Todays market was up all day, despite fears that the auto bail out failure would set off a downward spiral.While the DJIA closed higher, it did not pass last Fridays close, whereas the other two indices succeeded, but just, in moving higher this week.
The disparity between the NASDAQ gain of 2.18 percent, almost triple todays DJIA and the S&P500 action, is unusual.Today is only the seventh time for this pattern.Yet while rare, checking the circumstances of these prior events, provides no guidance for the future course of prices: three of these occurred with rising prices and three were associated with declining values
After posting gains, the market faltered, closing lower, and ended just below last Fridays levels. Prices continue their up-then-down pattern and so far, fail to maintain an upward momentum.While prices have recovered from their recent lows on November 20, they have not yet given a clear signal that the long awaited surge has started.
Yet, in contrast to the last bear market, in 2001-2002, which lasted 421 trading days before recovering, the current decline is just 283 days past its October 9, 2007 top.While this comparison implies that more time must pass before the next upsurge begins, the comparison of price erosion yields a different perspective.
In the last bear market, the S&P500 lost 43 percent, as it fell 596 points between February 2001 and October 2002; the current decline, as of the latest low on November 20, is 812 points, or 52 percent.
Clearly, from the viewpoint of price erosion, this market has surpassed the 2001 correction, and reached this low in far less time.
At the close, all three indices were in plus territory, but not by the sizable margins of recent times.While the DJIA gained.81 percent, the NASDAQ and the S&P500 rose 1.17 percent and 1.19 percent.This performance, however, is far smaller than the daily changes of the past few months.
In fact, with just two exceptions, todays gains represent the smallest advances since October 31 25 trading days ago. On the other hand, the count of the advances larger than 3.4 percent for the DJIA, 3.8 percent for the S&P500, and 4.0 percent for the NASDAQ, in any one session, amounts to just 17 days in the2,249 trading days since January 2000.
What’s more, ten of these, part of the 2008 downturn, came since March 18 of this year; while the other seven occurred during the market slide of 2001/2002.
Todays reaction to the substantial gains of the past two market days was sizeable.Price changes in both directions continue to be large relative to the past.
Consider the median daily percentage change in each of the three indices since November 3, and compare it to the median change for the same 26-day period between 2000 and 2007.
Median Daily Change November- December
2000-20072008
DJIA.067-.076
NASDAQ.081.186
S&P500.056-.206
It is considerably greater this year; indeed the S&P500s median daily percentage change this year is almost four times the size of the past eight years.
Even if the entire trading year, until today, is considered, the same conclusion applies for the DJIA and the S&P500.The year 2008s median is quite larger; except for the NASDAQ, however, which has a smaller median daily rate of change this year than in the previous eight.
Strong gains continued for the three indices, furthering the never seen before pattern of substantial daily gains in session after session.In the past 30 days, the DJIA, for example, scored 14 gains larger than two percent.Nevertheless, the level of this index remains almost unchanged, because 11 days of losses greater than minus two percent offset these runs.
One has to go to the decline of 1974 to find a near identical pattern.Yet while large price changes succeeded one another, that earlier situation did not bring about a pattern lasting thirty some days.
With not much guidance available from history, and without an available precedent it is near impossible to anticipate the markets future direction.
The past weeks closes established a sequence of changes never seen before.Namely, to focus on just the S&P500, although the other two indices behaved just about the same, todays gain of near four percent, following yesterdays-2.93 percent, and theprevious two gains greater than 2.5 percent, occurring after Mondays-8.93 percent loss, is unprecedented.
Moreover, this weeks string of closes: +1/-1/+2/-1has occurred only fifty other times since January 2000.These are plotted below, for the S&P500.(The days other than this specific pattern are omitted.)Even a cursory inspection shows that most of these days happen when prices are in an upswing.Specifically, 36 such days share this quality, while only 14 sessions occur when prices are falling.
However, the last four sequences took place during the current downturn, since January 2008.
Todays reversal dropped prices below Tuesdays closes, continuing the recent pattern of sharp fluctuations.Considering the past performance of the S&P500, when it fellby -2.93 percent or more, following the previous days advance, we find 12 such days since January 2000.
Moreover, ten of these occurred while prices were in a sharp decline; in fact, eight took place since this June, with November having the last three.Thus it is easy to believe that this pattern indicates a period of falling prices.
Yet the other two events, of the total of twelve, marked turning points, days when the market changed direction, and rising prices succeeded long declines.
Therefore, while the odds are 10:2 for further price erosion, there is hope that this last episode foretells, instead, the end of this long decline.
The indices rose again, and if not as sharp as yesterday, they closed up more than two percent.The NASDAQ set the pace, advancing2.94 percent.Yet the indices have not recovered their position of last Friday; they have not yet overcome Mondays huge losses.
While these large fluctuations, first up and then down, have become increasingly common lately, they are, nevertheless, not unique to the current market.Tabulating the 14,817 trading days since the start of 1950, to generate just two derivative series for the S&P500, provides some insight into price formation and the predominance of seesaw closes. Where seesaws mean that large and opposite changes in prices occur often.
Consider two derivatives of daily price change: first, the sum of the last five days percentage changes, and second the sum of the last ten days price changes.In comparing the size of their changes, the expectation is that the sum of ten days changes is greater than the sum of five days changes.While this is true on the negative side the smallest total for the ten-day cycle is-36.7 percent but only-31.5 percent for the five-day sum- the opposite situation exists for largest positive accumulation.The five-day extreme is18.7 percent but only15.4 percent for the ten-day sum.
In short, the longer the fluctuations continue, the deeper is the decline and the smaller is the gain.On the other hand, the historical fact that the five-day total generates smaller negative and greater positive sums, implies that longer seesaws result in deeper, cumulative losses.
Todays sharp reversal, coming on the heels of yesterdays huge losses, pushed up prices by more than three percent.Most of this action came near the end of trading, as the indices lost most of their early gains, but then shot up near the end of trading.
As of today, prices are down substantially from their year end closes of December 31, 2007: the NASDAQ has lost 45.3 percent while the S&P500 dropped 42.2 percent; even the DJIA, posting the smallest loss, is off 36.5 percent
As for the balance of the month, consider the S&P500 record since 1950.It closed higher 42 times; nevertheless, in nine of those years, prices fell in December.Whereas there were only six negative Decembersin the 15 years that the S&P500 closed lower, this results in a ratio oftwo December losses for every five negative years.Clearly then, negative years have almost twice as many negative Decembers -40%- as the positive years-21.4 percent.
Losses in the NASDAQ and the S&P500 reached near minus nine percent at the close, making this the second deepest cut in the indices since 1950.While the DJIAs fall was slightly smaller, nevertheless, its-7.7 percent drop today ranks as its third worst performance.
It was just 29 days ago that the market suffered similar, near record losses.Since that beating, prices advanced significantly, although in a seesaw pattern that included sharp losses.Yet today saw these gains wiped out, as the indices fell, not only below their recent high of November 4, but also beneath their closes on the earlier near record loss of October 15.
The worst day, in October 1987, marked a sharp but brief tumble, and, as described in the October 15, 2008 analysis, the market continued to substantially higher grounds.It is not obvious whether these recent deep reactions are a prelude to a similar upturn, or to further declines.Nevertheless, looking at the following day, prices recovered in the five percent range for the indices, not only last October but also in 1987.