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Do 9-to-1 Volume Days Matter Anymore?

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You had me at "skew"

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We have now seen five days in the past month where the volume on the NYSE has been skewed either 9-to-1 on the upside or 9-to-1 on the downside. Some suggest that such volatility in breadth figures is bearish, but history strongly suggests otherwise - extreme changes in breadth over a short period of time have almost always preceded good rallies.

But let's take a look at these volume figures and see if the same thing applies. We'll look at any time since 1950 (the time my volume figures become reliable) where we got five of these 9-to-1 ratios (up or down) within a month's time like we have now.

Ten trading days later, the S&P 500 was higher 9 out of 11 times, though the average return was small at +0.2%. But by a month later, we still had 9 positive instances, and the average return climbed to +3.0%. That increased again to +4.6% by three months out, and after six months the S&P was positive all 11 times, with an average return of +9.4%. There were a couple of hairy short-term corrections in there, but again it proved to be a very good and consistent intermediate-term buy signal.

Ahh, you say, but this time it occurred after only a minor correction from a new high.

You may have a point there. The lowest close over the past month was only -5.9% below the last 52-week high, which isn't a particularly deep correction. The average correction in the 11 instances mentioned above was -15.5%, almost three times as large as our current one.

There were only two occurrences (1/11/51 and 4/5/51) that showed a correction of less than -10% before we got these volatile volume figures. A month after those instances, the S&P had returns of +4.8% and +3.4%, respectively.

So while we only had a couple of instances with shallow corrections, overall the correlation between the correction and future one-month returns was +0.4 (on a scale of -1 to +1). What that means is that the smaller the correction preceding these volume extremes, the higher the return going forward. We have a small sample size here, so I don't want to get too carried away with the stats, but it helps to answer the "Is this time different?" question.

OK, well, maybe the fact that the NYSE moved to decimalization in 2001 has affected this indicator, since it's easier for a stock to show a daily change now. That should make it more common to see extremes in breadth and would make the current situation less applicable to historical ones.

This is the tried-and-true argument we hear every time we get an extreme in breadth, so let's check it out.

During a calendar year, the average year since 1950 has seen six days where volume was skewed by a 9-to-1 ratio either to the upside or to the downside. Since the NYSE got rid of fractions, however, the years have averaged three of these days. That's right - since decimalization occurred, we've been twice as less likely to see a 9-to-1 day!

With the impressive move over the past few days, a lot of the shorter-term measures I watch have become very stretched, which usually results in a multi-day pullback. We're coming out of intermediate-term oversold conditions, though, so we shouldn't see a move all the way back to the recent lows. If so, I'd have to question the idea that what we've seen is a valid bottom.

No positions in stocks mentioned.

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