Most of our intermediate tape studies have been positive, but there are some troubling short term variables I am having difficulty ignoring namely the fact that 1) today's reversal didn't create more afternoon buying as evidenced by a 10-16 Candlestick read and 2) Some weak seasonals.
As for the weak seasonals, the S&P is supposed to begin the month with some strength and my model has the next week in August, 1-9 when this current trailing week was negative over the last 30 years, for a median loss of 1.23%. The next week was also 4-11 in PreElection Years for a median loss of -0.23%. I can't rule out the possibility, the positive intermediate Technicals will dominate the short term concerns, as there are, what I consider, three strong 'intermediate' positives for the market.
- Tape Internals. Most notably Tuesday's 'Capitulation Day' study, which was 24-1 over the following year for a median annual return of 24.
- Technicals. When any commodity trades below the previous intermediate Low and then closes above it, resulting in an important double bottom chart formation whose importance is covered in most introductory technical analysis books. Today the S&P traded (1234.56) below the 2011 intraday low of 1249.10 set on March 16 and then closed (1260.34) above it. My explanation, which you have heard often, is the market likes to generate transactions and running through old support levels, triggers the breakout traders, who are then vulnerable to a subsequent whipsaw trade when the market reverses. Today was a classic example of this set up. As, I alluded, I would have liked to have seen a little more reversal to the upside as my candle analysis was only 10-16 for tomorrow. But extremely tough call for me, as my candle study doesn't see the intermediate term reversal. My mentor, Rennie Yang at MarketTells, has a similar study today, with similar results, looking at the length of the candle tails, but again, I'm still troubled by the fact, this candle is encompassing a previous intermediate low.
- Valuation. I do some casual fundamental analysis to support my technical perspective. I can't get over the fact with the market at 1260 and trailing earnings of $83.19, the current earnings yield is 6.6% as compared to a five year Treasury Note of 1.2%. The Bear's will argue that trailing earnings will not hold water going forward and certainly no one can say for certain. But even if you trim the earnings yield to 5.0%, it is still much higher than any return you can obtain across the 30 year yield curve. Even, the S&P dividend yield (2.1%) is higher than the Five Year Note yield.
Seven Down Days and then an Up Day
In case anyone was wondering, below are the results for a positive close, breaking a string of seven consecutive down days. There have been 23 since 1984.
S&P Performance after an Up Day
Breaking a String of at Least Seven Consecutive Down Days
DAY WEEK MNTH QRTR 6MTS YEAR DDOWN
#UP-DN = 12-11 12-11 9-14 16- 7 17- 6 19- 4
AVG%CHG= 0.14 0.35 -0.40 4.23 9.64 15.91 -8.31
MED%CHG= 0.17 0.30 -1.51 2.46 9.09 13.89 -5.33
The Intermediate Performance numbers were above average, but as we have mentioned, these kind of selloffs normally require some base building as suggested by the one month (9-14) performance numbers.
Tomorrow is a conflicting day and I will glad to get it behind me.
Wayne Whaley is a Systems Engineering graduate from Georgia Tech who takes an engineering approach to tape analysis. He is a registered CTA, co-owner of Witter & Lester and the 2010 MTA Charles Dow Award winner for research surveying various tape measures. For more insight see www.witterlester.com.