Short-term Outlook (1-5 Days):  Neutral  From May 25, 1049 SPX

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Equity Indicators - Updates and Extremes

Up Issues Ratio

One of the more notable developments yesterday was breadth.  The Up Issues Ratio was greater than 90%, meaning that 90% of all securities on the NYSE closed above the previous day's close.

Only two other days since 1940 have seen the S&P close at a three-month low, then an Up Issues day of greater than 90% the next:  10/10/08 and 03/09/09.

Let's relax the parameters just a bit and look for an 85% Up Issues day.  Then we get 12 precedents.

The table below shows how long it took before the S&P dropped below the low of the day that set the three-month low (e.g. Wednesday's low in our current instance).  If it didn't do so within six months, then that date has a "-" next to it.

The last column shows the maximum gain the S&P enjoyed before hitting that new low, or six months later, whichever came first.

In 7 of the 12 precedents, no new low was set at any time during the next six months.  In the others, it took a median of 13 trading days to reach a new low. 

The volatility of breadth has been historic.  13 out of the past 21 days has seen the Up Issues Ratio either above 75% or below 25%.  Only 03/05/46 and 10/27/08 can lay claim to such a feat.  In '46 the S&P rallied 11% over the next three months before rolling over to new lows.  In '08 it rallied 19% over a couple of weeks before rolling over.

Up Volume Ratio

At the risk of beating a dead horse with the breadth thing, we're getting a similar signal from the Up Volume Ratio.

Over the past week, we've now had two days with more than 80% of all volume flowing into stocks that were up on the day.  Considering this second one is coming off of a three-month low in the S&P, we're getting an unusual setup.

Below is every other time this has happened since 1940, along with the S&P's performance going forward:

Especially notable is the two-week return, which was positive 13 out of 14 times (it has been exceptionally rare to see over the past 50 years or so).

During the next two weeks, the maximum loss averaged -0.9%, while the maximum gain averaged +2.9%.  Without that one instance from 1974, the max loss would have averaged only -0.5%.

Mutual Fund Flows

Yesterday we looked at one sign that individual investors were finally exhibiting some pessimism, with a drop in bullishness in the AAII sentiment survey.  Today we see another.

According to Lipper FMI, investors pulled $5.3 billion from equity mutual fund during the past week, the largest outflow since March 2009.  Including exchange-traded funds, the outflow was a remarkable $16.7 billion, the largest since at least the summer of 2002.

Given the low level of cash reserves at mutual funds, persistent outflows can pose a problem, since it may trigger a vicious selling cycle.

The latest week's data may be large enough to be a contrary indicator, but this is the third straight week of outflows, and I'm not sure how much longer it can continue before we start to see portfolio managers forced to sell stock in order to meet redemptions.

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