An Ominous Event Has Just Taken Place…

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As early trading continues to surprise in 2017, an ominous event has just taken place…

The Dow turns negative for 2017
 
From Jason Goepfert at SentimenTrader:  “For the first time in 2017, the Dow Jones Industrial Average is showing a negative number in its YTD column. Prior to Thursday’s session, the Dow had been positive Year-To-Date every day this year…

Jason Goepfert from SentimenTrader continued:  The last time the Dow started off a year with two weeks of gains was in 2010. It turned negative for the year on January 21, 2010, which was 13 sessions into the new year. It went on to lose as much as 5% over the next couple of weeks.
Let’s go back to 1900 and look for every time that the Dow started off a new year with between 2-3 weeks of gains (higher than the prior year’s close), then finally turned negative year-to-date. Maybe it led to further selling pressure by nervous investors who didn’t want to press their luck.

The sample size is small, but the forward returns were not good. Over the next few weeks, in particular, the Dow tended to struggle. There were two times it managed to rebound immediately and sustain the gains (1931 and 2006), but otherwise, the index showed either moderate gains or outright losses.

We always prefer to focus on the risk/reward ratios, and they were ugly across almost all time frames. We don’t place a lot of weight on long-term returns when discussing a shorter-term indicator or pattern, but even those long-term risk/reward ratios were unusually negative for an uptrending market.

With excessively high optimism, the dip into negative territory year-to-date looks to be another negative for stocks in the shorter- term.

Sell Programs Hit Stocks
 
A little after noon on Thursday, Bloomberg users were alerted to an ominous development:
 


The typical indicator for determining whether program trading has hit the tape is the NYSE TICK. The TICK subtracts the number of securities that last traded on a downtick from the number that last traded on an uptick. Program trading is usually blamed when the figure reaches +/- 1000 securities.

Whatever the impetus behind the selling, that low TICK today was the worst reading in over a month. It was enough to drive the cumulative TICK that we update intraday to its lowest level since early December (see chart below).

Assuming that the low TICK on Thursday was a program trade and not a bunch of traders selling at the same time, let’s go back over the past 25+ years and look for other times that we saw a large negative TICK for the first time in a month when stocks were within spitting distance of a multi-year high. Results are shown on the next page.

We can see that the S&P tended to rebound over the next week, but suffer further selling pressure after that. The next 2-4 weeks were weak, with more declines than rallies, a negative average return, and a negative risk/reward ratio. Long-term returns were about in line with random, not unusual for a short-term indicator.

We’d consider this yet another minor negative for stocks in the short- to medium-term.”