Market Metrics Hit Extremes in Latest Correction

By on August 15, 2011

The stock market provided some entertainment for those with a penchant for statistical anomalies over the past few weeks. Quantifiable Edges and Ned Davis Research (NDR) were a few sources highlighting several historical precedents.

Quantifiable Edges recognized several volatility, price, breadth and volume outliers last week (specifically August 8th). For the first time ever, the VIX rose 100% in three days. The VIX also reached a record 74% above its 10-day moving average.

Quantifiable Edges also found that the S&P 500 was 10% below its 10-day moving average for the 4th time since they’ve been keeping this stat. The other times were the 1987 crash, August 1998 and the crash of 2008.

In the breadth category, Quantifiable Edges discovered on August 8th only 1.8% of issues trading on the NYSE closed up; the worst percentage since May 13, 1940. As mentioned previously on this blog the McClellan Oscillator hit a record low.

Volume was also impressive in this selloff as Quantifiable Edges points out. For three days straight, NYSE volume was the highest in a year. The only time this has occurred since 1940 was during the crash of 1987.

NDR is a good source for market data and historical guideposts. One eye-catching statistic was the percentage of stocks trading below their 200-day moving average – below 14% on August 9th. According to NDR, when so many stocks fall below this benchmark the averages are higher one week, two weeks, one month, three months and six months later. This has occurred 10 times since 1981 and the average gain was between 3% and 7%. But there is a catch.

The failure rate of these signals was between 20-30% depending on the timeframe and the losses crushing in some instances (including the previous two). So be careful out there because you can get burned trading on statistical oddities.

Source: Business Insider

Regarding the current outlook, NDR’s Chief Investment Strategist Tim Hayes said an environment where earnings estimates are high is actually a negative for future returns. But he notes investors are currently highly pessimistic which is setting up a bottoming process and a possible rally of the S&P 500 to the 1,250 to 1,265 area over the next four weeks. We could then see a re-test of the lows, followed by a rally potentially taking us to the highs for the year.

NDR’s so-called ‘Cycle Composite’ which blends historical patterns has turned negative. Source: Seeking Alpha

Below is an interview with Mr. Hayes:

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