USMarketView

July 29, 2011                    A Pattern Never Seen Before

There’s nothing odd about all three indices falling; there have been about 3,200 of these in the 15,493 sessions since 1950.  But today’s pattern- the S&P500’s fifth straight loss, the sixth successive fall of the DJIA, and the   NASDAQ down after yesterday’s increase-  is a first.

 Is it just a coincidence that an oddity strikes the financial markets simultaneously with the first ever lengthy budget standstill between the president and Congress?

Perhaps yes, but financial markets do reflect the realities of the day. Given Washington’s ongoing stalemate, the safe course of action is to stand aside. Not to project market changes until the political course comes to resolution.

DJIA            -.79   percent

NASDAQ    -.36   percent

S&P500       -.65   percent

July 28, 2011                    Uncertainty

The financial markets’ reaction to the continuing budget dispute seems low-key, so far. At least in the sense that asset pricing remains quite stable. Whereas the Congress’ intent is to generate significant shifts in how much the government pays for retirement and health care.

The only significant market difference between now and before, is the pattern of daily closes. Today’s configuration of closes – the DJIA down for the fifth consecutive session, the S&P500 posting its fourth decline in a row, while the NASDAQ moved up .05 percent after three straight losses – is only the third such alignment in our 60 plus years data base. Moreover, the earlier two happened years ago, in 1997 and 1998.

Such lopsided history prevents reliable projections of future prices. Indeed, it blocks the ability to rely on, or to use, past patterns to evaluate current decisions.

DJIA            -.51   percent

NASDAQ     .05   percent

S&P500        .32   percent

July 27, 2011                    Falloff Continues

DJIA and NASDAQ reported losses for the fourth session in a row, while the S&P500 experienced its third successive decline. Unlike some recent negative days with nominal markdowns, todays were the most substantial since Tuesday of last week.

As noted yesterday, that recent patterns have few antecedents, today’s results confirm that description. Only two other days, in the entire database, reveal four consecutive losses for the DJIA and the NASDAQ, while the S&P500 had three declines in a row.

Therefore, projections for tomorrow become impractical. Yet note that our method correctly forecast today’s decline.

Today’s diagram compares the current cycle with the previous, 2000/2007 decline and recovery. It took 1,835 trading for that earlier sequence to return to its 2000 high. The current market now about halfway to that stretch, provides some assurance that a catastrophic correction is not in works. That is, unless an explanation reveals the reasons why the market’s profile is bound to change.

DJIA                     -1.59   percent

NASDAQ             -2.65   percent

S&P500                -2.03   percent

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July 21/22, 2011                      Alternate Changes Top-out at Six

   Posted on July 24

Thursday ended the up-then-down series for the S&P500, but the DJIA and the NASDAQ stretched their streak to seven by losing  -.34 percent and  -.85 percent on Friday.  Our attempt to connect these consecutive opposite changes to market trends, though, ends without discovering a consistent and stable relationship.

Yet the record of these days provides an insight: the chance that a decline follows an increase hovers near 50 percent – and that rate remains the same for an increase after a decline.  For example, in this series, that ratio was 56 percent after two seesaw days. On Thursday, after six up and down days, the probability of another change in direction came to 54 percent.

However, this constancy does not mean, necessarily that declines follow every gain, or that gains follow every gain. But it does reveal that a change in the direction of prices is as likely after, say five up and downs as after two.

July 20, 2011                      Sorry – Next Post Friday, July 22

July 19, 2011                      Five Opposite Changes in a Row!

But it’s not a record. There have been 22 other runs before, with the last 19 in this century. The graph identifies these closes, but they do not flow in sequences. That means it is not possible to establish whether these changes signal rising or falling future prices.

Calculating just the average change of the S&P500, we see that the two bear segments average much larger changes on these closes than both the bull sections. That points to declining prices, since today’s advances range from 1.63 percent to 2.22 percent for the NASDAQ.

However, this result is contradicted when checking the proportion of closes with today’s pattern: these proportions favor a call for rising prices in the future.

Accordingly, as you will realize when considering this graphic, it is not possible to use it to derive an indication of a future price trend. Turning to Wednesday’s market, note that prices retreated on a substantial majority -12 of the last 19- next days. Further, their incidence was almost the same over each of these four price segments.

DJIA               1.63  percent

NASDAQ       2.22  percent

S&P500          1.63  percent

July 18, 2011                      Still on the Roller-coaster

Another day closes with prices moving in the opposite direction as the day before. Now four days long, today is the market’s 39^th repeat since 1999 of this sequence. Unlike previous daily up-and-down series, it is not possible to allocate this one either to rising or falling price trends.

Yet, considering only the 453 price declines in this century, the record reveals a slightly larger possibility of higher prices tomorrow. Roughly 55 percent of the following days closed with an advance.

Given these circumstances as well as insufficient other information needed to project the future, this post will not attempt to estimate what the market will do tomorrow.

DJIA               -.76  percent

NASDAQ       -.89  percent

S&P500          -.81  percent

July 15, 2011                                 Up Follows Yesterday’s Down

‘Another day, another change’ says it all when describing this week’s trading.  Yet, since the negative changes outweighed the daily gains, prices fell this week. The Friday-to-Friday change comes to more than minus two percent for the NASDAQ and the S&P500, and  -1.39 percent for the DJIA.

Today’s pattern, 1/-1/+1/-3, occurred only 11 times before, with 7 since 2000. Yet the distribution of these seven, over bull and bear times, provides a positive price outlook for the future. While none happened during the 2000/2003 drop, the following recovery saw four such closes. The 2007 decline had one, while today’s is the third happening in the current, 2009, upswing.

The record for the following day, this coming Monday, shows an almost equal number of gains and losses. We note, once more, that projections based on only seven observations out of a universe of more than 3,000 trading days have little, if any, reliability.

DJIA               .34  percent

NASDAQ       .98  percent

S&P500          .56  percent

July 14, 2011                                Up then Down

Five reversals over the nine trading days since the beginning of the month generates a ‘where are we’ attitude. Furthermore, the market continues to generate unusual or rare combination of patterns. Today’s pattern, as on many other days, has occurred on just four previous occasions in the past 12 years! Adding these uncertainties to the core risks fundamental to investing, leave little incentive to make new commitments.

Yet the comparison of the price movements of the current cycle with the previous, 2000-2007 downturn and recovery, allows a useful perspective.  At the diagram’s start, both cycles’ highest price is positioned at day One. Note that it took 1,835 trading days before the prior sequence returned to its previous high. In stark contrast, the current cycle stands at only 1,185 days after its October 2007 top.

That recognition, that now we are merely two-thirds of the span of the previous run, brings a level of comfort. Unless there is a reasonable justification to explain why the current run should end sooner, the previous and the current cycles will have parallel features.

DJIA               -.44  percent

NASDAQ      -1.22 percent

S&P500          -.67  percent