USMarketView

With prices returning to their recent configuration of small daily changes, is this a pause to consolidate, to take a breather before moving higher – or a moment of uncertainty in anticipation of a correction, cutting valuations significantly?

With our analysis of the 70 year data base so far not revealing how to interpret these off-then-on again price moves, today’s post only mentions, but will not provide, a review of past patterns.

But note that continuation of the current series of mergers leads to reducing competition, and thus to higher profits and increasing rates of return in that industry. The recent focus on the large compensation packages in the financial sector only confirms that concentration generates the high profits that enable these payments. Obviously, more individual firms in an industry yields not only more efficiency for the economy, but also smaller profit pools to finance executive compensation.

DJIA                   - .09 percent

NASDAQ             .05 percent

S&P500                 .07  percent

Even though the DJIA moved higher, posting its 8^th successive increase, its move was limited to just  .06 percent. Meanwhile the NASDAQ and the S&P500 retreated, posting their first decline after four straight gains. It is too early to tell if the rally will continue, slow or go into reverse.  And at this date, it’s useful to assess the run up that started at the end of last August, 114 trading days ago.

To this end, we use the rate of change in prices in 114-day intervals over the past. The diagram below indicates the NASDAQ 114 day rate of change with an X, while a solid line presents the daily closing price since August 26, 2010. 

It is encouraging to realize that so far, to this point, the current NASDAQ 114 day rate of change is only the fourth largest since 2000. If it were the largest ever, it would require a very optimistic outlook to expect prices to continue expanding at current rates.

Furthermore, not only does the present  114 day rate of change stands far below its end of 2010 peak, it has been ascending from the low reached just a few weeks ago.  In sum, then, a cautious outlook of further advances seems realistic: the information currently available fails to contradict it.

DJIA                    .06 percent

NASDAQ          -. 29 percent

S&P500               -.28  percent

Closing at 2797.05, the NASDAQ today stands just .24 percent below its most recent 2803.91 high,  reached on October 2007. Remarkably it managed to hurdle, in only 8 months, from 75 percent to 99.76 of  its 2007 high.

What’s more, the other two indices failed to keep up with the NASDAQ since last July. Back then, the recovery rate of the DJIA stood at 70 percent of the October 2007 high; and the S&P500 had reached the 65 percent mark.  But since then, DJIA deficit gap rose to 86 percent. So the NASDAQ improvement rate, or the DJIA lag, has widened to 13 percentage points,.

Similarly, today’s  S&P500 ratio is 85 percent of its 2007 top; that’s almost 15 percentage points behind the NASDAQ, while that difference was no more than 10 percentage points before the NASDAQ’s resurgence moved into high gear.

Yet these disparities represent opportunities for buying into the DJIA and the S&P500.  For unless the American business structure has undergone significant changes, these three indices should maintain their historical value differences.

At the top of 2007, the market valued the S&P500 at near 56 percent of the NASDAQ price; today that ratio has slipped 9 percentage points, standing at just   47 percent of the NASDAQ price.

Similarly, the DJIA priced was 5.05 times larger than the NASDAQ; today the DJIA valued is substantially smaller, with the ratio down to 4.37.

We have not overlooked the continuation of the DJIA streak which now stands at seven successive gains. But the prospects of price ratios changing as the S&P500 and the DJIA catch up with the NASDAQ recovery rate, look to be a better opportunity.

DJIA                    .59 percent

NASDAQ            .47  percent

 S&P500               .42  percent

Prices continue to rise, although not in large steps. Yet as discussed earlier, bull markets feed on  series of relatively minor advances; the resulting steepness becomes apparent only in hindsight.

The DJIA has now moved ahead six times in the past days; the other two indices have closed higher the last three sessions.

While welcome, these moves are unusual. Today’s pattern, for example is the first ever. Although six continuous gains and a combination of positive closes by the NASDAQ and the S&P500 do exist. Yet these fail to provide guidance for the future, since their consecutive gains are either larger or smaller than three gains in a row.

Accordingly, since this history is not identical to the current pattern, meaningful projections are not possible.

DJIA                    .57  percent

NASDAQ            .53  percent

S&P500                .62  percent

NOTE — First Blog Since January 28—Illness Gone—Analysis Will Catch Up

The DJIA, continuing its string of gains, closed higher in each of the five sessions this week. The total advance, from Friday-to-Friday, is 2.27 percent. Yet both the NASDAQ and the S&P500 did better –increasing 2.67 percent and 3.05 percent for the week- even though their prices retreated on Thursday.

Nonetheless, we place the major focus of this week’s action on the DJIA and its five straight gains. The diagram shows that most of these runs took place in conjunction with rising prices. While a total of 44 such runs happened since the beginning of 2000, only five took place in periods of market decline.

Thus this week’s DJIA action, adding another incident to that string, supports expectations of prices continuing to rise in the near future.

DJIA                    .25  percent

NASDAQ            .29  percent

S&P500                .56  percent

Will return with analyses for missed fays on February 3.