The Macro View May Be Ugly But Bulls Should Get Benefit of Doubt (For Now)

Well here we are… With just two more trading days left in 2011 most investors may be more interested in focusing on Saturday night’s festivities than digging into historical data or exploring market metrics. But after doing some research, it appears there might be some reasons to lean to the bullish side before the champagne is uncorked.

Wednesday’s decline qualified as a 90% Down Day. Those are often followed by a short-term (2-7 day) rebound. However, Lowry Research reports that this 90% Down Day came immediately following a 5-day ramp higher. Recent similar down days (Dec 8th and Dec 12th) were not followed by such 2-7 day bounces. Also, their gauge of buying power is near its lowest point of the year and thus not supportive of a sustained move.

So, according to this data, it looks like we may get a bounce or we may not. And if we do it may be limited and quite brief. (OK, I know…. This is not terribly helpful.)

Second, we have the latest readings for the Investors Intelligence Sentiment Survey. It puts Bulls at 50.5% and Bears at 29.5%. The number of Bears is the lowest since late August while the Bulls are at basically the highest proportion since last May (there was a 1-week spike in bulls at the end of July that was about equal).

These readings do not mean the market will dive lower anytime soon. Certainly though, we can claim that they do not provide support to the bullish case.

Third, I have received some rather interesting historical metric research that does point to a short-term rally. It turns out that a major drop in the market during the period between Christmas and New Years is actually quite rare. In fact, since 1950 there have been only 13 trading days which show declines of greater than 1%. That's out of a total of about 250 trading days, or roughly only 5% of the time.

Over the next few days, from the day of the large decline through the 2nd trading day of January, the S&P500 rallied 11 of 13 times (84.6%) and had a median gain of 2.8%. Even the two occasions which concluded with a loss did manage to show a gain during the period.

Another item is based on yesterday's very one-sided volume (only about 4% Up Volume). It surprised me to learn that since 1940 this reading was the worst ever recorded during the final week of December. In fact, according to the fine folks at SentimenTrader, there have only been 10 times when Up Volume Ratio was less than 20%. Once again we see that the market tended to rally through the 2nd trading day of January. SentimenTrader reports that the S&P500 rallied 90% of the time (9 out of 10) for a median gain of 3.0%. Even the one loser did show a 0.8% gain during it's time frame.

So, while traders may continue to focus on ugly macro picture in Europe, the odds would seem to favor an advance for the next few days.

Have a good one
Curtis Bergquist
Manager: Daily Decision-PRO

P.S. The Daily Decision-PRO Service is up on the year and has beaten the market handily for five months running now.

 

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