1.2% three days later
03/24/03... Nasdaq100 +1.4% three days later
09/23/02... Nasdaq100 +3.6% three days later
07/02/02... Nasdaq100 +5.3% three days later
09/20/01... Nasdaq100 +1.8% three days later
11/20/00... Nasdaq100 +1.4% three days later
08/26/98... Nasdaq100 -17.0% three days later
06/15/98... Nasdaq100 +4.6% three days later
04/27/98... Nasdaq100 +2.3% three days later
10/27/97... Nasdaq100 +2.2% three days later
12/18/95... Nasdaq100 +6.0% three days later"
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