Friday Was a 90/90 Day and What It Means

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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Last week ended on quite the down note. Friday's big selloff saw the Dow Jones Industrial Average drop 2 percent, or 318.2 points. The Standard & Poor's 500 Index fell 2.1 percent (38.2 points), while Nasdaq Composite Index declined 2.2 percent (90.7 points).

The technically significant issue was that Friday was a 90/90 day -- more than 90 percent of the volume (94 percent) and of the points (97 percent) was down.

A brief explanation for those of you who may not be so technically oriented: When markets experience a bout of intense selling -- those trading sessions when 90 percent of the volume is down, and nine out of 10 stocks close lower -- it can mark a short-term reversal in a bull run. Typically, it signifies a shift in psychology among larger institutions.

The motivation for this change is less relevant than the actual swing in buying. Whether it was caused by emerging-market turmoil or fears of a Federal Reserve taper or the expectation that the president will admit in his State of the Union address that he was really born in Kenya is irrelevant. The only thing that matters to this form of analysis is that the 90 percent threshold is met in both volume and advancing-versus-declining issues.

This is based on the work of Paul Desmond of Lowry's Reports Inc. Often, markets follow a 90/90 down day with a rally that lasts two to seven days. The big sell off creates an oversold condition that is relieved by a short move to the upside. (See chart showing oversold conditions).

Source: Bespoke

I have long argued that the daily action in equity markets is primarily, but not exclusively, noise. Tracking the battle between demand for shares and the supply to meet that demand is one way to generate some signal from the cacophony of data that daily trading creates. Looking at the past examples of deep 90/90 sell offs, we have seen only modest rebounds followed by more selling after days such as Friday.

So far, the 10 percent correction we discussed is still on track. A short oversold rally doesn't change the broader picture of a market long overdue for some corrective movement.

What would change the technical picture? A 90/90 up day. That's a reversal of Friday's sell off, where demand overwhelms supply and most of the price and volume action is up.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net