Strong Stocks, Declining Volatility and Momentum: What Next?

I noticed that we made a 20-day high in the S&P 500 Index (SPY), while 20-day median daily volatility in SPY (median daily range over the past 20 days) made a 20-day low.

Going back to 2000, we have had 130 such instances of 20-day highs in stocks and 20-day lows in volatility. Five days later, SPY averaged a loss of -.32% (52 up, 78 down). By comparison, for the remainder of the sample, SPY averaged a loss of -.03% (1158 up, 1065 down).

I also saw that, as we made the 20-day high in SPY, my Demand measure of upside momentum (an index of the number of NYSE, NASDAQ, and ASE issues closing above the volatility envelopes surrounding their moving averages) was lower than my Supply measure (stocks closing below their volatility envelopes). Since September, 2002, when I began assembling those data, that has occurred 61 times. Five days later, SPY was down by an average -.45% (24 up, 37 down). By comparison, for the rest of the sample, SPY was up by an average .07% (904 up, 760 down).

In all, the declining volatility and momentum during a move to new highs has been associated more with short-term correction than a bullish edge. As I mentioned in the evening briefing, the rally is looking a bit tired.
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