Indicator of the Week: Are Selling Climaxes Bullish Indicators?

Last week saw an extreme number of selling climaxes, especially within the energy sector

by Chris Prybal

Published on Aug 5, 2015 at 6:30 AM
Updated on Aug 5, 2015 at 6:30 AM

When looking back at the last week of July 2015, one indicator caught my eye as having contrarian implications: selling climaxes. A selling climax is a weekly signal, and occurs when a 52-week low is reached during the week, but the equity reverses direction and actually closes higher than the previous weeks' closing level.

Selling climaxes can be viewed as panic selling, or as a sign of capitulation and despondency -- potentially hallmarks of a change in trend. No indicator is perfect, however, and as you will see in the study below, during extreme market downtrends, selling climaxes occur frequently as a sign of investor disgust and depression.

For the study below, I used a parameter file containing all optionable tickers in the U.S. equity universe; any ticker that has listed options is included. For this study, I went back to 2005.

Elevated Selling Climaxes During the Last Week of July: Last week, there were 351 tickers that succeeded in achieving a selling climax. Out of a total ticker list of over 3,700 optionable tickers, this equates to an extreme reading of 9.5% of all tickers.

In the chart below, I plot all selling climaxes with the S&P 500 Index (SPX) since 2005 to illustrate this point. Previous extremes occurred the week ending Dec. 19, 2014, and the week ending Oct. 17, 2014. Both of these signals turned out to be contrarian buy signals on short-term market pullbacks. Another bullish signal occurred during the 2011 swoon, but, as we will see, when the market began to collapse in 2007 and 2008, selling climaxes spiked as investors hustled for the exits.

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The implications: In the table below, I list all elevated selling climax signals since 2005. I have the table shaded in orange and green to delineate bear markets from bull markets. Next, I separated the two market environments to illustrate the impact on returns. Selling climaxes signal-related results were decent during the early part of 2007 and 2008, as well as the bull market that has thrived since 2009. On the other hand, during the massive sell-off of 2008 and early part of 2009, selling climaxes skyrocketed as investors dismissed equities in droves.

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What About the Energy Sector?: If one particular sector of the market stood out as having an inordinate share of selling climaxes last week, it would be the energy sector. Will crude oil and natural gas stop declining in the face of oversupply? And, will selling climaxes within the sector lead to a recovery? Below, I show the sector breakdown, as well the top 10 energy companies by market capitalization that formed a selling climax last week.

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