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Market Rout Leads To Collapse Of New 52 Week Highs at Trader’s Narrative

The bears roared back pushing all major indices lower after two back to back positive days on Monday and Tuesday. While feeble and late, the bounce earlier in the week pushed up the percentage of S&P 500 components trading above their 10 day moving average to 63%.

But for all the fireworks, I don’t think it was a 90%-90% down day (as Lowry defines it). The bears did manage to crush the once lofty 52 week new high numbers. The NASDAQ only had 12, the NYSE just 20. If the market was still levitating as it was before I’d be worried that we’re putting in a major top. But the collapse in new highs and increase in new lows is natural in a correction.

nasdaq new 52 week highs Feb 2010

A breadth indicator I like is the simple 20 moving average of the daily advance decline numbers. Here’s a chart showing that while we’re down to the July and November levels, there is still a long way to go to reach the harrowing exhaustion points which we saw before:

Nasdaq adv dec Feb 2010

You can see a very similar picture by looking at the NASDAQ Summation Index (ratio adjusted). As well, we’re seeing a surprising lack of real concern and fear. The options traders are not running for the hills, at least that I can see. The CBOE put call ratio was just 0.79 (equity only) and the ISE Sentiment index which looks at the retail option traders was at 128 - it didn’t even break 100 to show more put buying vs. call buying! And the CBOE volatility ratio is still safely nestled within the long downward trading range it has been for months:

volatility index VIX Feb 2010.png

As I’ve been harping on for a while now, the market is like a dog on a leash and it tends to go from one extreme to another around its central trend line. For the past few months we’ve been pushing the overbought levels. We first saw the S&P 500 trade +20% above its 200 day moving average in mid-September 2009. Within a few days it will be 6 months since then and at this rate we are going to be revisiting the other side of that S&P 500 level. Today’s rout brought the market to just 4.62% above its long term trend line.

The Dow fell once again to inches of the much watched 10,000 level. I really don’t understand why this number has so much sway over traders. I realize we have 10 digits and our numbering system uses base 10 so a nice round number like 10,000 almost looks magical. But we’ve been here so often that by now the shine should be off this superstitious obsession.

Looking ahead to tomorrow, the last day of trading this week, Wayne, our resident quant, submits:

Over the last 10 years, 52.5% of days are up. Today, the S&P 500 was down 3.1%. Over the last 10 years, the day after a 2.5-3.5% drop is 35-18 for an average gain of 0.45%. Of course that means that 34% of days were down and that is no guarantee for tomorrow, but better than 60% odds are good for a day trade.

And Jason of SentimenTrader looks at what happens when the S&P 500 loses 2% or more before the Nonfarm Payroll announcement tomorrow and:

Nearly 60% of the time (7 occurrences), the S&P gapped down the morning of the report (the Open Gap column), and it was a coin flip from the open ’til the close. About the best pattern I can see is that out of the 7 times the S&P gapped down the morning of the report, 4 times that gap marked a short-term exhaustion point and stocks rallied into the close or next day. 2 of the other 3 times, the S&P suffered one more day of selling pressure, then reversed that in the days ahead. Only one instance (09/07/01), stocks completely failed to mount any kind of snapback.

What is spooking a lot of people is that suddenly the tape is acting as weak the way it did during the brutal days of the bear market. Across the board equities are down heavily, as well as gold by the way, and the US dollar is the only safe harbor as rumors and concerns of debt and deficits swirl - sound familiar?

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2 Responses to “Market Rout Leads To Collapse Of New 52 Week Highs”  

  1. 1 Speculation

    1046 was respected. The Hammer is at the end of the chart…

    Folks, the bottom is in!

  2. 2 Frank S.

    I too jumped in on Friday. Had to push myself to do it and am still uneasy. Much good news and a lot of hot air about a sovereign default and ,yes, the $10 billion in mortgages that the banks have to take on their balance sheets is , all of a sudden, a huge amount. Fear mongering is the opposite of irrational exuberabce, is it not !

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