Short-term Outlook (1-5 Days):  Neutral  From Apr 23, 1215 SPX

Go to:  Short-term Outlook  |  Int-term Outlook  |  Equity Updates  |  Indicator Summary  |  Commodity Updates

Go to:  Short-term Outlook  |  Int-term Outlook  |  Equity Updates  |  Indicator Summary  |  Commodity Updates

Equity Indicators - Updates and Extremes

Buying Climaxes

The volatility last week was jarring, at least in terms of what we'd gotten used to over the past year, and the past two months especially.

The spurt higher early in the week triggered a large number of stocks to trade at a new 52-week high, while the two large sell-offs were enough to push many of them back below the previous week's close.

That means that we had good conditions for a spike in the number of "buying climaxes".  That is simply defined as any stock that trades at a 52-week high during the week, but then closes the week at a lower price than the week before.

Indeed the conditions were good - the number of buying climaxes in the S&P 500 reached 118, the highest since I began constructing this data in 1996.

Looking at the upper end of previous extremes, we get a number of around 65 before we could consider the spike in buying climaxes to be extreme.

The table below shows each one, along with the S&P 500's performance over the next few months and months:

A few times, the S&P managed to bounce back the next week, but each time it faltered and gave back the gains.  The sweet spot for consistency was two weeks out, as the S&P was not able to muster much in terms of sustained gains after seeing so many buying exhaustions.

None of the losses were especially large, however, and each time the index ultimately headed back for another new high.  By three months later, the returns were solidly positive with just a couple of very minor losses.

Small Options Traders

We've touched on the behavior of small options traders quite a bit over the past few months.  The data we follow for these guys is about as pure a sentiment indicator as we're going to find, so I like to keep on top of what it's suggesting.

In January, we saw them spend nearly 40% of their total option volume on buying speculative call options, which did not work well for them.  Then by late February, they switched to the opposite extreme and were spending less than 30% on calls.

By March, the switched again, but this time the market managed to follow through.  That apparently was encouraging to them, since by mid-April they went full-force into call options by concentrating nearly 43% of it on speculative calls - the largest amount since November 2007.

After a brief respite, last week they plunged into calls once again.  Despite a 2.5% drop in the S&P 500 during the week, small traders spent 41% of their volume buying call options, up from 36% the prior week.

This indicator can fail just like any other - in fact, it did in March when it suggested that we should be more cautious because these (usually) wrong-way traders were so...not.

But given the recent surge to 43%, and this week's rebound back above 40% - extreme call buying activity in the face of a relatively hefty market decline - it does seem unlikely that they will be as fortunate as they were in March.

Go to:  Short-term Outlook  |  Int-term Outlook  |  Equity Updates  |  Indicator Summary  |  Commodity Updates