Why You Should Follow ‘90% Days’

12/09/2011 11:20 am EST

Focus: STRATEGIES

Lawrence McMillan

Founder and President, McMillan Analysis Corporation

Lawrence McMillan, founder of McMillan Analysis, explains what he means by a "90% day," and why it can provide important signals for both traders and investors.

My guest today is Larry McMillan, and we’re talking about something called the 90% day. So Larry, what is the 90% day?

Well, it has to do with advances and declines, and advancing volume and declining volume.

So, let’s just talk New York Stock Exchange figures. I mean, that might not be the best, because they do have some bond products…and it’s better if you use stocks only or an operating company only, but we’ll just say we’re going to use the New York Stock Exchange.

So if there at least nine times as many advances as declines, that’s 90% advances. So that would be a 90% up day. Obviously, the only way around it is nine times as many declines as advances—that would be a 90% down day.

Also, you can deal with volume. If the advancing volume is nine times greater than declining volume, that’s a 90% volume up day, and then same if declining volume is more than nine times greater than advancing, then it’s a 90% down day.

The other day, when we had that really nasty decline—you know, here we are in November 2011, right—and there was just that day a week ago when the market just dropped. That was the day the Italian debt went above 7% or something. It was 67 times declining volume over advancing, so it can get to really extreme figures.

Anyway, first of all, when one of these things happen, the market is already extremely oversold or overbought, and typically reverses back in the other direction within literally a day or two. So it’s a real good short-term indicator.

But in a broader sense, we track how frequently the 90% days occur, let’s say, over every 50 trading days. So most of the time, you get a few—like five, not even. But when the market gets nasty, like in 2008, it got to where we had like 20, maybe 20 90% days within the last 50 trading days. When that happens, it’s a volatile market, and everybody is pretty disgusted with the market, frankly.

But what happens when it starts to dissipate off of that, and then the rate of 90% days drop, let’s say, from 20 to 15, then you know you’ve got a market bottom in place. So just recently here in October 2011—well, September 2011—we went to 21 90% days out of the last 50 trading days, which was the highest I had ever seen.

It kind of lags, but it’s still very, very high right now. I believe it’s 15 exactly at this time. But since we have dropped from 21 to 15, I do consider that a positive for the market.

And again, I think it’s indicative. The market got all upset and crazy and volatile and everything, but it’s starting to dissipate a little bit, and so when the frequency of these 90% days starts to slow down, which it is now, but if it significantly slows down, then you’ll know that a major bottom is in place.

What’s the trade? How soon should I then start buying some calls, buying some longer positions?

Yeah, well, I think you can already start accumulating. But as long as you’re buying calls, you have fixed risk and you have limited risk, and so I would even probably suggest buying out-of-the-money calls on the Spyder Trust (SPY), let’s say, or something like that. If that doesn’t work out, you can always roll to the next time out.

But usually these are major kinds of bottoms. There was another one at March 2009 of the same indicator, so you know there are a number of things like this that don’t happen very often, and when they do, you probably should pay attention. I think this is one of them.

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