Indicator of the Week: The Warning Sign Not Seen Since 2014

A spike in weekly buying climaxes has historically been a bearish indicator for the S&P 500 Index (SPX)

Senior Quantitative Analyst
Sep 21, 2016 at 6:00 AM
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There has been a recent spike in weekly buying climaxes for stocks. From the chart below, 10% of stocks made a buying climax a couple of weeks ago -- the highest reading since early 2014. Some investors consider this an indicator that the market could be rolling over and heading lower. A buying climax is when a stock reaches a 52-week high during the week, but then turns lower and finishes the week negative. This week, I am going to take a look to see if this has, in fact, been a sign of a tired market. I'll also examine which sectors these climaxes are coming from. 

SPX Buying Climaxes

After Spikes in Buying Climaxes: Going back to 2010 -- which gets us past the volatility of 2009 and into the current bull market -- the first table below shows how the S&P 500 Index (SPX) performed after 10% of all optionable stocks that we follow (about 2,350 stocks) made buying climaxes. I show returns from one week after the signal to one year.

Looking at the average return, the market does tend to perform quite poorly after these signals, at least in the short term. The average return is negative out to three months after a signal. Once you get to a year, however, the average return is pretty much back to normal. Based on these 10 signals since 2010, a spike in buying climaxes looks like a short-term bearish indicator, but one that can be disregarded for longer-term investors. 

SPX after signal since 2010

SPX anytime since 2010

Going back farther, to 2000, there have been 23 of these signals. The table below shows generally the same conclusion. This is a bearish indicator in the short term. When you go back to 2000, though, the average return gets back to normal after three months, which is sooner than the data above. 

SPX after signal since 2000

SPX anytime since 2000

Sectors: Which sectors are these buying climaxes coming from? It could be a sign of sector rotation out of these sectors. Just as buying climaxes could be an indication of the market rolling over, this could be a warning sign for these particular sectors, especially in the shorter term. Out of 36 designated sectors with at least 20 stocks, below are the sectors with the highest percentage of stocks making climaxes. Finance companies and real estate firms are particularly prominent. 

Buying Climax Sectors

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