Market Internals Leading the Averages

New York City, N.Y. — Friday was much more than a “rebound rally” following the -2.5% drubbing the S&P 500 (^SPX) suffered on the second trading day of the year. The stats on market breadth were in the historic category.

Up Volume finished at 20 times Down Volume. Adding an exclamation point, advancing issues beat decliners 10-fold.

Having followed data on Market Internals for a few decades, I’m struggling to pinpoint a day in the annals of market history where we have been treated to the exacta of UVOL at 20 times DVOL and adv/decl logging in at 10 to 1.

What Does This Mean?

Data on market internals can only get this lopsided under a few circumstances:

First, the market must be extremely oversold, following a steep and/or lengthy decline. Clearly we have had a steep decline, although in a very condensed period of time.

Second, there must be some very recent indications of the selling pressure having been recently exhausted, or what many would call capitulation selling.

We likely experienced this in waves that spanned from the second week of December, fueled by the December 19 press conference by FED Chairman Jerome Powell, and reaching a crescendo with the “throw in the towel”, “just sell it”, “I’m out until January 7”, final “tax loss selling” on the abbreviated trading session December 24.

Third, markets likely need an actionable news event to Ignite a Market Reaction that metaphorically gets investors off the sidelines, reversing near term negative sentiment. Friday investors were treated to a double header.

At 8:30 am the blockbuster jobs report included every positives from every possible internal component of the report, including upward revisions of +60,000 jobs from Oct and Nov, that was hardly mentioned.

Two hours later, FED Chairman Powell speaking at a forum on Central Bank policy, walked back his “auto pilot” comment regarding the current FOMC balance sheet reduction schedule, in addition to hinting much more “doveish” on interest rate hikes for 2019.

The Take Away

No doubt, there remain unresolved issues that pose potential risk for the market. Possibly the upside here is that skepticism will remain elevated, giving markets the opportunity to climb the proverbial “wall of worry”.

We will continue to monitor Market Internals very closely with the conviction that continually improving data on UVOL/DVOL and Advance/Declines is a key ingredient for improving market averages.

90 minutes into the trading day these internals are giving encouragement, as advancing issues are ahead of decliners by 4 to 1.

We mention this with some caution given the frequent intraday reversals during the Q4 selloff, but less than half a day into what should be an action packed week, we’ll take it.