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TW Patron++
Posts: 1,054
Reply with quote  #1 

Last week, beginning Tuesday, 1-30-07, the NYSE posted three consecutive days of advance-decline breadth ratios greater than 2 to 1.  Since 1975, what we call the "modern market" time window, there have been 20 such events when positive breadth plurality exceeded 2:1 for three consecutive days, thus the obvious question:


What do these rare events mean with respect to prices going forward?


First, let's look at a listing of the 20 events over the past 30+ years when the NY Advance to Decline ratio exceeded 2:1 for three consecutive days, and what price returns, as measured by SPX, resulted in varying time frames following the events.



The prior 19 events before this latest instance, had an overall average gain in all time frames up to 60 trading days later.  However, the past nineteen events occurred following varying market action leading up to three consecutive days of 2:1 AD plurality.  A quick perusal of price returns following the events result in a rather wide range of price action: nice upside moves to nasty declines, and about everything else in between the extremes.


Last week's consecutive days of 2:1 A-D plurality coincided with new 52-week highs in both price, as measured by SPX, and the cumulative NY AD line itself.  Adding a filter requiring a string of 2:1 AD ratios to culminate with new 52 weeks highs in both the SPX and the NY AD line, resulted in four qualifying events, including the latest one, over the past 30+ years.


The sample space is extremely small for this rare combination, thus one cannot apply much statistical confidence in the results, but next is a list of the returns following the filtering criteria of new 52-week highs in both the SPX and AD line.


For the near term, the combination of new price and AD line highs coinciding with three consecutive days of positive 2:1 breadth ratios, was not good for the bulls on average over next four weeks.... but there were also no large paydays for the bears.


Let's take a look at a chart of the two events meeting the qualifying criteria in 1983.  The chart is expanded beyond 1983 to reflect the price and AD line action leading up to, and following a qualifying event.



The two 1983 events were posted within a two month time frame well into a maturing bull leg from the August 1982 price lows.  Within a few months of the second 1983 event, the market entered a consolidation phase lasting nearly one year, culminating in a 12.7% price decline from the fall 1983 price highs to the summer 1984 price lows.  Note how the AD line began diverging with price for several months prior to the meat of the 1983-84 price decline. 


The AD line divergence with price prior to a SPX price decline greater than 10% should be duly noted by those expecting a price crash right now. Over the past 80+ years, new multi-year highs in the NY AD line have not coincided with price highs that immediately plunged into corrections greater than 10%.  Cumulative breadth always diverges with price prior to price declines greater than 10%.


Next a look at price and the AD line since the 2003 price low with the September 2003 event marked.  Note the 2003 event followed a multi-week price consolidation, and served as the kick-off to a multi-month price rally that eventually added 15% price appreciation to the SPX by January 2004.



The filtered version of the three consecutive days of 2:1 positive breadth plurality has such a small sample space, it is difficult to predict if this latest event is a terminating or initiation signal, but what it does suggest to me is any decline into the upcoming cycle lows will not be a crash where a 20% or more haircut will be given to prices..... unless we see a significant divergence of the AD line with price over the coming weeks. 


The one wild card these days for significant price declines coinciding with new AD line highs is the geopolitical/terrorist risks.






TW Patron++
Posts: 497
Reply with quote  #2 

Very nice work, Randy.



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