Low Volume When The Market Rises Strongly

I showed yesterday how a very-low volume day during a decline can often lead to a short-term reversal. Today I will review a study that first appeared in the blog on 5/13/2008. It looks at extremely low volume on strong up days - like Monday. (Volume studies typically use the symbol $TVOL in Tradestation, which is their measure of NYSE volume. This is what is being used in the below study.)




We’ve seen several studies like this over time and many of them were identified by the Quantifinder on Monday. With so many studies confirming each other, it seems the downside edge in these very low volume rises is for real. One caveat with Monday’s action though is that it was Yom Kippur, meaning a lot of traders were out of action and somewhat lower volume could be expected. Still, it’s been a steady enough edge that I decided to it was worth review.

Friday's Very Low Volume Provides An Upside Edge

One hint from Friday that suggests a bounce is likely is the fact that volume came in very low. It was the lowest volume in over 2 weeks. Below are some tests which demonstrate the potential importance of this.

First, let’s look at 3 day pullbacks that don’t occur on extremely low volume.

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As you can see there is a slight upside edge. The % winners were between 57% and 60% and the average gains days 1-3 were between 0.1% and 0.275%.

Now let’s look at times were the volume was extremely low:

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Here the upside edge is significantly stronger over the next few days. The % winners were between 68% and 76% and the average gains days 1-3 were between 0.59% and 0.94%. The reliability of a bounce occurring at some point in the 3 day period increased from 75% to 87%.

Volume can often provide some valuable clues. For more volume-related analysis, you can check out the volume label on the right hand side of the blog.

Fed Day Selloffs

Wednesday’s Fed day reversal acted much like the one that appeared on April 30, 2008. The May 1, 2008 blog featured a couple of studies that were relevant again today. They were just some of what the Quantifinder identified as relevant last night. I re-ran those studies below. This 1st one looks at times the SPX made a 20-day high and then closed in the bottom 10% of its daily range.

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There appears to be an upside edge here. Although it isn’t the most powerful edge we’ve seen it still appears to suggest bullish inclinations over the next few days and weeks.

Also in that May 1, 2008 blog I looked specifically at Fed days that closed in the bottom 10% of their daily range. I re-ran that study as well tonight.

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Much of the edge here appears in the first day. Poor closes on Fed days have rarely seen significant follow through in the coming days. More often the selling is viewed as an overreaction and the market is able to rebound a bit.

It appears Wednesday's action suggests bullish implications over the short-term.

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A Long-Term Look At Fed Days

Below is a long term chart of market performance on scheduled Fed days. I didn’t include non-scheduled meetings. Those are generally surprise rate cuts that are aimed at boosting the market. They’re inherently bullish yet unpredictable since the meetings aren’t scheduled. Therefore there is no point in including them in this study.

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Over the last 27 years there’s been a persistent upside edge. The average Fed day has ourperformed the average day by about 7.5 times.

For more studies on Fed days make sure to check out the Fed day link.

Last Week's Equity Put/Call Ratios Suggest A Pullback

The CBOE Equity put/call ratio was consistently low last week. The 5-day average is 0.53, which is nearly 22% below the 200-day average of 0.68. When the 5-day average gets extremely low as it is now that can lead to a short-term market pullback. Below is a study that exemplifies this.

Most notable and also most compelling about this study is the fact that all instances have occurred after the March bottom. Prior to that the 5-day ratio had never stretched 20% below the 200-day. This is another example of just how extreme the current bull move has become. It also makes the results that much more impressive from a negative standpoint since they were achieved during a 60% run-up in the market.

The 2009 Rally - Breadth Without Compare

Yesterday I looked at Worden Bros. T21111, which measures the number of stocks trading at least 2 standard deviations above their 200ma. As you’ll recall, it was hitting an all-time high. (Data goes back to 1986.)

With Wednesday’s big rally, we are now seeing even more extraordinary numbers. Not only is T2111 up to 58.51%, but T2112, which measures the % of stocks trade at least 2 standard deviation above their 40-DAY moving average, is also in record territory. It is showing that a remarkable 57.19% of stocks are now stretched far above their 40-ma’s.

The action in T2112 truly exemplifies the uniqueness of the rally since March. Below is a long-term look at the indicator. Note that from 1986 through 2008 the highest reading this indicator ever registered was 37.22% in November of 2004. That record has been blown away repeatedly over the last 6 months.

Let’s now zoom in on this year to better see what I’m saying.

There simply is no comparison over the last 23 years to what we are seeing in this recent rally. There have now 5 distinct periods in the last 6 months where T2112 has rallied through the old high. And now we’re seeing the most extreme breadth numbers of all.

Never Have So Many Stocks Been So Stretched Above Their 200ma.

Near the end of August I discussed that some of the breadth measures tracked by Worden were near all-time highs. This situation corrected itself as the market embarked on a brief selloff. Tonight two of their indicators actually registered their highest readings ever. These are T2109 and T21111 which track the number of stocks 1 and 2 standard deviations above their 200-day moving averages. Below is a long-term chart of T21111 with full history of the indicator going back to 1986.

I marked on the chart the 4 other instances that came close to the current reading. What you may notice is that these spikes were generally brief. Every case was followed by at least a mild selloff that worked off the severely overbought conditions. In no case did the extreme spike mark the end to the bull market that created it. It’s dangerous to read too much into only 4 instances, but a short-term pullback does seem reasonable. The current reading does not suggest a long-term top, though.