My Capitulative Breadth Indicator (CBI) moved up to 11 on Friday. In the past, readings above 10 have signified broad capitulative action in individual large-cap components. It has been a reliable indicator of exhaustive movement and has frequently been followed by a substantial short-term bounce in the S&P 500. Readings above 10 have been a fairly rare occurrence with only 16 instances in 13 years between 1995 and 2007. They’ve become more frequent recently, though. This is the third time the indicator has moved to 10 or higher in the last 5 months.
As I’ve written in the past, buying the S&P 500 on a close in the CBI of 10 or higher and then selling when the indicator closes back at 3 or lower would have been profitable 100% of the time. The indicator is currently 17 for 17. This does not mean it will work this time. It also does not mean there won’t be significant downside before the expected bounce ensues.
In a post on January 22nd, “CBI Spiking – How Bad Can It Get?” I looked at the two worst selloffs from a percentage standpoint that occurred after a 10+ CBI reading. I’d suggest reviewing it.
I ran a scan tonight to see what the longest period of time was before a bounce ensued under the following conditions: 1) The SPX is trading at a 50-day low. 2) The CBI moves up to 10 or higher. Seven of the past 17 CBI spikes have occurred when then SPX is at least at a 50-day low. Of these seven times, the longest the market has continued to drop before beginning a substantial bounce was 3 ½ days. The lowest close was 3 days later. The lowest low was 4 days later. Interestingly, these were the July 2002 and September 2001 instances listed in the “How Bad Can It Get?” study.
While the market could fall substantially over the next few days, the CBI is suggesting a multi-week low should be made by the end of the week.
Rob, have you ever tested the CBI using Dow Jones historical data? Seems that you might be able to go back much farther than 1995.
ReplyDeleteI am considering taking this CBI signal, possibly by tomorrow's close, depending on the action.
rob,
ReplyDeleteBesides the 2 instances in 2001 and 2002 you gave have there been othr draw downs that have been steep that we could look to say 4-6%. Also naked puts seem like a good trade her because of the play on time and adjustable deltas what do you think about that ?
Woodshedder,
ReplyDeleteWith only 30 stocks, the DJI may be more prone to spikes than I'd prefer. It may be worth looking into though. I'll check it out when I have some time. Thanks for the suggestion.
Anon,
Naked puts can be enticing because of the large premiums. The problem is that reward is limited at a time when market risk is high. I prefer strategies that don't limit upside in highly volatile environments.
Rob