USMarketView

June 3, 2011                  Higher Unemployment and a New Outlook

Whether the report of higher unemployment influenced the market, or not, the DJIA and the S&P500 dropped for the third day in a row. The NASDAQ lost    -1.46 percent, but because it stayed positive yesterday, the analysis focuses on ‘three declines for the DJIA and the S&P500, but only one down day for the NASDAQ.’  

This pattern is so rare that it occurred only eight times since January 2000.  Today, as every other market day this week, the ending combination of ups and downs is extraordinarily uncommon. Yesterday’s pattern, for example, was just the 20^th of its kind in the more than 4,000 trading days in this century.

Readers of this blog realize that its recent analysis focuses on where, in terms of rising or falling prices, these patterns show up. Until today, their location was dominantly in times of rising prices. But the current distribution, for the first time, reveals a definite shift, with these happenings now coinciding with falling prices.

Not only do most of these patterns crop up when the trend of prices is down; but also almost each observation happens just before prices turn down. Previously, many, if not most, appeared when prices tended up.

Yet, given the current climate, with its unexpected jump in the unemployment rate while the creditworthiness of our Treasury makes headlines, large price changes and frequent reversals in their direction are to be expected.

DJIA             -.79 percent

NASDAQ    -1.46 percent

S&P500         -.97 percent

Stability followed yesterday’s deep losses; the NASDAQ moved up  .15 percent while the DJIA and the S&P500 fell a further  -.34 and -.12 percent. This NASDAQ gain reveals the littleness of these changes, since only 850 other positive days in the entire history of this index are smaller.

Today’s pattern, two straight losses for the DJIA and the S&P500, coupled with the NASDAQ gain after yesterday’s loss, is only the 20^th repeat in the last 12 years. Of these, the 2000/2003 decline had ten, while the following bull phase had eight. Accordingly, this pattern does not imply either a continuation or a reversal of the current trend of rising prices.

In the past, eleven of the following sessions moved higher, with the other eight days in the red. However there is a substantially difference between the bear phase –with an even number of plusses and minuses- and the following bull market. It had only two advances but suffered six losses on the next day.

DJIA             -.34 percent

NASDAQ       .15 percent

S&P500         -.12 percent

June 1, 2011                    Worst Drop Since August!

August 2010 marks the last time the market lost more than two-and-a-quarter percent – that was 200 trading days ago. Today’s setback pushed prices down to mid-April levels. In brief, today’s action wiped out all the appreciation of the last 28 days.

Yet this recoil need not have followed the four straight advances since last week. In the past, since 2000, prices rose for a fifth day as many times as they fell. Thus the record contradicts the belief that the market ‘was due’ for a decline.

Nevertheless, given the long advance over the last five or six months, the question of ‘whither the market’ becomes a front burner issue. The debt ceiling scuffle in Washington obviously will influence in some way on asset values.  However, limiting our focus to the history of today’s pattern, note that a major price drop with today’s pattern occurred in October 2002. And shortly thereafter, the security prices, which had been in a free fall, stabilized and went on to achieve a new high in 2007.

Finally, most of these reversals after four straight advances were posted while the price trend was positive, and not while the market was in a free fall. With this background, given this experience, further declines and an end to the recent advances need not automatically follow today’s substantial decline.

DJIA             -2.22 percent

NASDAQ     -2.33 percent

S&P500       -2.28 percent