Interesting Technical Indicator, Nine to one

Thursday March 22, 2007

A rare and bullish technical event occurred Wednesday:


By Mark Hulbert, MarketWatch
Last Update: 5:43 PM ET Mar 21, 2007
ANNANDALE, Va. (MarketWatch) -- The most bullish thing a market can do, as the saying goes on Wall Street, is to go up.
I disagree.
It is even more bullish for it to go up as it did on Wednesday.
That's because Wednesday's stock market action was so strong that it triggered a rare technical signal that, far more often than not in the past, has heralded higher stock prices over the subsequent several months.
The particular technical signal is referred to as a "Nine To One Up Day." It refers to the volume of all NYSE-listed stocks that go up on a given day, expressed as a percentage of the total volume of all stocks that rose or fell on that day. On a day when rising stocks' volume is the same as declining stocks' volume, for example, this ratio would be exactly 50%.
A "Nine To One Up Day" occurs when this ratio is 90% or higher. According to Martin Zweig, who helped to develop this indicator several decades ago, such a huge imbalance of up volume over down volume "is a significant sign of positive momentum. In other words, when daily up volume leads down volume by a ratio of 9-to-1 or more, that tends to be an important signal for stocks." The quotation comes from Zweig's 1986 book, "Winning on Wall Street."
I am familiar with Zweig's research because, until the mid 1990s when he discontinued them, he used to publish two investment newsletters. Both letters were ahead of the stock market averages at the time they were discontinued, according to the Hulbert Financial Digest.
How bullish are 9-to-1 up days?
Zweig in his book argues that, "Every bull market in history, and many good intermediate advances, have been launched with a buying stampede that included one or more 9-to-1 up days."
The relevance of all this to today's market is that there have been two 9-to-1 up days in recent weeks: one occurred on March 6, and the second one this Wednesday.
This second 9-to-1 up day adds greatly to the bullish significance of the first, according to Zweig. That's because a single 9-to-1 up day, by itself, has not always been a bullish event. Perhaps its biggest false signal came on March 16, 2000, at more or less the exact top of the market before the Internet bubble burst.
Such a spectacular failure might incline you to dismiss altogether any focus on the ratio of upside to downside volume, but that might be too hasty. In his 1986 book, Zweig acknowledged that a single 9-to-1 up day can issue false signals and that, therefore, it would be better to focus on occasions in which two such days occur relatively close to each other (Zweig used a three-month window).
Zweig called these "double 9-to-1 signals." And with Wednesday's impressive rally, we now have such a signal.
But are there any flies in the ointment?
One might be that there was a 9-to-1 down day on March 13, when down volume on the NYSE was more than 90% of combined up-and-down volume. According to Zweig, a 9-to-1 down day in the proximity of two 9-to-1 up days implies "not as much [upward] thrust" as do two 9-to-1 up days that are unaccompanied by a 9-to-1 down day.
Nevertheless, Zweig wrote that the stock market's average return is still above average following double 9-to-1 days that are accompanied by 9-to-1 down days. "The record [for such days still] provides great comfort to the bulls," as he put it in his book.
This comfort is confirmed by statistical tests conducted by David Aronson, an adjunct professor of finance at Baruch College. Professor Aronson recently wrote a book entitled Evidence-Based Technical Analysis (Wiley, 2007), in which he discusses how to use the "scientific method and statistical inference" when judging investment strategies.
In an interview, Professor Aronson told me that recently, he and the students in a class he teaches at Baruch tested the statistical basis for Zweig's confidence in double 9-to-1 signals. They did not differentiate between such signals that were accompanied by intervening 9-to-1 down days and signals that were not.
Professor Aronson told me that he and his "class used data from the beginning of 1942 through fall of 2006, and we looked at what happens in the stock market in the 60-trading-day period following a Zweig double 9-to-1 signal, versus what happens the rest of the time. In those 60-trading-day windows, S&P 500 Index
SPX1,434.54, -0.50, 0.0%) produced an average annualized return of over 22%, on the assumption that an investor entered the market on the close the day after a double 9-to-1 signal was triggered and held until the end of the 60th trading day later. In the non-signal periods, in contrast, the return averaged 4.5% annualized. The difference between these two average returns is statistically significant." (Professor Aronson told me that these calculations do not include dividends.)
The last time a double 9-to-1 signal was triggered was June 29 of last year. An investor who bought the S&P 500 at the close on June 30 and held for 60 trading days realized an annualized gain of 19%, remarkably close to the 22% average that Professor Aronson found going back to 1942.

Friendly Fed :-)

Wed. Mar. 21, 2007

We have another fundamental shift. The Fed has gone from the angry ogre lofting rates higher to curtail runaway inflation to a guardian angel providing liquidity in the markets if the housing woes continue. With their Fedspeak they are telling us today that they will cut rates if necessary. One sure way to interpret their lingo is by looking at the markets, the S&P's are up 17 points as I am writing this, led by the financial sector. They are basically telling us, " rate cuts are ahead guys don't worry, buy stocks, be happy". The Fed is creating increased volatility here through a basically knee jerk reaction to the recent correction. That is good for traders and we really need to be aware of our technical levels and trends to capitalize on trend trades. Lets pay close attention to the Fed Governors speaking this week. Every time they speak we should be making money. Why? Because we know that currently, when the market reacts to them we will trend.

We are seeing a rally in Bonds as Stocks move higher. This may seem strange to some. The reason for this is, as the Fed cuts rates Bonds must rally because Bonds move in the opposite direction of interest rates, that is simply how the contracts are constructed, and lower interest rates are good for Stocks, so Stocks rally as well.

Shadowtrader's Fear Factor = 0
1. Obvious Reasons!

Shadowtrader's Goldilocks Economy Indicator = 10
1. Friendly Fed
2. Ben S. Bernanke and Mr. Rogers never seen in the same place at the same time.
3. Foreclosures, Fiveclosures, Sixclosures...Who cares!

Sunday March 18, 2007

Consolidation

Consolidation is my new market buzz word, with the S&P's being down about 1 point over the past two weeks. What does it mean? It means the Fed stepped in and supported the market with some of their friends, the collective "them" that you will hear those of us at Shadowtraders speak about from time to time. Why do I think this? I think this because the news last week was god awful. There were too many headlines about subprime lending woes to count. Last week there was a warning from one of the nation's largest lenders, Countrywide, that their earnings would be hurt by the subprime disaster. There was this headline on Tues. :

CHICAGO (MarketWatch) -- Many more U.S. homeowners were unable to keep up with their mortgage payments in the fourth quarter, the Mortgage Bankers Association said Tuesday, with the rate of homes entering the foreclosure process hitting a record 0.54% and the delinquency rate on U.S. home loans leaping to 4.95% from 4.67% three months earlier.
As I am writing this there is a headline streaming on Bloomberg that says the Fed may have to Cut rates aggresively by year end. In the options market there was a 0% probability for a rate cut this year, 2 weeks ago, last week the options priced in a 24% chance the Fed will cut rates 3 times, that is a big leap and there is no better a predictor of "them " activity than the options market. The options are where the big boys go for protection first.

It is quite interesting that after the sharp selloff 3 weeks ago the best we could do to recover is a 1 point loss over the past 2 weeks. This means to me that we are in a consolidation phase and we will most likely move lower because we have had a fundamental shift in the marketplace. Americans are having difficulty paying for their homes. I saw one quip that read, a senator was considering a bill to make it impossible to foreclose on an American citizen. How will that affect business?
Watch the 1400 level this week, I think it is very significant. Anytime we are below it and having trouble bouncing up through it, it is probably a good short. If we are above it we can rally 10 points, so be careful.

Highlight of the week is the FOMC meeting Mar. 20-21, they will probably do nothing but imply in some way rate cuts may happen at some point, if this occurs you could se a rally. Don't be afraid to take profits from being long after the meeting, quickly. Why? Because initially on the rate cut comments the market will rally, but then you could get a snap back down if the market thinks the Fed is getting desperate and their desperation is evidence this economy is in trouble.

We are currently seeing strength from overseas markets and from a proposed deal for Barclay's to buy ABN Amro for 10 billion, this should boost the markets temporairily.

Shadowtrader's Fear Factors:

1. VIX-16.79%, a couple points higher this week

2.Treasury options volatility up to 7.4%, .4% higher than last week

3. Housing- this remains the same, terrible, see above

4. Things cooling off here, with the Asian markets pretty strong right now, Nikkei up 130 points
5. Inflation- many commodities at multi-year highs including energies, metals and grains to name a few.

Shadowtrader's Fear Factor = 6
Only because of the current strength of the overseas markets and proposed deal between Barclay's and ABN.