Bank Action And The Market

The one sector that held up very well Thursday was the Banking Index (BKX). Yesterday I showed a study that suggested a bullish bias following a negative SPX day where the SOX thrives. Below is a similar test using the BKX instead of the SOX:

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This study would have triggered both on Wednesday and Thursday. Instances are too few here to draw any solid conclusions. It does appear worthwhile to keep an eye on the BKX as well as the SOX, though. Interesting about this study is that there were two occurrences in 2008. They were on 1/22/08 and 10/10/08. Both near notable market lows.

Edit: Citigroup is trying its best to ruin these results as I type this. Expect the banks to remain front and center. Looks like we'll have another action filled day.

SOX Gives Intermediate-Term Bullish Market Indication

A positive intermediate-term sign Wednesday was the fact that the Semiconductor Index (SOX) rose even as the S&P and Nasdaq suffered 1% declines. I first showed the below study on the blog last August. I’ve updated the stats to run up until the present.

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These are solidly bullish results with the winning percentage, the profit factor, and the average trade all posting strong numbers throughout the test period.

Not shown above is that over the next week the S&P has posted a close higher than the trigger day close 89% of the time. If you look out 12 days there has been at least 1 close higher than the trigger day in 42 of 43 instances (98%). The only loser came after the 7/21/98 signal. This has been a solidly bullish intermediate-term signal.

VXO Collapse May Indicate A Brief Pullback Is Likely

The VXO fell over 15% on Tuesday – a fairly rare occurrence, especially when the S&P 500 is moving off a 50-day low. Below I took a look at how the S&P has performed following such instances:




Notable above is that only 1 of 10 instances saw the S&P rise the next day. Not shown in the chart is that the lone day 1 winner closed lower than the entry on day 3 – meaning there was a short-term pullback in every case. Instances are a bit low in this study but notable and quite suggestive nonetheless.

Another Study Suggesting A Short-term Bounce

Monday marked the 5th day in a row that the S&P 500 closed below its lower Bollinger Band (20 period, 2 std dev). Looking back to 1960 I found only 23 other occurrences. Of those, 22 managed to close higher than the trigger-day close at some point in the next 3 days.

Unfortunately, as you can see from the table below, the edge has been very short-term:

As this selloff has worsened more and more evidence is suggesting a bounce is well overdue. To this point, though, the bounce has evaded us. I expect it shouldn’t be too much longer until we see it.

CBI Hits 7 For 1st Time Since November

I haven’t mentioned the Capitualtive Breadth Indicator (CBI) for a while. For those unfamiliar it is a proprietary method of measuring the amount of capitulation evident in the market. You may read the intro post here or the entire series here. Since the November lows it has been pretty much dormant except for a quick blip in January. It began to move up last week and at Friday’s close it hit 7. Long-time readers will recall that this is a level where I feel a decent bullish edge exists. Below is a chart of the CBI from the Quantifiable Edges members section.

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In the past I’ve demonstrated that it can be used as a market timing tool for swing trades. One “system” I’ve shown here on the blog is to purchase the S&P 500 when the CBI hits a certain level (7 being one of them) and then sell the S&P when it returns back to 3 or below.

Below is an updated performance report of the above “system” covering 1995-present.






I'll keep readers informed of significant changes in the CBI over the next several days until it returns to neutral.

Short-Term Oversold At An Intermediate-term Low Provides Bullish Edge

Short-term oversold at intermediate-term lows can be a powerful combination. Let’s look at the current situation. The 2-day RSI of the SPX closed basically right at 2. The SPX also closed at a 50-day low. Below is a test that shows how this combination has performed since 1985.

We see here a strong inclination for an almost immediate bounce. The edge is very short-term though as it begins to dissipate after just 2 days. Not seen in the table above is that an astonishing 30 of 31 instances closed higher than the entry price at some point over the following four days. The only failure was on March 25, 1994.

Mild Selloff After Sharp Drop Sets Up S&P For A Bounce

In the past I’ve found that weak bounces after strong selloffs have had bearish short-term implications. Wednesday’s action just missed the weak bounce as the S&P finished marginally lower. So tonight I looked at S&P performance following a sharp drop and then a marginally lower day. Below I show the 5-day return across a spectrum of possible % declines between 0 and X%.

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Rather than the bearish results found when the market undergoes a weak bounce, we see here that limited additional selling carries a bullish expectation over the following week. The edge remains fairly consistent regardless the level of decline between 0% and 1%.