Two measures of buying and selling activity tracked on the Trading Psychology Weblog each day are the Adjusted NYSE TICK (a daily summed measure of number of stocks on NYSE trading at offer minus those traded at bid, adjusted for a zero mean) and the Institutional Composite (the same measure, but with the Dow Jones Industrial Average stocks). During the past five trading sessions, we've had four net selling days in the TICK and all five showing net selling in the Composite. I decided to investigate what happens after we get similar periods of significant weakness in both measures (average daily Adjusted TICK < -300; average daily Composite < -200).
It turns out that we've had 20 such occasions since 2004 (N = 708). Three days later in the S&P 500 Index (SPY), we've seen an average gain of .44% (15 up, 5 down). That is a meaningful bullish edge compared to the average three-day gain of .10% (397 up, 311 down) for the sample overall.
The market, of course, is on edge this AM awaiting the big jobs numbers. Keep an eye on the interest rate and currency markets to see if the news pushes us to new levels of valuation in those markets. If so, the news really is economic news and the adjustments of macro traders could lead to a sustained downward revaluation of equities as well. If the news doesn't really change the outlook for rates or the dollar, I'm going to question whether we'll sustain a major revaluation of stocks. In that scenario, the odds tell us that, as a whole, selling into a week of weakness is not a good bet.