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Like a big cat after a nice kill, this market is due for a nap. It's the nature
and the length of the nap, though, that will make or break the rally.
So here's the lowdown. The stock market rallied in a big way and delivered one of those statistical anomalies, a 40-plus to one up/down volume day, which according to the keeper of all things statistical, Mark Hulbert, has to be some kind of record. We've seen big days before, with at least one or two 20 to 1 up/down volume days coming to memory pretty readily. One was back in May of 1990, which led nowhere, and essentially was a one day summer rally.
Hulbert, also noted the following: "No indicator is perfect, of course, and this one is no exception. There was a double 9-to-1 day this past Dec. 30, for example, and the market topped out just two days later. Another serious misstep for the indicator came at the top of the market in March 2000, just as the Internet bubble was bursting."
So what is a 9 to 1 up/down day? It's when the volume of rising stocks on the NYSE in nine times the volume of falling stocks. It's called a momentum thrust, at least as originally described by Martin Zweig in his book "Winning on Wall Street." But like most indicators, it's not as flawless as time passes and more traders become aware of it.
Yet, this one makes you wonder. Think about it, 41 times the volume in rising stocks to one. That means that just about everything that happened in the market on Monday was to the up side. That means that this is either the beginning of a huge rally, or that was the burnout.
The real key development is when you get two 9 to 1 up volume/down volume days in succession, described by Zweig as essentially a doubly bullish signal.
Hulbert, using data provided by David Aronson, an adjunct professor of finance at Baruch College, author of a book called "Evidence-Based Technical Analysis" (Wiley, 2007)," noted: "Professor Aronson, along with the students in a class he teaches at Baruch College, tested the statistical significance of "Double 9-to-1" signals. Aronson told me that his students did this by measuring the stock market's return in the 60-trading-day window following a Double 9-to-1, using historical data from 1942 through February of this year. They found that, in these trading windows, the S&P 500 index (before dividends) produced an average annualized return of 18.3%," compared to an annualized return of 4.3% otherwise.
And although that sounds pretty good, this indicator has been less than stellar, as we have noted here times lately. As Hulbert notes, since the bear market started in October 2007, this indicator has had its problems. Note the following:
- "The Double 9-to-1 signal that was triggered this past Dec. 30. It was just two trading sessions later that the rally that began at the Nov. 20 low came to an end. And the market then fell off a cliff, declining by 20% over the next two months."
- "Another Double 9-to-1 signal was triggered on Feb. 6, furthermore, and yet another on Feb. 24. It wasn't until March 9, of course, that he bear market hit what, at least so far, is its low point."
Hulbert talked to Aaronson in March and asked him how good the 9 to 1 up/down indicator really was, to which Aaronson answered "that the signal has had other failures before the current bear market, some spectacular. In fact, Aronson said, the stock market since 1942 has failed to rise in about one out of five of the 60-day periods following Double 9-to-1 signals."
In other words, this thing has about an 80% chance of being right. Aaronson also told Hulbert that multiple 9 to 1 up/down days are more bullish, to which he answered that "There is no statistical support for such a notion in the data."
Conclusion
We had a big day in the market. Anyone who followed our recent picks likely made money. Now comes the real work, the management of the gains.
That, of course, has to do with our trading discipline, our attention to our sell stops, and how the market does.
Stocks look set to open down on Tuesday. That's no surprise. But if they close down big, say maybe a 200-300 down day on the Dow Jones Industrials, that would be a bad sign.
Bernanke and Geithner are on the hill today, which of course means that Congress will be asking questions and posturing. That, in an of itself should give all investors a chance to worry.
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