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

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Equity Indicators - Updates and Extremes

Up Volume Ratio

On Friday, we took a look at the huge upward thrust in breadth from the day before.  So many stocks had risen on Thursday, and the volume was so large going into them, that we were seeing readings that typically resulted in higher stock prices when looking out several weeks.

It happened again yesterday, as we got yet another day with more than 90% of all volume flowing into stocks that rose on the day.

The table below shows the S&P 500's performance one month later when we've seen two 90% Up Volume days within a week, and at some point within the past week the index had hit at least a three-month low.

For the most part, the market held well, at least in that time frame of a few weeks or so.  Out of the 12 instances, 6 of them turned out to coincide with major market bottoms.

Two out of the three most recent occurrences weren't quite so auspicious.  In 2007 and 2008 the market held up OK for a couple of weeks to a month, then it cracked lower.

What's also notable is that yesterday's 90% up volume day came immediately after a day where we had less than 10% up volume.  That kind of reversal is historically rare when coming near a three-month low in the S&P.

A month after the other instances, the index was higher 5 out of 6 times, with an average return of +1.6%.  The one failure was, again, the most recent occurrence in October 2008 (for those curious, the dates were 6/11/40, 9/20/46, 6/15/62, 11/26/63, 3/6/07 and 10/28/08).

The thing that's troubling about all this is that we didn't see any kind of extremes in breadth like this for several decades, then all of a sudden we're seeing more and more.  It reminds me of something we discussed back in August of 2009.

The problem is that days of extreme breadth have become more common.  So perhaps these 90% breadth days just don't mean what they used to.

Let's just look over the past decade and see how things have changed.  The chart below plots a blue horizontal line for every day that the Up Volume Ratio was either below 30% or above 70%.

We can clearly see that the lines become more common as we progress towards 2010.  In fact, they are so plentiful that from 2007 on, it just looks like just one big solid block of blue.

Now let's become more constrictive and only look for 20% or 80% Up Volume days.

This makes it even more apparent.  We rarely saw such extremes prior to 2006, then they became more and more common.  Shockingly, we saw almost as many of these days during 2009 (80 of them) than we did during the historic volatility of 2008 (86 of them).

Now let's go one better and look for the truly historic days of less than 10% or more than 90% of Up Volume.

Same story here.  Pretty much nothing prior to 2007, then a rash of them.  In fact, if we stretched this chart back to 1940, the story wouldn't change much.  We'd have an isolated day or two here and them, and then the big block of them starting in 2007.

Volatility alone can't explain this phenomenon.  We've seen volatility just as higher, or higher, before...especially when considering that we've seen almost as many of these days from 2009 onward as we did in 2008 when volatility was so much more extreme.

So what's going on?  Probably a combination of decimalization and high-frequency trading.  Those are the usual culprits, but they also make the most sense.

Does it make the current extremes less meaningful than they were in the past?  Yep.

I still believe the current thrusts we've seen are a net positive for stocks over the next few weeks or so, but that's mainly because it proved to be so in 2007 and 2008.  I just don't trust it to be meaningful when looking out longer-term than that.

Individual Investor Asset Allocation

Each month, we typically touch on where individual investors say that they've stashed their investments - into stocks, bonds or cash.

In December of last year, they had jumped into stocks, putting 64% of their assets there (which was up from only 41% in March 2009).  That enthusiasm didn't pay off right away, and they dropped their allocation.  It had climbed steadily back up to 60% as of April.

May's crash was apparently a jarring event for these folks, as they went down to only a 51% allocation to stocks.  They moved up to 24% in cash, and a whopping 25% in bonds (that's tied for the highest bond allocation ever, matching August 2009).

That 15% one-month decline in their allocation to stocks is the third-largest one-month drop in history.  The two larger drops were -20% in October 2005 and -19% in May 2006 (both happened to lead to very good returns in the S&P over the next few months).

I wouldn't dare suggest that this data is yet showing any hints of long-term pessimism among investors, but I do think the one-month scare is intriguing and probably confirmation that the May crash led us to excessive shorter-term fear.

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