Another Meeting, Another Reversal?
Tuesday, September 21st, 2004 8:00pm EST
TICK Talk
Bottom Line: We have seen a long stretch of very positive closes to the NYSE TICK. Usually a good sign of strength, after long periods it can equate to overbought market conditions.
Market breadth is a broad category, and there are multiple ways to monitor it. Generally, one wants to see how the underlying components of a certain index are performing in relation to the price of the index itself. The most common measure is the advance/decline line for the NYSE, and there are innumerable variations of it and its derivatives.
Probably my favorite measure, on both a very, very short-term basis as well as for a longer-term view is the TICK. I’ve discussed the TICK before, and we have several indicators posted to the site which track it, but briefly it measures the number of stocks that last traded on an uptick minus those which last traded on a downtick. For example, if MMM traded at 82.00, then traded again at 82.10, it would be considered to be on an uptick. By watching how all 3500-odd companies on the NYSE are currently trading relative to where they last traded, we can get an idea of how much buying or selling pressure is entering the market.
On a very short-term basis, when 1,200 or more companies are trading on an uptick versus those on a downtick, it normally coincides with some sort of “blow-off” top on an intraday basis, and we see at least a few minutes of weakness in the broader market as the buying pressure is digested. By summing up this TICK data over a period of hours or even days, we can get an idea of how aggressive traders are being in chasing stocks higher or lower. When we see a prolonged period of strong TICK readings, it usually marks some sort of market high, as that type of pressure simply cannot be sustained over time (the one exception to this is when we are initially emerging from an extremely oversold market).
On the site, we post a summation TICK indicator which tracks the TICK every ˝ hour and sums up the last 13 readings (equating to one full trading day). We also show a longer-term measure, which sums up the last 10 daily closing readings. I also personally watch the TICK on other time frames, but they usually do not warrant a mention. One that I want to mention tonight, however, is the daily closing figure for the TICK over the past 21 days.
Over the past month, the TICK has closed at an average reading of about +500, which is quite unusual. If we sum up the closing readings over the past 21 days, the total comes to +10,623, which is off slightly from the high of last week, but it is still extremely high. So high, in fact, that it is the highest in the history that I have, going back to 1998. The chart below shows other instances of the TICK reaching +10,000 or higher since the rally began last year.
From the chart, we can see that even during the strong uptrend, such prolonged high TICK readings tended to precede some weakness in the market in the short-term. Since 1998, any time the TICK reached a 21-day sum of +10,000 or higher, the S&P 500 was lower 10 days later 79% of the time, sporting an average return of -1.4%. The reason I think this is notable is because high TICK readings are usually considered a sign of strength. The problem, it appears, is that if that strength persists for too long, it typically means we need to see some consolidation to work off the pressure.
Fed Pattern, Part Two
Bottom Line: A look back at history served us well after the June Fed meeting, as a rally in bonds and stocks on Fed day was a head-fake of large proportions.
I want to reiterate something from the July 1st commentary:
“Near the close on Wednesday, I noted in an intraday comment that the fact that both stocks and bonds closed up on the day was not necessarily a good sign. The Fed only began explicitly announcing its target for the fed funds rate in 1995, so since 1996, anytime both stocks and bonds have liked the Fed's action by closing higher on decision day, the S&P was higher three days later only 5 out of 11 times, and the average return was -0.8%. After 30 days, only 4 times was the S&P positive, and the average return was -0.9%.
Those figures are for any Fed decision – whether they decided to raise, lower or leave rates unchanged. Anytime both stocks and bonds closed higher on a day the Fed raised rates, the S&P was lower after 30 days every time, with an average return of -3.6%. There were only four instances, however, and all were in 1999 and 2000. I’ve noted before how it is extremely difficult to use past reactions to economic data as a guide for future reactions, since what is considered “good” news is constantly changing, but this at least gives us a little perspective.”
At the time of those comments, we were in a somewhat similar situation after the market had rallied from the May lows and was struggling at those price levels for most of June. Now we have rallied off the August lows, are in a relatively overbought sentiment situation, and both bonds and stocks rallied on a day the Fed raised rates. While the S&P did reverse its positive close after the August meeting, the market is obviously higher now than it was then. But I think it makes a difference that we were quite oversold at that time, as opposed to overbought this time around.
As I said then and still believe to be true, it is extremely tricky to extrapolate reactions to past economic factors into the future. Traders are constantly trying to figure out what is “bad” news and what is “good” news, so today’s rate increase could be considered a positive by many. Still, looking at history, today’s rally in equities and fixed income does not necessarily bode well for the future.
Conclusion
This has been the least-volatile September in nine years, in terms of how far the S&P has moved from close to close each day. That’s probably a good chunk of the reason why options traders are expecting volatility over the next 30 days to be extremely low as well. There is nothing inherently bad with low volatility (just look at 1995), but it does leave the market very vulnerable to swift and severe short-term shocks as traders re-evaluate and re-price their holdings in light of new information if something remotely unexpected happens.
Last Tuesday, I mentioned an indicator which monitors the total dollar amount of net long and short positions held by commercial traders and small speculators in all of the major index futures contracts. At the time, the indicator was at -34 which didn’t mean much of anything. As of the most recent data, however, the indicator dropped to its maximum lower boundary, -100, for the first time since March 5, 2002. What this tells us is that large, “smart” traders are holding a large net short position in dollar terms across all the indexes while smaller, “dumb” traders are holding a large net long position. The broader market can and has rallied in spite of these kinds of readings, but more often than not it hasn’t. As I showed in a table last week, the market does much more poorly after readings such as the current one than it has when this data has been more market-friendly.
Last week, I felt strongly that we would see some weakness after options expired. I did not feel that it would last only one day. While the bulk of many options-expiration hangovers tend to occur on Monday, the whole week tends to close negatively, which has been an especially strong pattern for September expirations. Today’s Fed gyrations muddle the picture a little, but the fact remains that the S&P 500 continues to act well, and a breakout above the 1130 area will be a clear signal to many technicians that we have an all-clear to the next set of resistance points. From the data I’ve gone over during the past week, I’ve felt that we would be more likely to see some downside rather than substantial upside, and I am still leaning that way. It’s difficult to fight a good technical picture (only because so many others see the same thing and tend to act as a herd), so I do think there is substantial risk in holding short positions should we hold above the 1130 level. However, should we remain below that important area, there is amble evidence that some excessive comfort needs to be worn off by lower prices.
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
Disclosure: long OEX puts
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.
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