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Thursday, February 21, 2008


plenty of liquidation in the quarterly window

one of the most interestingly researched indicators i've run across is the concept of the 90% day -- when both volume and points exhibit and extreme 9:1 bias in one direction or another. these represent, as one might suspect, climactic periods, particularly when grouped together. the leader in research to my knowledge has been the lowry report, which has remarked recently on the large number of 90% days recently as unusual.

i track such days independently as well. looking back, i wondered about the incidence of such days and what they might indicate about the market going forward.

my software setup tracks (through telechart) the stocks of the current s&p 500, meaning that -- as we go back in time -- fewer and fewer of the 500 were active. by the time one gets back to 1985, about 275 of the current membership were trading. and of course many were very different stocks and companies then. that means my data is less valid going back long distances. but -- with that important caveat -- here's what i found.

using a rolling quarterly window, the current activity in 90% days is rare, but certainly not unprecedented. it is characteristic of just a few periods in the last 20+ years -- and these periods were the climactic bottoms of major bear markets.

the recent peak on september 7, 2007, of 13 90% days (of either direction) is a level that was not exceeded even in the depths of 2002 -- where the mid-october bottom of the 2000-2002 bear maxed out at 11. notable financial crisis periods in 1998 and 1997 topped out at 8 and 9, respectively. the 1990 bear market also peaked at 9 within a month after the final price low.

the disaster of 1987 is the outlier by my flawed data -- in the aftermath of the crash, the count peaked at 21 and stayed elevated (though not exceeding 10) until november of the following year (1988). this is of course colored by the reduced count of stocks in my index and their (much smaller) capitalization at that time.

the key notion here, i think, is that these periods of intense market polarity represent forced liquidation and panic. it is as notable that, during the entire dot-com rise and decline from 1999 to early 2002, the count never rose over 2 -- in spite of dramatic price movements in both directions. it wasn't until the terrifying final plunge in the second half of 2002 that 90% days (up AND down) began to appear in large numbers.

how much forced liquidation is enough? there's always room for more, i suppose, but the count has been declining as the calendar advances -- it's now down to 7 -- and in the past similar declines from high readings have indicated that the panic is past. this has normally been platform for explosive subsequent gains.

bca research points out that the market is sitting atop a big pile of kindling -- but there needs to be some kind of catalyst to send it up. i've no idea what that may be or when it would come -- but it will eventually come.


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