The Weakest Week (updated)

Last year I showed that the week following September options expiration has historically been the most bearish week of the year. 2011 didn't do anything to make the stats look any more bullish.  Below is an updated chart showing the persistently poor performance since 1961.

As you can see the bearish tendency has been pretty consistent over the last 51 years.  There was a stretch in the late 80’s where there was a series of mild up years.  Since 1990 it has been pretty much all downhill.

What Friday's VIX Action Hints At

Even with the SPX rising Friday, the VIX managed to close up a bit. The VIX will typically trade in a direction opposite the SPX, so it is unusual that they both close higher. On Fridays, the VIX has a natural tendency to dip in the afternoon, so it is most unusual to see them both close higher on Friday. The study below was last seen in 4/30/12 subscriber letter. It examines other instances of the VIX and SPX both closing higher on a Friday while the SPX is in an uptrending market. All stats are updated.

As you can see, there appears to be a decent downside edge suggested by this study. That edge has primarily played out over the first three days.

When The Fed Sparks A Rally To A Long-Term High

In “The Quantifiable Edges Guide to Fed Days” I discussed Fed Days that close at new highs.  The basic finding was that when the market closed at a short-term high on a Fed Day, then it was likely to pull back over the next few days.  But when it closed at a long-term high, then the rally was likely to continue.  Below is a study from the guide that.  I’ve updated all the stats.

This suggests further upside is likely over the next 1-2 weeks.

The Impact of Intermediate-Term Highs on Fed Day Performance

Tomorrow is a Fed Day. As I have discussed many times, Fed Days generally carry an upside tendency. But this tendency is greatly impacted by certain variables. A large collection of these variables may be found here on the blog under the “Fed Day”label. And many more may be found in the “Quantifiable Edges Guide to Fed Days”.

One variable I showed in January was whether the market was already at an intermediate-term high. There is a decent chance the market closes at a new high today so I've decided to update that study.

First, let’s take a look at SPX performance on Fed Days when the SPX has NOT closed at a 20-day high the day before.

That’s basically 30 ½  years of bullishness.

But now let’s see performance at times when the SPX did close at a 20-day high the day before.

No consistency and no pronounced edge in this sample of 37 instances.

Traders looking to play for a short-term Fed Day bump should perhaps be hoping the SPX does not close at a new high today.

Also, for more updated Fed Day research be sure to check out today's Overnight Overview at Overnight Edges.

A Pattern Of Strength Suggesting More Strength To Come

Short-term strength is often followed by short-term weakness, but when that short-term strength is unusually impressive, it can create a situation where that extreme strength will beget more strength. When the market leaves an unfilled up gap that is considered a sign of strength.  When it does it 2 days in a row and closes at a 50-day high, that can be considered exceptional strength. That is what happened on Friday, and past performance is shown in the study below.

The size of the follow-through isn't terribly large. But it has been very, very consistent that at least some follow through was achieved in the next few days.

One Strong Short-Term Positive About Thursday's Breakout

In the 7/19/12 blog I looked at the short-term importance of an unfilled upside gap accompanying a breakout.  With yesterday’s breakout occurring along with an unfilled up gapI have revisited that study below.

Results here are strong across the board.

Now let’s look at instances where the 50-day high breakout was not accompanied by an unfilled gap.  Interestingly, the number of instances was nearly the same.  This study also appeared in the 7/19/12 blog and is updated.

As you can see these moves to new highs that don’t start with an unfilled gap are much less reliable over the short-term.

Technicians will often use the term “breakaway gap”.  This suggests the gap occurs on the same day as a base breakout.  The idea is that the new high causes excitement and the gap leaves a good amount of people sidelined or stuck short.  When it doesn’t immediately fill, it leads these people to chase and helps to propel the market even higher.

Interesting Implications of the RUT/SPX Divergence on Tuesday

Last night in the Quantifiable Edges Subscriber Letter I examined short-term implications of strong 1-day rises in the Russell 2000 (RUT) while the S&P 500 (SPX) declined. I found that there appeared to be a decent upside inclination for the following day. This morning I played around with this concept a little further, added a filter that eliminated instances occurring in conjunction with intermediate-term lows, and ran the test out longer. What I found was quite interesting and can be seen in the stats table below.

While 1-day implications appear bullish, looking out over the next couple of weeks there has been a strong downward tendency. This may be worth keeping in mind over the next 10 days or so.