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Remember Last Week’s Panic Selling In U.S. Stocks? It Triggered A ‘Buy’ Signal

Did you know there was some of the biggest panic selling in stocks last week? It may not have felt like it, but the intensity of last week’s selling reached levels rarely seen in recent years.

On Aug. 14, 84% of stocks listed on the New York Stock Exchange (NYSE) declined; on Aug. 5, the share was 90%.

It’s said that such broad-based selling is often indicative of a “throw in the towel” mentality. It shakes out the weak hands and tends to be seen at or near market bottoms.

The last time the NYSE suffered two 90% (or near 90%) down days within a 10-day period was on Feb. 2 and 5, 2018, which was the low for 2018.

Single 90% down days marked the Aug. 24 and Sept. 28, 2015, double bottom. That’s not what you want to see if you are a stock market bear (which currently includes me).

My Forecast

I outed myself as a mid-term bear when I published this S&P 500 projection in the June 2 Profit Radar Report. According to this projection, the S&P 500 was to rally to about 3,030 points and suffer a steep drop thereafter.

All went according to plan until panic selling kicked in last week. In the spirit of objectivity, I examine (bullish) evidence that could derail my (bearish) forecast.

The Analysis — Part One

The chart below plots the S&P 500 against the percentage of advancing stocks (green graph) and declining stocks (red graph) trading on the NYSE.

The dashed red arrows highlight every 90% (or greater) down day. The dashed red circles highlight two near-90% down days.

First conclusion: One or two 90% down days always lead to a bounce, but sometimes that bounce is followed by a retest of the initial panic low (October 2015, February 2016, November 2016, April 2018). Only in December 2018 did the S&P 500 suffer much lower prices.

The Analysis — Part Two

A closer look at the chart shows that 90% “up” days are actually more consequential than 90% “down” days, especially when they appear in clusters.

The green circles (and corresponding green arrows) highlight two or more 90% (or near-90%) up days. The last such cluster happened in January 2019. I wrote about it on Jan. 10 on MarketWatch: “S&P 500 started 2019 with the same bullish signal as 2009.”

The green circles (and corresponding green arrows) highlight two or more 90% (or near-90%) up days. The last such cluster happened in January 2019. I wrote about it on Jan. 10 on MarketWatch: “S&P 500 started 2019 with the same bullish signal as 2009.”

Every cluster of 90% up days was bullish, either short-term or long-term or both. This is particularly true for the February 2016 cluster. Based on this cluster, I wrote back then: “Bear market risk is zero.”

Although the above analysis is based on the S&P 500, it also applies to the Dow Jones Industrial Average, Nasdaq and corresponding ETFs like SPDR S&P 500 ETF, Dow Jones ETF and PowerShares QQQ.

Conclusion

Down days of 90% usually trigger a bounce, but they can lead to a retest of the initial panic low, and in rare cases (such as December 2019) much lower lows. All recent 90% down days were long-term bullish.

Clusters of 90% up days almost always mark a bottom. We’ve seen a number of good up days over the past week but buying pressure has not (yet) been as strong as other times.

The strong selling pressure in the first half of August may be enough to derail my mid-term (one- to three-month) bearish outlook, but is not an all-clear signal yet.

I think there is a 40%-60% chance the S&P 500 will drop into the 2,700s, which would be a better place for a more sustainable bounce. A move above 2,985 would reduce the odds of further weakness.

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