The market lost substantial value since the beginning of the year; the summary statistics are the DJIA off-8.8 percent, the S&P500 down-8.6 percent and the NASDAQ-6.4 percent lower.Worse than this sorry result, is the repercussion on forecasts for the rest of this year.
Many investors pay some attention, at least to the rule of thumb that the year goes the way January goes.Indeed, there is some correlation between Januarys market action and the results for the rest of the year.The diagram plots NASDAQs percentage changes in January against the percentage change for the whole year.
About a quarter of the variations in December-to-December prices is associated with changes in the December-to-January results.Moreover, for every one percentage point change in January, there is a2.2 percent change in that years final performance.The diagram reveals that relationship: the straight line running through the cluster of actual results is the estimated, statistical relationship.
The fact that the January and year pairs more often than not move in the same direction provides significance to the association.Over the 27 years of this analysis, the changes of the January and year-end changes moved in opposite directions only nine times.History reveals then that Januarys result have a bearing in considering the markets future.
With the TV jocks evaluating the pros and cons of the near trillion dollar US economy bailout with airs of professional expertise, its important to focus on the fundamentals.
First, anyone taking the first Economics course, in the last some sixty years, will remember the government spending multiplier and the tax change multiplier.This accepted premise is no longer just a conjecture.Just look at our deficit spending in World War II, and consider the rapid and substantial recovery it brought to our economy.
Second, while the stimulus difference of a tax cut for individuals is smaller than an equal amount of spending, assertions that all of the tax cuts would go into savings is not upheld by our experiences.Sure much of the tax cut would be saved and where are the critics who regularly complain about the lack of savings in the United States? Yet some, if not the majority of it, would be spent.
Third, most Americans prefer tax cuts to government spending, because a stimulus in that form permits each of us to determine individually what the extra dollars will buy.In other words, as the textbooks would read, the individual, rather than some bureaucrat or legislator, will decide on the uses of our resources and what they will produce. This view of private vs. public spending is fundamental to our American way of life.
Lastly, questioning whether governments specific spending programs will help or not help restore our economy is beside the point.A dollar spent on sex education provides as much economic stimulus as a dollar spent on anything else.As the economist who first discovered this stimulus relationship said, if we have no worthwhile projects, pay people to dig holes and then pay others to fill in the holes.The focus is not on the what but rather on the size of the government deficit.
Surely, we all agree that not everyone will find happiness and approve of how Washington spends these stimulus dollars. And while some question the specifics, such as money spent on sex education, they have an obligation to do so.But thats not equivalent to believing that those dollars will not help restart the economy.Surely, are we all not better off if we individually spend our tax cut, to purchase things that sustain and aid our individual set of beliefs? Then we can be faithful to our personal value set and still stimulate the economic recovery.
It was a3.55 percent day for the NASDAQ, the best since last Wednesday, and its fourth positive close in a row.The S&P500 has a similar score, with a3.36 percent advance.Even DJIA, which had the smallest increase of2.46 percent, now has closed higher for its third straight session.
While there have been 48 (42 for the NASDAQ) closes with larger gains, 34 of these have come since January 2000.Moreover, 2008 saw 15 such days, with 11 of these happening after September.A final point is that 30 of these last 34 streaks occurred in 2000, 2001, 2002 and 2008 all years in which values were smaller on December 31 than on January 1.
Furthermore, in 2008, 10 of the 15 days following this streak, failed to continue these advances, closing lower than the day before.
On the other hand, another feature of 2008 is that on the next day, each of these indices scored three significant gains.The NASDAQ ranged from 2.94 to 6.33; the DJIA from 2.05 to 4.93 percent, and the S&P500 went from 2.58 to 6.07 percent.
The NASDAQ and the S&P500 closed up for the third straight day, while the DJIA extended its positive streak from one to two.This combination has occurred only 22 times since 1950.Five of these days were in the four years when prices fell between January and December.
Each index behaved quite differently on the following day.The NASDAQ went higher 14 times and fell 8 times.The S&P500 had an even number of plus and minus days, whereas the DJIA increased just nine times and decreased on thirteen days,
However, in the four years when prices fell, all the indices managed just one positive follow-up while falling four times. (There were two such closes in the negative year 2002.)
The record for the 16 positive years, when prices at the end of December were higher than at the beginning of January, is significantly different.All three indices moved higher 12 times and declined just four times.
January tends to be a telltale month; often considered to indicate what will happen to prices during the rest of the year.Bearing in mind the S&P500, note that the January median decline was-2.75 percent in the 16 negative years since 1950.As of this moment, with that average falling from 903.25 on December 31, 2008 to todays 845.71, the rate of change so far is-6.4 percent.
Todays market results were the most stable since January 16, the last time all three indices moved in the same direction for two straight sessions. Before this close, these averages changed direction four times in the last five trading days.
This pattern of closes does not surface very often.Only 51 such series exist since 1950, with 15 of these occurring since 2000.Moreover, these often arise when the market is shifting direction, but not necessarily heading down.
A further sign of steadiness is the decline in the size of the daily changes.The NASDAQs last two closes were less than one percent, while the S&P500s were limited to.6 percent.Previously, they ranged from-5.78 percent to+4.60 percent.
In the 19 trading days since December 29, only two closes were smaller than one percent.The average daily change over this time was2.24 percent. (This is the result of adding all changes regardless of sign.)
The final price of the DJIA retreated from yesterday by-.54 percent- while, by the end of the mostly negative day, the NASDAQ managed a gain of.81 percent and the S&P500.54 percent.Such diverse results are not common, yet they have occurred on 4.5 percent of all trading days since 1950.
Nor is there a relationship between these closes and market performance.Divergent closes account for 4.6 percent of the total in years of climbing prices, and while the ratio falls to 4.1 percent in negative years, this difference lacks significance.
As for the next day, consider the record since 2008.There have been eight divergent closes since last March 25.The NASDAQ declined on each of the following days.While the index lost a mere-.26 percent once, there were five losers greater than one percent.
The DJIA and the S&P500, had one advance that was minimal,.02 percent and .16 percent, the other seven closes were negative.Moreover, these ranged all the way down to -4.71 percent, with four changes deeper than minus one percent.
The market reversed itself again, as prices fell after yesterdays strong performance.The drop was not as deep as Mondays decline as the NASDAQ lost-1.28 percent and the S&P500 was off by-1.52 percent.The DJIA, however, which experienced the mildest reaction on Monday, gave back the most some-2.75 percent.
The focus of yesterdays analysis was that large changes in opposite directions are characteristic at the end of a decline, and mostly occur close to the lower turning point.But volatility itself, and by itself, was not associated in the past with recovery.In fact, price volatility is one of the significant features that accompany declines in market value.
The figure below plots the daily price change percentage of the NASDAQ index, between January 2000 and today, and compares it to the closing price of the index.It shows that the size of the daily price change increases when the price declines.Moreover, it is clear that the price volatility increases far in advance of the lower turning point.
Accordingly, the reversal requires more than just an increase in fluctuations: in the past, these came mostly when daily price changes acted like a seesaw gone wild.
The indices soared more than 4 percent, almost regaining all of yesterdays losses.Market history does not have many whipsaws as large as yesterdays drop and todays jump.In fact, only six such twin days exist; and all happened before 1962.
The good news is that most of these came just before the reversal of a long down turn and the following recovery.Indeed, three occurred just months ago, starting in the middle of October and lasting to the third week of November.While prices did not start rising, they did stop their sharp decline.
In 1962, after the two day reversal on May 29, the market recovery started barely a month later, on June 26.There is just one occasion, in 1997; when the market was already rising, and the boomerang seems not to have any impact on the price trend.
While such a projection may not be realized soon, nevertheless, past patterns place an optimistic spin on this pattern.
In stark contrast to last Fridays analysis, todays comments focus on the significant losses that hit the indices today.There are just ten closes with deeper losses in our data stretching back to 1950.In fact, there is none as deep between 1950 and the end of 1987.
Of greater significance than the actual losses, is the fact that in the past, they all came except one when prices were experiencing substantial declines.Indeed, four of these occurred between October and December of last year.
Thus todays-5.78 percent attrition of the NASDAQ, the-5.28 erosion of the S&P500 and the DJIAs -4.01 percent loss, might be a signal of further declines in the future.The record shows only one occasion, in 1987, when a major upturn followed such deep reactions.
However, such a future need not indicate that tomorrow will see another sharp drop.In the past, there were only two days on which further deep declines followed; on the other nine occasions, prices increased instead, ranging from2.7 percent to 5.9 percent advances.
Until today, the market failed to achieve two positive sessions in a row. (Its correct, of course, to interject that on the first day of the year, the indices moved higher after two straight up closes at the end of last year.) While last year saw 22 separate strings of double positive days, for 8.7 percent of total closes, these accounted for only 7.2 percent between 2000 and 2007.
Yet, this comparison is misleading, because over a longer time span, the frequency of two positive days [double positives] in a row has increased. This is so, whether values and prices rose or fell during the year. The table below separates the total number of double positive closes by positive and negative years. These data show that the frequency of double positive closes is higher in years of rising prices than in periods when the December 31 price is smaller than the year before.
Whereas this is as expected, the fact that the percentage of double positives is almost identical, at near three percent, in rising years and in falling years is a not.
Moreover, in comparing the 1950-1999 results with those since 2000, the ratio of double positives is higher in the latter years than in earlier ones. In addition, note that this feature holds in bad years as well as in good ones.
