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Thursday, August 6, 2015

Daily update 8/6 Selling Climaxes

I thought the bears took control yesterday.  They left no doubt today.

They started selling right from the opening bell.  A late day rally improved the breadth to -59%.  The new highs dropped way down to 50.  New lows increased to 345.  Volume was high once again. 

This time we have confirmation of red price bars.  The futures are now below all the key moving averages again.  On the micro time frame it looks like the bears won.

Market internals shifted to negative in both the breadth chart and the green/red bar chart.  Not only did the red bars overtake the green bars, but they were over 50%.  The rally never got that strong.

Everything indicates the bears are in control.  SPX is only 11 points above its 200 SMA.  Being as we bounced off that MA twice recently without making new highs it is less likely to hold this time.  I think the more important support level is 2040.

Historically the period from Aug. to mid Oct. is when a lot of bad things have happened.  We have very weak internals which have coincided with a lot of bad things happening.  Two darling stocks that many people own AAPL and DIS got smacked on earnings.  On one hand I have Wall Street long only money managers saying to be calm.  Don't worry, the market will be higher by year end.  On the other hand I have several billionaires telling me the markets could be in big trouble.  Who do you believe?

This is an interesting article.  Indicator of the Week: Are Selling Climaxes Bullish Indicators?

When looking back at the last week of July 2015, one indicator caught my eye as having contrarian implications: selling climaxes. A selling climax is a weekly signal, and occurs when a 52-week low is reached during the week, but the equity reverses direction and actually closes higher than the previous weeks' closing level.

Selling climaxes can be viewed as panic selling, or as a sign of capitulation and despondency -- potentially hallmarks of a change in trend. No indicator is perfect, however, and as you will see in the study below, during extreme market downtrends, selling climaxes occur frequently as a sign of investor disgust and depression.

For the study below, I used a parameter file containing all optionable tickers in the U.S. equity universe; any ticker that has listed options is included. For this study, I went back to 2005.
Elevated Selling Climaxes During the Last Week of July: Last week, there were 351 tickers that succeeded in achieving a selling climax. Out of a total ticker list of over 3,700 optionable tickers, this equates to an extreme reading of 9.5% of all tickers.
In the chart below, I plot all selling climaxes with the S&P 500 Index (SPX) since 2005 to illustrate this point. Previous extremes occurred the week ending Dec. 19, 2014, and the week ending Oct. 17, 2014. Both of these signals turned out to be contrarian buy signals on short-term market pullbacks. Another bullish signal occurred during the 2011 swoon, but, as we will see, when the market began to collapse in 2007 and 2008, selling climaxes spiked as investors hustled for the exits.

It is one thing to have a lot of selling climaxes when the market is down more then 10%, but that is certainly not the case now.  Not normal.  I found this table interesting also.

The results 63 days later are mixed.  There are two sizable winners and three sizable losers.  With the market this close to the highs I doubt this is going to be a big winner.  The two big winners came with market down more then 15%.   Note that the 8/10/2007 was a forewarning of the bear market.  We could easily be in that situation this time. 


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