Although, macro economic analysis is not my niche, Doug Kass makes the argument that the European economic dilemma is a very well known quantity which the market’s have had plenty of time to digest, and he argues Bear Market’s normally occur from the introduction of unforeseen negative economic variables. Although Bears will argue there are additional unknown and negative European developments on the horizon, my contrarian nature gravitates toward such logic.
There is some speculation there will be another round of coordinated Fed Easing in the First Quarter. My analysis of interest rate/equity market correlations suggest higher rates from extremely low levels are generally very conducive for higher equity prices, as fears of the potential deflation, which induced the extremely low rates, dissipates. I believe any such additional Fed easing will continue to hint at panic, and to the contrary, I am of the opinion, if the 30 year bond yield could make its way back to 3.5% on its own this year, the S&P would likely breathe a sigh of relief and visit all time highs in 2012. The current 30 Year Bond yield is 2.919%.
As I was attempting to refine my 2012 outlook today, I felt compelled to peruse my Fourth Quarter commentaries and revisit those studies which appeared to have intermediate implications into next year or were simply a cut above the rest. Since I have those studies at my fingertips, I thought I would pass them along again today in their original form with an additional reference to that day’s S&P price in the heading. The thought that I carried away from the review exercise reinforced my perception that, at least from a tape perspective, the combination of the various early October tape thrust off the retest of the August 8th Low, and the strong net Fourth Quarter, likely puts the odds in the favor of the Bulls as we head into 2012.
October 6, 2011, A PTA7 Volume Thrust Signal, S&P = 1164.97
UDT2= UPVOL/(UPVOL+DNVOL), over the last two day on the S&P 500
UDT2 had been over 89.2 each of the last two days, giving the model a PTA7 volume thrust signal. These signals are 25-0 six months later for a median six month gain of 17.12%.
October 10, 2011, An S&P 500 Five Day Breadth Thrust, S&P=1194.89
ADT5 registered a 78.59 today, the twenty second 75+ reading on the S&P since 1970. The 20 signals, which have expired, were 19-1 a year later. The last two signals are less than a quarter old and are still under water, which brings into question whether High Frequency Trading, etc, has altered the signal’s reliability. You can see they occur much more frequently now. Of course there, is still nine months remaining on the last two signal’s shelf life and they have time to turn their fate around. The last two columns contain the max drawdown and drawups obtained over the following year. The maximum drawups are very impressive, with 14 of the 20 signals up at least 20% at some point in the following year.
The eight ADT5s > 75 which reversed an ADT5 of < 35 in the previous five days were 8-0 one year later for a medium return of 21.04%.
October 12, 2011, Four 1% Positive Price Moves in Five Days, S&P = 1207.25
The S&P finished 25 cents short of posting its fifth 1% gain in seven days and would have presented me with a very impressive tape study had it done so. I considered presenting it as Five 0.99% days out of seven, but for some reason, that seemed like a bit of a push. But regardless, backing up a couple of days, from last Tuesday through Monday, we posted four +1% S&P Days out of five trading days, which has a pretty solid record of calling intermediate moves. Since this study doesn’t require market internals, I took the scan back to 1950. From an intermediate perspective, a couple of the data points could have been considered repeats. Ten of the 15 data points were followed by 20% years.
October 28, 2011, A Very Significant Monthly Price Thrust, S&P = 1285.09
The October S&P rebound has set up a very significant Bullish Signal for the equity markets, which occurs about twice a decade on average. The S&P closed at 1285.09 today completing a 20 Day Period with only 6 down days of which none occurred on consecutive days.
Daily S&P Performance October 3- October28, 2011
# DATE S&P %CHG # DATE S&P %CHG
1 20111003 1099.20 -2.85 11 20111017 1200.86 -1.94
2 20111004 1123.95 2.25 12 20111018 1225.38 2.04
3 20111005 1144.03 1.79 13 20111019 1209.89 -1.26
4 20111006 1164.97 1.83 14 20111020 1215.39 0.45
5 20111007 1155.46 -0.82 15 20111021 1238.25 1.88
6 20111010 1194.89 3.41 16 20111024 1254.19 1.29
7 20111011 1195.54 0.05 17 20111025 1229.05 -2.00
8 20111012 1207.25 0.98 18 20111026 1242.00 1.05
9 20111013 1203.66 -0.30 19 20111027 1284.59 3.43
10 20111014 1224.58 1.74 20 20111028 1285.08 0.49
October 3 – October 28
October 3 – October 28
I was curious as to how common a 20 day feat this might be for the S&P, so I scanned my database back to 1950 and found 74 cases (not including one month repeats), which is about 1.2 such signals a year. The current S&P is up 13.58% over the last twenty days. Upon visual inspection, I noticed that many of the previous 74 cases were actually in sideways markets, with small positive days and large down days, which is much different that the market characteristics we are currently experiencing. I found, if I simply added the constraint that the SP had to be up at least 8.9% over those same 20 days, the list was narrowed to a special set of 11 prior cases which had some very special features, in that:
- The signals were 11-0 at both the forward six and twelve month time intervals.
- All 11 cases finished the next year up at least 12% for a median return of 20.29%.
- Not one single case incurred a 5% drawdown measuring from the signal Date.
The Bears may point out this is an extremely small sample size, but I could reduce the 8.9% twenty day trailing S&P requirement to 7% and the signals are still 27-1 one year later for a median gain of 17.93%.
In summary, Price Thrust that occur over 5 to 20 day period have been shown to have some value in predicting bullish intermediate moves, but if the thrust can be extended to a month and be strong enough to exclude any meaningful pullbacks, it has historically been very significant.
November 3, 2011, A Two Day Up Volume Thrust Signal S&P = 1261.15
The level of Up Volume vs all Volume (UDT2) over the last two days is 90.03 on the S&P 500. One of my intermediate tape models (PTA7), scans daily for an occurrence above 89.20. There have been 25 previous 89.2s and they have historically been one of the most reliable intermediate signals in my arsenal. None of the previous signals has experienced a 10% drawdown in the following year measuring from the signal Date and is 23-0 six months later. The 17.02% median six month return is almost unheard in terms of tape signals with 20 occurrences over a 40 year period and every signal was up at least 12% at some point in the following year, putting these signals in the PTA Hall of Fame.
Lopsided Volume studies have lost a bit of their luster, since they occur about three times as often in the 21st century as they did in the 80-90s. Given that this one falls on the backend of my ‘20 Days With No Consecutive Down Days’ Signal, I am inclined to give this one some room to see if it has legs.
November 16, 2011, The Flashcrash Analogy S&P = 1236.91
(Note: The S&P was down 6% over the next 5 trading days)
I was hoping there would not be a reason to address this again, but there continue to be some eerie similarities. The primary difference is we did not make a new Low today, as we did on this day in the 2010 pattern, but the candle sizes and colors are surprisingly similar. I suppose since the word about is, I have forecast for such, I should start pulling for it, but I really am not inclined to do so. I’ll let you admire the daily correlation and decide for yourself if a computer anomaly is possible Fri-Monday.
December 27, 2011, The Finish/Start Of Year Correlation Story, S&P = 1265.43
As of December 27th, the S&P is up 11.84% for the 4th Quarter. In those 10 previous years since 1950, where the 4th Quarter was up at least 10%, the following First Quarter of the subsequent year was 9-1 for a median gain of 3.32% with a single fractional loss (0.06%) in 2002.
Conversely, in those years where the Fourth Quarter was negative, the following First Quarter was a subpar 4-9, with a significant 3.66% median loss, arguably preceding or catching one of the first three innings of the previous Bear Markets of that time period.
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.