Trader’s Narrative

Last week something quite remarkable happened. We saw an almost back to back buying frenzy in the markets which pushed the internal breadth into the stratosphere.

How explosive was it? On the NYSE, 90-95% of the volume was for stocks that went up in value. To see a more concentrated torrent of buy orders we’d have to go back 20+ years.

Not only do trends get kick-started after wide ranges in advance decline numbers, a lot of research and market history shows that heavy buying that is this lopsided tends to foreshadow further gains.

According to Jason Goepfert at SentimenTrader.com:

Historically, two instances of 90% up volume days within a five-day period has been a good sign of further strength to come. The last 19 signals, dating back sixty years, all showed positive one-month forward returns, averaging +3.5%. Prior to that, the returns weren’t quite as consistent, but then was it was quite a bit easier to see such extreme readings the further back we go. There were 38 of these buying orgies in the 1940’s alone, but only 14 since then.

Of those 14, the performance in the DJIA going forward was very impressive (when buying after the second 90% up volume day). Looking at returns from one day to one year forward, at no periodic interval was the Dow positive on less than 11 of the 14 occasions.

One month later, the Dow was up 12 of 14 times by an average of +3.7%, but perhaps most impressively the average maximum loss during that month was only a measly -0.6% compared to an average maximum gain of +4.6%. That kind of risk/reward skew, spread out over an adequate sample size, makes me sit up and take notice.