USMarketView

The S&P500’s decline joined the second straight loss of both the DJIA and the NASDAQ index, resulting in a close experienced just 14 times since 1950. It is the 9^{th repeat} in this century. A brief look at this recent history allows an optimistic view for higher prices.

In the past, advances outnumbered declines 6:2 on the following day. Further, the diagram shows this pattern happening mostly during the 2003/2007 expansion. Note also that the only repeat in the 2007/2009 contraction hit just before the end of that trend, that soon thereafter, prices turned higher; and that its most recent appearance, in July 2010, marked the end of a short price correction.

DJIA                                                    -.46  percent

NASDAQ                                            -.70  percent

S&P500                                             -.40  percent

Today’s almost minute gains lie at the low end of previous closes with today’s pattern. The S&P500 average change is 1.23 percent for the 72 previous repeats in this century of one gain after two declines. It added just .17 percent today. Further, these closes have a huge range, extending from a low of .04 percent to top at 7.08 percent.  The NASDAQ dispersion is even larger, ranging from  .02 percent to 14.2 percent.

Yet a detailed analysis of this pattern’s history yields good news:  prices move higher in the past when daily closes are at the bottom of these ranges.

Consider these comparisons. The average S&P500 daily change during the 2000/2003 decline was 1.72 percent; it fell to .75 percent in the following 2003/2007 bull market. Similarly, it was 2.16 percent in the 2007/2009 drop but it came to just 1.30 percent since then.

Here are the ratios for the DJIA: the average daily close during the two declining markets were 1.27 and 1.21 percent. They fell to just .67 and 1.21 percent through the following 2003/2007 and 2009/2012 advances. These yield identical advance:decline averages of 52 percent in each phase.

One further set of comparisons attests to the higher future prices scenario: while 21 of today’s pattern occurred during these last two declines, the other 51 happened throughout the past two bull markets. Or percentage wise, 1.9% are bear market while 2.5 percent are bull market closes.

DJIA                                                    .03  percent

NASDAQ                                            .32  percent

S&P500                                              .17  percent

Prices toppled more than two percent the day after the president’s reelection. But that’s not unusual for Mr. Obama – in 2008, the day after his first win, the market lost 5.3 percent. That’s a huge amount by any standard. Indeed, only ten days in this century –over more than 3,100 trading days- suffered a sharper, deeper daily loss. In fact, eight of these ten happened in 2008, between September 29 and December 1.

Lest we think that financial markets suffering drastic changes is par for presidential elections, consider the record, since President Reagan’s reelection in 1984. The diagram shows just moderate changes for Election Day and the day after. And while the market reacted with declines for every president, none were the extend that greeted Mr. Obama.

(The NYSE was closed on presidential election days until 1984.)

DJIA                                                  -2.36 percent

NASDAQ                                           -2.48 percent

S&P500                                             -2.37 percent

Today’s diagram shows how closely recent prices trace the S&P500 closes of the first five months of this year. It reveals that though the rate of acceleration is slowing, it has not declined to the extent of the April to May retreat. Instead, the S&P500 remains in the 1400 to 1450 range.

Now with the presidential race behind us, and the ravages of Sandy on the mend, we see no reason for the market to continue marking time. Of course, as always, the end of year personal tax considerations may enhance any downward pressure on prices.

Today’s pattern of two gains after one loss has occurred 94 times in this century. Each of our three market averages has distinct characteristics for the following day. The DJIA moved higher 57 percent of the time, while the S&P500’s gain ratio came to 48 percent and the NASDAQ trailed with gains on only 43 percent of the following days.

DJIA                                                  1.02 percent

NASDAQ                                            .41 percent

S&P500                                             .79 percent

The see-saws of daily gains followed by daily losses continues, as the DJIA, the NASDAQ and the S&P500 reversed direction, moving higher after yesterday’s declines. Today’s such close is the 502nd since the beginning of this century almost 3,200 trading days ago.

While 12 percent of all closes during the 2000/2003 decline were ups-then-downs, these rose to nearly 18 percent in the 2007/2009 bear market. Similarly, 15 percent of the 2003/2007 expansion days belong to this class, but only 11 percent have done so since the last, 2009 bottom.

Our diagram shows the five previous 2012 occurrences. It reveals these initiate periods of higher prices in the short run always with only one exception. That was earlier this year, and as is seen, lasted for a bit but then ushered in the major price gains of the past four months.

Now these changes pose the significant dilemma: will prices continue higher, or will they repeat the stiff correction of earlier this year?

DJIA                                                   .73 percent

NASDAQ                                           .58 percent

S&P500                                             .67 percent

Prices lost almost all of the previous day’s advances, as the DJIA, the NASDAQ and the S&P500 posted their 485^th loss, since January 2000, after moving higher the day before.

Consider also that on November 1, 2012, each of these three averages closed with a gain larger than one percent; today, though, each index gave back just about all of those increases of the day before.

The outlook for the following day, based on the record, is split evenly between a further loss and a recovery.

However, there is good news: prices should progress to higher levels according to our scrutiny of recent daily price patterns. By including yesterday’s closes, we consider the following pattern: losses after a close of two successive gains by the S&P500 and a single advance by the DJIA and the NASDAQ. This array, occurring just three times in the past 13 years, happened only when prices were climbing, during the 2003/2007 expansion.

The logic of our projection results from looking at when given patterns occur. This is quite different than forecasting future prices on the basis of historical analysis of daily price changes – which is the basis of typical economic and financial forecasts. Here we make the symmetrical, but opposite, projection, saying if  in the past ‘it’  happened during bull markets, then this event today reveals that we are now in a period of rising prices.

Obviously, inferences of bear markets can be based on the same evidence. We caution, of course, that these are forecast, that they assume that the underlying conditions of our society remain constant.

DJIA                                                                             -1.05 percent

NASDAQ                                                                     -1.26 percent

S&P500                                                                      -  .94 percent

It was the first greater than one percent day since September 13, 33 trading days ago, as the NASDAQ added 1.44 percent, the S&P500 gained 1.09 percent while the DJIA increased 1.04 percent.

But before celebrating this feat, note that today’s triplet is only the 13^th so far in 2012. Last year had 28 such days, while 2010 saw 30. Indeed, the largest totals occurred in 2009 and 2008, with 49 and 51 DJIA, NASDAQ and S&P500 closes exceeding one percent.

On the other end, 2006 had the smallest total, of only 9, with 10 the year before, and 16 in 2004. That is quite odd, since prices scored their best gains in these three years.

We turn to today’s pattern, the second plus day for the S&P500 while the DJIA and the NASDAQ moved up after yesterday’s losses. There are only 9 days with this record in this century.

The following day, in the past, closed with a near equal distribution of gains and losses.

DJIA                                                1.04 percent

NASDAQ                                         1.44 percent

S&P500                                           1.09 percent

The closing pattern of the first session after the two day closure caused by the devastating Hurricane Sandy, continued the recent chain of unusual combinations. Today’s pattern of +1/-1-1 happened just once before in this century: on July 15, 2010. Indeed, there are only two other days, since 1950, on which the S&P500 moved higher after a decline while the DJIA and the NASDAQ fell.

Our diagram shows prices rebounding sharply, but first they had to weather  severe decline.

This propensity mirrors similar price changes in the 1972 and 1978 incidents.

These facts are information and history only; three repeats are not sufficient basise for a projection.

DJIA                                                -.08 percent

NASDAQ                                         -.36 percent

S&P500                                            .02 percent