Intel's Role as a Bellwether

Bottom Line: Intel’s after-hours wallop (if it holds) will be one of its larger gap down opens in recent history. And, like a true bellwether, these events have often had a sizable impact on the broader market.

With the complete focus of traders on tomorrow morning’s jobs report, and the light volume due to the upcoming holiday and New York’s political convention, it’s probably futile to delve too deeply into what I had planned to discuss tonight. No matter what our measures are saying, the market will be pushed around by however the large traders feel about tomorrow’s economic report.

As an example of what I had planned to discuss, our intraday cumulative TICK measures on the NYSE and Nasdaq reached nosebleed territory, as the NYSE indicator hit +7655 by today’s close – the highest level reached since last October. Our Down Pressure gauges finished in extremely low territory, the price oscillators went through the roof, and our short-term and intermediate-term indicator “scores” are now reflecting these overbought conditions. In fact, the intermediate-term score is now at its lowest point since mid-January.

The other event so many have been focused on was Intel’s update released after the close today. As most of you are already aware, they did not exactly meet expectations, and the stock so far is down around 7% after hours. So instead of focusing on our measures, let’s instead take a look at other INTC overnight “blowups” over the past 18 years. The table below shows how INTC gap down opens of 5% or more have fared as a bellwether of broader market performance. Using the S&P 500 from 1986 through the present, we can see how bad news from Intel affected the rest of the market.

Intel’s Major Gaps Gap Down Opens of 5% or More, 1986 - 2004
Date	INTC Gap	S&P 500 Performance from the Close Prior to the Gap
Date	INTC Gap	Day of Gap	1 Day Later	3 Days	5 Days	10 Days	30 Days	60 Days
11/21/88	-14.6%	-0.1%	0.3%	0.3%	1.7%	4.2%	5.1%	10.6%
10/26/89	-5.7%	-1.3%	-2.2%	-0.6%	-1.2%	-1.7%	1.8%	-3.2%
08/06/90	-5.7%	-3.0%	-2.9%	-1.4%	-1.7%	-4.7%	-7.6%	-11.8%
03/11/91	-5.8%	-0.5%	-1.3%	-0.4%	-0.8%	-1.4%	1.8%	2.7%
09/13/91	-12.6%	-1.0%	-0.4%	-0.1%	0.1%	-0.4%	-0.8%	-2.3%
04/19/93	-8.6%	-0.3%	-0.9%	-2.1%	-3.4%	-1.4%	1.1%	0.3%
12/06/93	-10.2%	0.3%	0.4%	-0.2%	0.2%	0.2%	2.0%	0.0%
01/19/94	-6.3%	0.0%	0.2%	-0.5%	-0.2%	1.6%	-2.4%	-5.9%
07/19/95	-11.3%	-1.3%	-0.9%	-0.3%	0.6%	0.1%	0.4%	4.4%
01/17/96	-8.6%	-0.3%	0.0%	0.8%	1.9%	4.5%	5.3%	4.6%
05/30/97	-13.0%	0.5%	0.3%	-0.5%	1.7%	5.8%	8.8%	9.0%
08/22/97	-6.7%	-0.2%	-0.5%	-1.2%	-2.8%	0.7%	5.1%	2.3%
10/15/97	-6.8%	-0.5%	-1.5%	-1.5%	-0.2%	-5.3%	-1.9%	-3.2%
03/05/98	-13.2%	-1.2%	0.8%	1.6%	2.2%	4.0%	7.2%	4.2%
10/13/99	-5.3%	-2.1%	-2.3%	-4.5%	-1.8%	-1.2%	7.9%	9.8%
09/13/00	-5.0%	0.2%	-0.1%	-2.5%	-2.1%	-3.7%	-7.9%	-9.3%
09/22/00	-24.0%	0.0%	-0.7%	-1.6%	-0.9%	-2.8%	-1.5%	-8.7%
11/10/00	-8.2%	-2.4%	-3.5%	-0.7%	-2.3%	-3.7%	-6.1%	-4.8%
11/30/00	-9.9%	-2.0%	-2.0%	2.6%	0.1%	-0.1%	-1.1%	-7.6%
03/09/01	-9.2%	-2.5%	-6.7%	-7.8%	-9.0%	-9.9%	-3.2%	1.5%
09/17/01	-6.9%	-4.9%	-5.5%	-9.9%	-8.2%	-4.9%	-1.3%	4.0%
09/21/01	-8.0%	-1.9%	1.9%	2.3%	5.7%	8.8%	10.4%	15.2%
06/07/02	-17.3%	-0.2%	0.2%	-0.9%	-2.1%	-3.9%	-22.5%	-13.2%
10/16/02	-18.1%	-2.4%	-0.2%	2.1%	1.7%	1.1%	6.5%	5.1%
07/14/04	-7.8%	0.1%	-0.3%	-1.2%	-0.5%	-1.8%	-1.6%

Average Return		-1.1%	-1.1%	-1.1%	-0.9%	-0.6%	0.2%	0.1%
Number of Instances		25	25	25	25	25	25	24
Number Positive		5	7	6	10	10	13	13
% Positive		20%	28%	24%	40%	40%	52%	54%

The table above tells us that on the day that INTC gapped down at least 5%, the S&P ended up closing the day lower than the day before 20 out of 25 times, and suffered an average loss of over 1%. The next day, the market rebounded somewhat, but still on only 7 occurrences was the S&P better off. Actually, we can see that on average, it took up to 30 days for the S&P to regain the price level it was at prior to INTC taking such a large opening hit.

One of the interesting sidelights in the data is that there is actually a negative correlation between the size of INTC’s gap down open and the future performance of the S&P 500. That means that the larger the gap, the better the S&P did over the next few days. That seems counter-intuitive at first, but when we realize that these large gaps can mark some sort of exhaustion low, it makes a little more sense. Still, counting on it marking a low is a loser’s proposition, at least statistically. If you had bought the Nasdaq 100 at the open after these large INTC gaps, the majority of trades would have been losers even if holding up to 10 days later.

As I noted above, many of our measures, particularly in the short-term, are giving off extreme readings as of today’s close. These types of confluences can often lead to good short-term trading situations, but unfortunately it looks like Intel’s release will likely deflate any potential balloon that was forming. The biggest question, of course, is tomorrow’s jobs report, and I have no edge there. If it follows the pattern, we will see wild swings after the release, then settle into very light-volume drifting after about the first 1 ½ hours of trading.

With the INTC aftermath, the economic release, the end of the Republican convention and pre-holiday trading, anything at all could happen tomorrow, more than a typical day, so it probably doesn’t pay to go over the history of the extremes in our other measures. I continue to believe that being aggressive in either direction is unwarranted by the measures we follow. The data above suggests that Intel’s gap will be a negative factor for the broader market, at least for the very short-term, unless it marks some sort of capitulation low in the stock. Most traders should be returning to work by next week, and with these hyper-sensitive events out of the way, we should soon be able to get a clearer look at the market’s prospects.

This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.