USMarketView

October 30, 2008

The market opened higher and maintained its gains to the close. The S&P500 increased 2.58 percent, the NASDAQ 2.49 percent while the DJIA moved 2.11 percent higher. There have been thirteen days, since 1974, with this record. And the NASDAQ posted further increases on all of the next days. The records for the DJIA and the S&P500 are almost as good, with twelve increases and one decrease on the following day.

Another analysis of recent closes yields a different insight but does not contradict the above. It focuses on the frequency count of recent changes, rather than the size of the increase. Note that the NASDAQ now has three positive closes in a row, whereas the other two indices, while increasing today, changed directions three times in the last four days.

There have been 16 of these combinations since January 1950. Now consider the direction of the market when, and shortly after, they occurred. The chart below plots closing prices of the S&P500 over time, and places a vertical line when each of these 16 days occurred. It is quite clear that the great majority of these happened when prices were topping out or faking. In fact, 13 of these events share this feature, and only three occurred when the trend of prices was up.

DJIA 2.11 percent

NASDAQ… 2.49 percent

S&P500 2.55 percent

October 29, 2008

At an unscheduled meeting, the Fed cut its funds rate 50 basis points. But after a short surge, stock prices fell. While the NASDAQ closed higher by .47 percent, the DJIA sank -.82 percent and the S&P500 by -1.11 percent.

This reaction was unexpected, since prices increased in five of the last seven rate cuts in the series that started in September of last year. One has to wonder at the Fed’s motivation to add this initiative on the day after index prices climbed to a near record high. Did it expect the rate cut would increase prices further, and thus help the market move out of the slump that started in early September?

There have been 18 fed fund rate cuts since 1995. The NASDAQ has a record of moving higher on the following day; and it did so 12 times. The DJIA and the S&P500, however, have not responded as one sided, rising just half of the time, and falling on the other nine times.

DJIA -.82 percent

NASDAQ… .47 percent

S&P500 -1.11 percent

October 28, 2008

The large increases today were close to the record boosts by the DJIA and the S&P500 set just two weeks ago, on Monday October 13. Indeed, these indices posted their second highest percentage advance today in more than 80 years; moreover, the NASDAQ scored its fourth highest gain ever, and the largest since April 2001.

Yet the recent market actions dictate a cautious outlook; they indicate a phase of major increases and substantial decreases. Rather than being on a roll, prices continue to seesaw. Remember that just two days after the record October 13 run up, prices had dropped almost as sharply on the following two days. The S&P500 lost more than it gained, while the other two indices held on to only a small portion of their advances.

As for the history of the trading day following these large gains, the NASDAQ rose only once, while it fell three times – with those losses deeper than -1.9 percent. While the other two indices fared better, they nevertheless decreased as often as they increased. We sense that we are more on a rocking horse than on an escalator

DJIA 10.88 percent

NASDAQ… 9.53 percent

S&P500 10.79 percent

October 27, 2008

The market climbed most of the day, but failed to sustain the rally, so by late afternoon prices declined and closed in the red. Thus, the NASDAQ fell for the fifth day in a row, while the DJIA and the S&P500 had their second successive loss.

There have been just 14 such days since 1971, and today’s is the third repeat since June 2001. Moreover, all of these occurred during periods of substantial decline, and furthermore, the subsequent rise in prices was far from near.

In downturns as widespread as this one, the past has little to offer in terms of short term forecasts. The one lesson the 1929 disaster offers, is that prices will recover over the long term. But how long ‘long’ is, is hard to ascertain.

DJIA -2.42 percent

NASDAQ -2.97 percent

S&P500 -3.18 percent

October 24, 2008

All three indices lost more than three percent on Friday, as the NASDAQ dropped for the fourth day in a row. Although the DJIA and the S&P500 had only three down days this week, they dwarfed the gains of Monday and Thursday. As a result, the indices fell this week, after ending up the week before.

While the NASDAQ fell four times in the past five weeks, the current -9.31 percent loss is not as bad as the -15 percent and -10 percent drops earlier this month. Moreover, it is smaller than the record -25 percent loss of April 2000, and overall ranks as the eighth’s worst week in its history.

The S&P500’s Friday-to-Friday fall of -6.79 percent is also the fourth loss in the past five weeks, and ranks as its 11^th worst weekly result since 1950. Similarly, the DJIA fell for the fifth time in six weeks, and its -5.34 percent loss is far down in the size list.

DJIA -3.60 percent

NASDAQ -3.23 percent

S&P500 -3.45 percent

October 22, 2008

In a welcome change from the past two days, the DJIA added 2.02 percent and the S&P500 1.26 percent, but the NASDAQ failed to close higher. In view of the drastic decline since the beginning of September, the question about the market’s ultimate bottom is the focus of almost everyone. While yesterday’s analysis focused on the 1929 collapse and similarities to today’s pattern, today we consider the changes in the DJIA in this century.

The benchmark of the percentage change over 33 trading days ago is appropriate, because this many days have passed since the DJIA’s last top. The diagram below plots these changes since January 2000. It reveals what we already know, that we are in the deepest decline of recent times.

Moreover, it also exposes the several other times that we faced significant drops of long duration.But the recovery portions of the past also show the recoveries and reversals into positive territory, where gains equal earlier losses. While this is history, and not a guarantee of the market’s future, it nevertheless focuses on the fact that equities have been here before, and then turned higher.

DJIA 2.02 percent

NASDAQ -.73 percent

S&P500 1.26 percent

October 22, 2008

All the gains collected over the past nine trading days went down the drain, as the S&P500 lost -6.10 percent, the DJIA fell -5.69 percent and the NASDAQ declined -4.77 percent. Despite some meaningful advances recently, however, the declines outnumbered gains by six days to three days. As a result, the indices returned to levels when closing prices fell seven days in a row.

The DJIA is approaching the rate of losses experienced in its drastic decline between September and November 1929. It lost -48 percent of its market value in those 49 trading days. While that was its deepest, concentrated decline, prices continued down for another 664 trading days, until July 8, 1932, when the bottom was hit at 41.22, a drop of -89 percent.

However, there is difference in the chronology between 1929 and the ongoing decline. Recent losses are more severe than at the beginning of the correction. Between October 2007, and May 2008, it took 262 trading days for the DJIA to fall -8.02 percent. Since then to today, in just 101 trading days, the loss accelerated to -34.6 percent.

DJIA -5.69 percent

NASDAQ -4.77 percent

S&P500 -6.10 percent

October 21, 2008

The seesaw continues, more than wiping out the NASDAQ comeback on Monday. The other two indices fared somewhat better, holding on to a good portion of their day before advances.

The S&P500 and the NASDAQ have lost 25 percent of their value in the past 22 trading days. The DJIA, while doing slightly better, nevertheless, is off 21 percent.

These current losses are about twice as deep as experienced at this stage in the 2000 downturn. Moreover, in that earlier downturn, the S&P500 recovered 15 percent over the following 20 days. And it encountered just seven losing days in that run-up.

DJIA -2.50 percent

NASDAQ -4.14 percent

S&P500 -3.08 percent

October 21, 2008

Prices recovered smartly, and -after small losses on Friday- combined with Thursday’s rally, have recovered and more than made up last Wednesday’s drop. Do these strengths signal the bottom of the current cycle; do they forecast the beginning of prices returning to 2007’s levels?

The uncertainties of our financial situation, of course, cloud judgments and hang over fundamental analyses. Yet a comparison of the current cycle, with the pattern of the last, 2000, price cycle provides a meaningful insight.

Clearly, the 2008 drop seems to have reached a bottom that is similar to the up and down experience at the end of the 2000 experience. In addition, the previous cycle is extended for another month, comparable to the end of November 2008.

Thus, if history repeats itself, good news is ahead on the price frontier. Nevertheless, a quibble is possible, by pointing to the steeper and longer decline, as a foretaste of further weakness to come.

DJIA 4.67 percent

NASDAQ 3.43 percent

S&P500 4.76 percent

October 16, 2008

The first positive close since Monday generated increases ranging from 4.25 percent for the S&P500 to 5.49 percent for the NASDAQ. The DJIA gained 4.68percent. This is consistent with the results of the past, when these indices dropped as steeply as yesterday. On October 20, 1987, the day after the sharper than -20 percent fall in the DJIA and the S&P500, index prices increased more than five percent.

The NASDAQ comparison yields different result. First, this index fell more than -8 percent six times since 1987; second, the index fell twice on the next days; and finally, two of the gains were substantially greater than today, while two were smaller.

As for the following day, that is, the parallel situation as tomorrow, both the DJIA and the S&P500 rose more than 9 percent. The NASDAQ, on the other hand, came in with three losses, one as deep as -4.49 percent, and three gains. Two of the latter exceeded seven percent.

DJIA 4.68 percent

NASDAQ 5.49 percent

S&P500 4.25 percent