USMarketView

November 25 – November 28, 2008

All time records were set as the S&P500 jumped 12.03 percent this week, while the NASDAQ soared 10.92 percent and the DJIA moved up 9.73 percent.  Moreover, the S&P500 and the DJIA closed higher five days in a row; the NASDAQ, however, posted one decline during this run.

The ‘plus’ part of the good news comes from the five straight positive closes over the past week.  There have been just 16 such five-day-runs since January 2000.  Three of these occurred in the year 2000, when prices were heading down.  But the 12 other strings before today’s came during recovery periods and rising prices.

This could be a signal that the present, long down side market is approaching its limit.

Focusing on just the Thanksgiving part of the market, note that the Wednesday before, as well as the Friday after, typically close higher.  Indeed these indices have a history of gains in three years out of four.  On the other hand, the record for the following Monday favors declines, with these occurring 56 percent of the time.

November 24, 2008

Prices advanced more than six percent for the NASDAQ and S&P500, while the DJIA gained  4.93 percent., after increasing by just about the same robust  rate on Friday.  That’s the good news; but there could be bad news ahead, because in the past, such large increases foreshadow market declines, not recoveries.

In 1987, for example, the indices rose seven, nine and ten percent on October 21; but that was only a pause in the steep decline that continued for another few weeks.

Similarly, the recent huge increases, on October 13, October 28 and November 13, failed to turn the market around unquestionably.  Prices have not yet shown stability, either on the upside or in declining.  What is clear, though, is that the daily swings, be they up or down, are increasingly in the more than five percent range.

DJIA                      4.93  percent

NASDAQ…          6.33  percent

S&P500                 6.49  percent

November 21, 2008

This is a good time to step back from the present, to consider the historical perspective of this market.  Until now, 1929 was the catastrophe of record as losses spread from the stock market to the consumer market.  The banking system crashed, unable to meet the demands of depositors for cash.  Unemployment soared to 25 percent.  Economic recovery did not take hold until the 1940’s.

Everyone knows the measures, invented by economists and implemented by government, to free the future from recession and deep depression.  Sure, some have been modified in recent years – in response to market globalization and the pressure of our financial markets facing international rivals. Whatever, be it that, or blame the housing bubble, few expected to see 1929 again.

Nevertheless, look at the DJIA today; compare its current price decline, from October 2007, with that of the 1929 debacle.  Although the recent correction was gentler at the beginning, the gap is closing.  On Friday, the DJIA closed at 57 percent of its peak value, while the earlier cycle, also 284 trading days after the peak, was at 49 percent of its 1929 value.

DJIA                      6.54  percent

NASDAQ…          5.19  percent

S&P500                 6.32  percent

November 17, 2008

The indices lost more than two percent today, as they posted their fourth straight negative Monday. Until recently there was a near equal balance in Monday trading, with 19 upticks and 18 declines. Accordingly, these last four declining Mondays appear to be part of the steep reaction still hanging over trading.

The pattern of closes since last Wednesday, November 12, has been seen only twice in the past 60 years, with the three indices tallying a -2/+1/-3. That is shorthand for describing the two most recent closes as losses, that prices rose the day before, and that a string of three negative days occurred before then.

The record show just two other incidents of this pattern: one was at the end of 1981, when that bear market still had a ways to go before recovering; the other day, in November 2003, however, was part of a strong and long, recovery.

Moreover, on the following day in 1981, the averages gained about a half percent, while prices fell the next day in 2003. Accordingly, this descriptive information is not helpful in ascertaining what kind of changes are in store.

DJIA -2.63 percent

NASDAQ… -2.29 percent

S&P500 -2.56 percent

November 14, 2008

Despite steep declines, the market did not lose all of yesterday’s appreciation. Nevertheless, with four down days, prices ended the week below last Friday’s closes. The NASDAQ gave up -7.92 percent for the week, the S&P500 -6.20 percent, while the DJIA dropped -4.99 percent.

Returning to yesterday’s analysis, showing that the 1987 recovery awaited sharp price reversals before moving to an upturn that grew values for several years, the question is whether the current market has reached that required stage.

This year’s S&P500 price profile, in the diagram below, reveals that its recent declines do form a triple bottom. But is this formation sufficient –and similar enough to the 1987 pattern- to signal an impending strong recovery? (Note that the 1987 price profile is part of the November 13 posting.)

Moreover, this same comparison should be extended to the 2002-2003 turnaround. It is clear, by reviewing both these cases, that the previous recoveries endured far deeper price erosion than suffered so far in 2008.

DJIA -3.82 percent

NASDAQ… -5.00 percent

S&P500 -4.17 percent

November 13, 2008

All three indices jumped more than six percent today, an event so unusual, that only three other closes since 1950 exceed this magnitude. October 21, 1987 is the earliest date; then the three indices gained between seven and ten percent. The other two events are more recent, occurring just a month ago, on October 13 and 28.

The common element of these dates is a substantial decline, following these spurts in prices. Indeed, plotting the 1987 price line of the S&P500 illustrates the relationship between a vigorous drop in prices at the end of the downturn and the impending recovery. The diagram below illustrates these events.

This raises the question: Is a large drop necessary to start recovery?

DJIA 6.67 percent

NASDAQ… 6.50 percent

S&P500 6.92 percent

November 11 and 12, 2008

The slump continued with the indices losing some two percent on Veterans’ Day and around five percent on Wednesday, the following day. Trading reflects, and maintains, the steady decline begun in September. It is revealing to compare the current situation with the price erosion of the previous, 2000 cycle.

The period of these two sequences is quite similar, from their respective tops, to a month ago. The first diagram shows the earlier cycle reversing itself, prices moving higher, and the next bull market starting their recovery.

The second diagram compares the same cycles, but compares their daily prices against each other. With each day is marked with its month, it shows that the parallels between these two cycles remain constant until this month. Note that the 2000 prices are starting to increase, while the current prices are continuing their decline. That is why the price action of October, marked by 10’s on the diagram, are shown below the data points of September, marked by 9’s. Moreover, the 11’s, also below the earlier observations, continue the current trend of declining prices.

November 11 November 12

DJIA -1.99 percent DJIA -5.19 percent

NASDAQ… -2.22 percent NASDAQ -5.17 percent

S&P500 -2.20 percent S&P500 -4.73 percent

November 10, 2008

The indices declined, and as often this year, continued their seesaw. Today’s fall follows Friday’s increase, which came after two straight, and severe, down turns. It is a first for 2008, although this -1/+1/-2 pattern has occurred seventeen times since January 2000.

On the day following such closes, all three indices fell further just seven times but reversed direction, continuing the up and down oscillations, ten times.

The diagram of the DJIA closing prices since 2000, marks these days with vertical lines. It is clear that most of these -1/+1/-2 events are associated with trends of falling prices.

DJIA -.82 percent

NASDAQ… -1.86 percent

S&P500 -1.27 percent

November 7, 2008

Friday’s strong ending pushed the S&P500 2.89 percent higher; the DJIA increased 2.85 percent and the NASDAQ 2.41 percent. Yet this brief rally failed to offset Wednesday and Thursday’s deep losses. Thus, the indices closed lower than last Friday.

Focus on the pattern of the past three days, moreover, creates more doubt than confidence in a near term recovery. The NASDAQ, for an example, closed up 2.41 percent today, after falling -4.34 percent yesterday and -5.53 percent on Wednesday. Consider the history of two such closings: in 1987 and 2001. The NASDAQ, as well as the DJIA and the S&P500, were in lengthy declines. In 1987, the drop continued for another 45 trading days, before the market recovered its growth path.

The 2001 experience is no different, but the ultimate upturn took longer, requiring another 150 trading days. Yet that was not the end of that price decline: it took another year before the market .returned to its upward growth trend.

DJIA 2.85 percent

NASDAQ… 2.41 percent

S&P500 2.89 percent