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Extreme Positive Breadth Signals Coming Rally at Trader’s Narrative

Yesterday’s Fed rate cut of 50 basis points (which I predicted based on the fixed income market) threw the market into a buying frenzy. It carried over into today’s session also, but yesterday’s was absolutely breathtaking.

There were many remarkable statistics generated but what I found most interesting was the volume skew. Believe it or not, up volume outpaced down volume by a 25 to 1 margin.

To call that extreme is to not do justice to the term. According to Jason Goepfert, the last time we had this much lopsided volume to the upside was in August 1982 - just before the great bull market of our generation was stoked.

Since 1950, there have been 6 other times this has happened. Each and every one of them also gave a positive performance in the next 3 months time.

Looks like we have once again confirmed the Lowry’s 90 90 up day that I was looking for. I expect we’ll pull back from here as the market digests the “surprise”. Historically the short term picture is mixed. But if we follow the script the market has played out before, we are in for a sweet rally in the coming months.

Here are the charts for Nasdaq and NYSE breadth:

nasdaq advance decline september 2007

NYSE advance decline september 2007

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5 Responses to “Extreme Positive Breadth Signals Coming Rally”  

  1. 1 Bourne

    Along with insiders buying, contrarian sentiment, 90 90 days, etc, yet another sign pointing to a mid-term rally, isn’t it?.

    I observe in NYSE graph another 25/1 in mid-august.

    As for the short term, I found the last Investor’s sentiment data too quickly rebounded towards optimism. Comparing the evolution in summer 06 with this one, the rebound of sentiment from pessimistic area has been much more violent. From a bulls-bears differential of 5,5 and in just two weeks it is now in 26,9, almost reaching the excessive optimism area. (I am using as criterion 30 overbought).

    Also for the short term and thinking about the futures&options expiration, I have just checked the put-call ratios (cboe’s equity & oex and isee), and they suggest an upward expiration (all of them skewed toward optimism: in fact, OEX closed at the same level as 17th, before FED).

    So I would expect an upward expiration friday, followed by the typical exhaustion days which could lead to that pullback you mentioned.

    Thanks, Babak.

  2. 2 Johan

    I feel very comfortable to bet that we will be higher in 1-3 months. Maybe MUCH so.

    But in the short run I’m comfused. At the moment I am betting on a continuing rush.

    Sure there are some sentiment indicators that rushed too positive too fast, but I would say that many people are outside of the market right now.

    According to Hulbert and his indicator of newsletters the situation is bull for the market now.

  3. 3 Johan

    Another very important BUT is that… everytime in the last decades when we had crashes like the one we had last month, we had a re-test of that bottom EVERY time, within 1-1½ month. So when is this re-test going to happen this time?

    I will let the short-term indicators guide me out of my long term positive stance. And during the time I will also look for other stop losses when it comes to anomalies from the expected pattern.

    Good luck to ya all!

  4. 4 Johan

    We got that bottom tested two times as predicted. But it took a little bit longer than usual. So it’s about time to buy again.

  1. 1 Stock Market Carnival Sep 24, 2007 Edition

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