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Monday, June 18, 2012

McClellan summation index

I showed the summation index in the latest sentiment post, but I thought it might be a good idea to show some past instances with similar selling pressure.  The change in stock pricing from fractions to the decimal system we use today has greatly affected the breadth numbers in the market.  When pricing was done in 1/4 increments a lot more stocks were unchanged on the day then they are now.  As the fractions got smaller more and more stocks left the unchanged category.  This caused major changes in the extremes the indicators using the breadth data reach.  We can only go back the late 90s and the 1/8 pricing to get indicators in similar ranges to today with decimal pricing.  The summation index recently got below -3000, which is very rare.  Here are the charts with a comparison to SPX of all comparable instances.


Notice SPX retested the initial crash low more then a month later.


In late 1999 the summation index got close to -3000, but did not quite get there.  The market did not retest the low in this instance before going on to new highs.  


In 2002, SPX made a slightly lower low 3 months later, but the low held.


The sell off in 2008 was a different story.  This time the retest failed and we really crashed.


This is our current situation.  This is the smallest decline from the high to reach this kind of selling pressure.
Of the four previous examples, only 1999 did not retest the low (summation index did not exceed -3000 though).  It was also the next smallest decline.  The 2008 example was the only one that did not actually make a market low in that price area.  Panic bottoms like this usually have some fear that can be measured by the VIX indicator.  Here is the peak VIX around the time of the most negative summation index reading.  In 1998 (52.5), 1999 (35.5), 2002 (56.7), 2008 (30.8), and 2012 (27.7).  There definitely is less fear based on the VIX and that goes with the sentiment surveys I recently posted about.  The VIX was lower this time then it was at the only instance that did not make a bottom.  I don't think we can say this market is truly sold out as is the usual case after such a broad based sell off.

So where does that leave us.  We have extreme selling pressure not accompanied by the usual sign of fear or panic in the market.  Between the low VIX and the less percentage decline then in past instances, we really have quite a different situation.  This makes trying to figure out what the outcome will be even more difficult then usual.  All three instances of the summation index getting below -3000 led to a retest of the low.  This is a small sample size, but that is all we got.   I would say the odds of a retest of the low are pretty high.  The timing of such a retest can vary greatly as we have seen in the prior examples.  Whether the FED does or doesn't do some type of QE program could have a major affect on the market.  If we retest that low and it fails to hold, the risk of a major crash is high.  We will have to wait and see how it plays out this time.

Bob

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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.