USMarketView

Not much change from yesterday but the DJIA and the S&P500 moved higher whereas the NASDAQ declined. Yet the gains came in too small to change the current fundamentals or the outlook. The gain for the DJIA of plus .05 percent and of .04 percent for the S&P500, are among the 60^th lowest positive closes in the past 20 years. On the other hand, the -.28 percent drop of the NASDAQ is among the more common occurrences.

Thus it is not unexpected that the count of these closes is 48 times since 1950 and just ten times since January 2000. As for tomorrow, in the past the NASDAQ experienced five losses and five gains; the S&P500 had six losses and four gains, whereas the DJIA had only three further advance and seven declines.

DJIA                       .05 percent

NASDAQ             – .28 percent

S&P500                  .04 percent

Prices fell today – marking the fourth day in a row that the market reversed direction. Unusual yes, but the identical pattern crossed the tape on 65 different occasions, with the last 45 happening since January 2000.

In the past, on the following day, the NASDAQ and the S&P500 increased as often as they decreased. The DJIA, however, scored 26 gains and declined just 19 times.

DJIA                           – 1.39 percent

NASDAQ                   – 1.56 percent

S&P500                      - 1.47 percent

While today’s upturn combined with its magnitude -each of the three indices gained 1.65 percent- seems welcome, analysis of this +1/-1/+1 pattern in the past reveals the pessimistic side of this combination. Consider the distribution of the last 77 occurrences since January 2000 illustrated in today’s diagram.

Even though their frequency relative to the number of days in the up and down history of the S&P500 seems near constant, their average size seems inversely related to the trend of prices.

The average advance of 1.36 percent on the last day of this +1/-1/+1 combination in the 2000/2003 decline exceeds the .62 percent average in the following upturn. Similarly, in the comparison of the 2007/2009 bear market up to the present day, the mean 1.64 percent change in the falling market is larger than the current period’s 1.23 percent.

Such an inverse relationship surely is counter intuitive, yet if it does exist, then today’s large positive changes are not welcome: they could be precursors of a further correction in prices, not a sign of better times ahead.

DJIA             1.65 percent

NASDAQ     1.65 percent

S&P500       1.66 percent

With all three indices declining, yesterday’s good news became just a memory. August 2010 so far is a downer. The S&P500, for one, dropped from 1127.79 on August 2 to 1051.87 today. These last 17 trading days eroded its value 6.7 percent.

Looking at the record to evaluate this change, the evidence indicates the magnitude of this collapse. Of the more than 2,600 sessions since January 2000, there exist only 197 sequences in which prices eroded more steeply.

The diagram of the S&P500′s daily closes since 1996 uses a circle to indicate these occurrences. Surely they are not in evidence when prices are rising. Instead these 17-day-declines cluster together in bear markets.

Nevertheless, this identification fails as a reliable tool for predicting the direction of prices in the future. That’s because we find these days not only when the market is starting to fall, and when prices are dropping, but also immediately before prices turn higher.

Their projection value lies in recognizing their presence as revealing periods of unusual change; they identify churning prices, mostly during reversals but also when the trend of prices is about to become positive.

DJIA         -.74 percent      NASDAQ -1.09 percent

S&P500   -.77 percent

It’s been a whole week since the DJIA, the NASDAQ and the S&P500, together, posted a gain. Yet the recovery was modest: the DJIA managed only a .20 percent uptick, the S&P moved up by .33 percent, and the NASDAQ added .84 percent.

Putting these results in perspective, note that the DJIA posted only 262 DJIA gains smaller than today’s since January 2000; that more than 1,100 other DJIA advances in the last nine years, outrank this latest change.

Nevertheless, we welcome the upturn.

The record shows just ten other sessions with today’s profile. Whereas 451 days ended with these three indices advancing for the first time after falling, only ten occurred having today’s profile. In the past, the following day showed six advances and four declines.

DJIA             .20 percent

NASDAQ      .84 percent

S&P500         .33 percent

Today’s diagram compares the current price path with that of 2007, when the S&P500 peaked at 1465.  The market hit bottom 355 trading days later, on March 9, 2009, although the graph ends on the 106^th day.

With the blue line representing the proportion of the 2007 top for each day’s close, and the red line showing the S&P500’s ratios of the April 27, 2010 price, the similarity in these two time paths becomes noticeable. On this interpretation prices seem headed for a further, substantial decline. If they fall to the 2007 extent of 81 percent off the top, the near term low target of this cycle falls to about 985 for the S&P500.

And at today’s last price for the S&P500 of 1051, that’s not very far to go. Yet in last cycle, the drop continued substantially beyond that point. At its low, the S&P traded at 676.53; on March 9, 2009: the price had fallen to 46 percent of its previous high. The comparable drop for the present cycle would be about 560. That disastrous consequence would push prices back to 1995, and lose 15 years of growth.

These projections are only that. No consensus exists on declaring the April 23 high, the current market top. Furthermore, a closer examination of these time paths yields several points of contention; that the two lines do not always move in parallel.

Nevertheless, this analysis reveals the extent of the actual, last cycle and how much further prices could drop – should they copycat the latest history.

   DJIA    -1.32  percent    NASDAQ   -1.66  percent    S&P500  -1.45  percent

August 23, 2010  No Clear Direction in Daily Price Changes  Each of these three indices continuing to post individual patterns, rather than moving uniformly, adds difficulty to the task of projecting future prices. Today, for example, the NASDAQ posted a loss while the DJIA and the S&P500 fell for the third day in a row.

Only seven such days occurred since January 2000. However, the pattern of all three indices on the day before, last Friday stood identical at minus two. Had the NASDAQ declined instead, it would have resulted in a pattern of three declines for these indices. This would yield a record of 51 such days since 2000.

It’s futile of course to beg off the forecasting task just because the market fails to present a consistent configuration. Indeed, the irregular market mandates even better and more reliable projection techniques. Consequently, the current MARKETVIEW method’s reliance on historical parallels of patterns needs adjustments to remain useful.

Our program therefore needs some reworking.

In so much as past statistics, nevertheless, do present analytical possibilities; we continue to publish them with these reservations.

The last seven closes with today’s pattern, in any case, provide no guidance for tomorrow: the following day had three declines and four increases.  DJIA  - .36  percent     NASDAQ - .92  percent     S&P500    - .40  percent

Declines offset by gains left the indices almost unchanged from last Friday’s close. Yet the last NASDAQ trade of the week stayed higher –by 6 points out of its total value of 2180. The other two indices fell, but their changes were negligible. Thus, with today’s NASDAQ gain of  .04 percent, the minus .56 percent change for the DJIA, and the -.37percent loss of the S&P500, the comparison pattern becomes  +1 for the NASDAQ and  -2 for the latter indices.Contrary to what is called common sense, only 86 other sessions experienced this combination, with 19 of these happening since January 2000. On the following day, advances outnumbered declines 11 to 8 for the DJIA and the S&P500; the NASDAQ record is 12 up and 7 down. 

DJIA                  - .56  percentNASDAQ             .04  percentS&P500             - .37  percent 

The market failed to sustain yesterday’s pace, relapsing to gains of  .09 percent for the DJIA, .15 percent for the S&P500 and .28 percent for the NASDAQ. So far this year, of the 154 trading days, the DJIA has recorded only 16 other closes this small. Similarly, the S&P500 count of positive changes but less than today’s comes to 13 while the NASDAQ scored 21.   

Today’s pattern is two successive gains for the DJIA whereas the S&P500 and the NASDAQ posted their third daily advance in a row. There have been 23 days with this pattern in the past, with 6 occurring since January 2000. The results for the following day show twice as many declines as positive closes. DJIA    .09 percent                      NASDAQ       .28 percent                               S&P500                .15 percent

The NASDAQ soared  1.26 percent, scoring its largest advance since August 2’s  1.80 percent. The other two indices posted similar increases, with the S&P500 up 1.22 percent and the DJIA rising  1.01 percent. Today is the second successive plus close for the NASDAQ and the S&P500; it is the first positive day for the DJIA after five successive declines.The resulting pattern of  +2 for the NASDAQ and the S&P500, with  +1 for the DJIA, happened 41 times, with 13 closes since January 2000. On the following day, the recent group had almost an equal number of positive and negative changes.

Whereas today’s significant advances ratified the projection   based on yesterday’s historic results that increases were three times as frequent as decreases.

Addressing the ability of today’s pattern to yield significant and correct projections of the future, the diagram illustrates a test in which the forecast period was set arbitrarily to 50 days ahead.

The circles represent the S&P500 values of the last 13 closes with today’s frequency pattern. The triangles directly below those circles indicate the actual, future prices 50 trading days thereafter.

Eight of these 50 day projections showed falling prices with increase occurring just five times. Allocating these results to periods of falling and rising prices, shows that during the 2000/2003 bear market, ‘future’ prices fell three times and increased just once. In the following 2003/2007 expansion, the two increases offset two declines. Finally, the last bear market of 2007/2009 registered three increases and two declines.

Accordingly this tabulation shows that forecasts based on this haphazard 50-days-ahead scheme fail to provide useful insights. That’s because only the first, declining phase yields a plurality of losses; the following rise as well as the next decline, however, does not. Whereas the 2003/2007 stage had an equal frequency of gains and losses, the next, negative phase had the contrary outcome of just two declines but three advances.

Yet, lest we overlook the random, arbitrary method of ‘projection’ – other estimates based on the fundamentals of market delays deserve attention.  DJIA          1.01 percent                                                    NASDAQ  1.26 peercent                                                S&P500     1.22 percent