Thursday, May 14, 2009

A Look at a High Momentum Decline and What It Might Mean

Wednesday's market broke to multi-day lows, with most major indexes participating in the weakness amidst strong selling pressure. For the first time since early March, new 20-day lows outnumbered new highs. The percentage of S&P 500 issues trading above their 20-day moving averages plunged to 43%, half of the level from earlier in the week.

One distinctive sign of weakness was that Demand, my index of the number of stocks closing above the volatility envelopes surrounding their short term moving averages, was only 11, while Supply (an index of stocks closing below their volatility envelopes) was 210. That suggests significant downside momentum among a broad range of NYSE, NASDAQ, and ASE stocks.

Going back to late 2002, when I first began compiling the Demand/Supply numbers, I found only 24 occasions in which Supply exceeded 200. Interestingly, the next day the S&P 500 Index (SPY) averaged a gain of .65% (16 occasions up, 8 down). By four days out, however, the average change in SPY had dropped to -.48% (9 up, 15 down). This is a nice example of how strong momentum moves tend to follow through in the near term: after a quick oversold bounce, we tend to see further weakness following a high momentum move to the downside.

This is the kind of information that informs my "what-if" scenarios for the upcoming day, per the recent post. I will be watching tomorrow for signs of rebound strength that, ultimately, may not be sustained in the sessions ahead. As always, the market indicators referenced above will be updated prior to the market open via Twitter.