Did the S&P 500 Index (SPX) Just Flash a Historic 'Buy'?

The SPX just wrapped up its longest streak of 90/90 down days on record

by Andrea Kramer

Published on Aug 25, 2015 at 2:43 PM

It's been a wild ride on Wall Street. After wrapping up their worst week in years, stocks took a nosedive out of the gate yesterday, sending the CBOE Volatility Index (VIX) -- also known as the "fear barometer" -- to new heights. In the meantime, it appears we might've logged the first ever three-day stretch of 90/90 down days on the Desmond volume/price indicator, per Schaeffer's Quantitative Analyst Chris Prybal. So, what could this mean going forward? 

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First, let's back up a bit. On Thursday, Friday, and Monday, the S&P 500 Index (SPX) volume was more than 90% to the downside, and nine of 10 stocks closed lower -- the parameters for a 90/90 down day. The last time we saw this signal was back in early July. 

Going back to 1975, we've seen about 250 90/90 down days. While there are many "clusters" of these days over time -- particularly during the October 1987 crash, as well as the financial crisis of September and November 2008 -- and a few two-day stretches, there aren't any other three-day streaks. The last back-to-back 90/90 down days were Nov. 26 and 27, 2009. (Note: There were only about 200 stocks in the 1987 grouping, whereas yesterday's signal encompassed about a thousand tickers. Plus, we are using a filter line where the equity must be trading above $5 per share.)

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Pooling from the roughly 250 signals since 1987, the SPX has averaged a one-week return of 0.8%, and a 63-day return of 4.2%, following a 90/90 down day. The barometer has been positive more than two-thirds of the time 21 days after the signal, and has been higher 71.4% of the time after 63 days.

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Following the last back-to-back 90/90 down days -- in late November 2009 -- the SPX was 1.3% higher a week later, and up 2.5% after 63 sessions. Likewise, the SPX was up an impressive 19.1% a week after the two-day stretch in mid-November 2008, but whittled its 63-day gain down to 2.8%.

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The SPX's anytime returns have paled in comparison. The index has averaged a five-day return of 0.2%, and has been positive almost 57% of the time -- in line with post-signal returns. Going out 63 days, though, the SPX has averaged a return of 2.1%, and has been positive less than 69% of the time. So, is now a good time to buy the dip? We sure got a nice start...

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