What to Make of This Signal At a 4-Year High

Last week, the stock market experienced another surge in selling climaxes -- just as it did last August, marking the first one-two punch since the financial crisis. For the uninitiated, a selling climax occurs when an optionable stock (that meets liquidity requirements) hits a 52-week low in intraweek trading, but eventually settles on a week-over-week gain. So, could this rare occurrence have broad-market implications for the S&P 500 Index (SPX)?

Below is one chart presenting this data, courtesy of Schaeffer's Quantitative Analyst Chris Prybal. It shows the absolute number of selling climaxes last week, with 999 out of 3,627 optionable tickers qualifying. This is the highest total since the week of Oct. 7, 2011, when 1,003 stocks hit a selling climax. 

In the next chart, Prybal then presents weekly selling climaxes on a percentage basis. Last week, 27.5% of optionable equities hit selling climaxes -- the most since that same October 2011 signal, when 29.3% qualified -- marking the fourth highest percentage overall, dating back to 1981. The last -- and only -- time we saw at least 20% of optionable stocks hit weekly selling climaxes twice in such a short span was during the financial crisis.

So, what are the implications of selling climaxes? Based on Prybal's third chart below -- which looks at weeks in which at least 300 stocks hit selling climaxes, or approximately 10% of all tickers -- the picture is less than encouraging. The average 10-day SPX return following the last 15 signals is negative 0.5%, with just 40% positive -- which compares unfavorably to typical anytime returns of 0.2%, with nearly 60% positive.

Going out further, the picture doesn't look much better. Even one year out, the SPX averages just a 2.6% gain and is positive 58% of the time, which pales in comparison to the anytime return of 9.6%, with 84% positive. In other words, last week's rebound from Wednesday's low is no guarantee that outsized returns lie ahead.

Nonetheless, if you're still banking on last week's selling climax surge as a sign of good things to come, below is a list of the 24 highest-cap stocks ($50 billion-plus) that flashed. Obviously, space does not allow us to present all 999 tickers.