Market Selloff Buying Opportunity?

by Craig on 04/02/10 at 1:08 pm

The North American markets have been hit hard by the concerns centered around sovereign default fears for a number of European countries including Greece, Spain and Portugal. At the time of writing the S&P 500 is down 2.5%, the Dow by 2.1% and the TSX 2.1%. And while it may take some time for these concerns to clear, what is needed is some guidance and comments from the major European countries such as the UK, France and Germany. One could assume in the coming days we will hear some comments and this should help the markets.

But looking simply at the selloff, we did some analysis of the NYSE up and down volume. This compares the total volume of shares that are higher on the session compared to the total volume of shares that are lower. Not surprisingly the ratio is very tilted to the downside today. In fact the ratio is about 20 to 1 for down vs. up volume. Going back 3-years, we took a look at the subsequent performance of the S&P 500 following days when the ratio is this one sided to the negative. The good news is following such days, the market moves higher about 80% of the time the next day and has an average performance (including both up and down days) of 1.6%. Not a bad little bounce.

We are going to play this bounce with the S&P 500 ETF (NY:SPY). The Spiders, as they are commonly called, are currently at $107.05.  But if this trade works, it will be relatively short lived. As you can see, most of the average positive performance comes in the 1st day and by the 10th day the market is lower again (2nd chart). But also keep in mind we used the past 3-years which did incorporate the severe bear market of 2008 to early 2009.