USMarketView

After closing at never-before highs, the market remains near recent tops, not posting sharp declines nor moving vigorously to new records.  Today’s frequency count of  one down day, after one up day, that followed three declines has happened 11 other times in this expansion.

This frequency is very similar to the 2003/2007 cycle of 18 repeats and near identical to the 14 occasions in the 1996/2000 bull market.  Our diagram shows when these patterns happened; however, does not associate these days with significant changes in the future direction of prices.

With today’s S&P500 close at 1626.72 almost identical to its 1625.96 level on May 7, some 27 trading days ago, it remains difficult to ascertain the direction of prices.  A further unknown, of course, is the Fed and its impact on interest rates.

In sum, today’s results fail to bring more clarity to where this market will go.

DJIA             -.70 percent

NASDAQ       -.63 percent

S&P500         -.59 percent

The good news is that today’s gains, well in excess of one percent, occur far more often during bull markets than when prices are heading down.  Our diagrams show these proportions separately, in good times and in bad times.

These graphs indicate that today’s increases, of 1.21 percent for the DJIA, 1.32 percent for the NASDAQ and  1.48 percent for the S&P500,  occur near twice as often in bull markets.

So today’s data yield an outlook that presents a more favorable outlook for higher prices than in previous days.

DJIA             1.21 percent

NASDAQ      1.32 percent

S&P500        1.48 percent

With this bull market losing momentum, we focus on two concerns.  First, consider its age – 1,072 trading days of expansion since March 2009.  Though that is less than the 1,154 days of the 2003/2007 bull market, we have passed the 1,059 length of the 1996/2000 growth period.

Secondly, the actual rise in interest rates and the fear that they will continue higher as the Fed steps back from its aggressive policy to enhance the economy.

Interest rates and value move simultaneously, but in opposite directions.  Higher interest rates translate automatically into lower capital value.  This bipolar relationship holds true for all assets, not just for the price of the keynote 10 Year Treasury debt.

Today’s diagram reveals that hinged relationship between the S&P500 and the 10 Year note.  It plots the inverse of that interest rate against the S&P500 ten days later.  These parallel paths illustrate, and provide an explanation for, the impact of Fed policy on capital values.

While that relationship always exists, we found the ten-day lag between interest rates and prices simply by eyeballing and curve fitting.  Of course the delay between these two factors might be different.  Yet, given any lag between interest rate changes and stock prices, today’s rate –the red line- projects future stock prices.

Thus the red line –which shows the interest rate of ten days ago- extends beyond the blue line of current  S&P500 prices. Indeed,   this diagram forecasts further stock market declines in the future. 

DJIA             -.84 percent

NASDAQ     -1.06 percent

S&P500          -.84 percent

Though the DJIA and the S&P500 moved down again, and even while the NASDAQ declined after three straight advances, today’s pattern has occurred more often when prices are trending up than when they are heading down. 

We have seen fifty repeats of two losing days following two advances since 1996; thirty occurred during the 1996/2000 and the 2003/2007 bull markets, ten others happened since the last bottom in 2009.  Hence, we take this -40 of 50 happenings when prices are trending up- as a positive signal for higher prices in the future.

If this were not enough favorable news, the outlook even improves when we add the closing pattern of two earlier days.  Our diagram shows the past closes when ‘two declines follow on the heels of two straight advances.’

Eight of these nine days happened when the market was moving higher; there is just one during the two bear markets of this century.  Such data indicate good times ahead.

Today’s outlook seems quite the opposite of yesterday’s projection.  Then we showed the similarity between the current market and the tops of 2000 and 2007.  While it appears that these back-to-back conclusions differ, their opposite facets attest to the uncertainties the market faces today.

DJIA             -.76 percent

NASDAQ     -1.06 percent

S&P500       -1.02 percent

Prices remain below their May 21 high; now 14 trading days later, the S&P500 has lost 1.58 percent.  All this while short term interest rates are moving higher.  The ten-year Treasury, as traded in the CBOE market, closed today at 2.21 percent.  That is far below its low of 1.63 percent at the beginning of May.

Yet despite this 26 percent interest markup, fears continue that the Fed will continue to move interest rates higher.  That’s bad news for the stock market, since all capital values –not just US Treasury prices- fall when interest rates rise.

Our diagram shows today is in close parallel with the last two bull markets.  The most important feature of these time paths is that prices do not collapse after these highs, but rather decline moderately as they start on their way down.

Accordingly, the fact that a sharp correction has not hit this market is not assurance that the top remains in the future and that prices will continue higher.  

DJIA              -.06 percent

NASDAQ         .29 percent

S&P500          -.03 percent

The S&P500 posted the third largest daily gain of the year.  At plus 1.28 percent, only two other days, in January and April, topped today.  That’s the good news, but there’s a caution: prices fell on the following days.

Yet the good news is even better: today’s surge is near the top of all gains during bull markets.  Our diagram shows these and points out where the 1.28 percent fits in – less than ten percent of all increases exceeded today’s close.

Today’s up market, the second consecutive plus day, is just one of the 42 two day runs since 1996.  With some 33 of these during expansions, we see a confirmation that the current market is moving higher.

As for tomorrow, however, losses occurred as often as gains followed this two up days in a row pattern.   

DJIA                 1.38 percent

NASDAQ          1.32 percent

S&P500           1.28 percent

The S&P500 scored its largest gain since May 17, 13 trading days ago, as it posted the first gain in three days.  This performance beat the NASDAQ and the DJIA, which also moved higher after two losing days, but their gains restored them to levels of only seven and three days earlier.

The outlook for tomorrow is mixed.  First, because the unemployment rate comes out on the first Friday of the month.  Second, because the record shows the number of gains just about equal to the number of losses after these averages move higher after two losing days in a row.

DJIA               .53 percent

NASDAQ        .66 percent

S&P500          .85 percent

Losses twice as deep as yesterday pushed the market down for the second day in a row. The bad news is the growing concern of further losses resulting from the belief that the Fed will let interest rates rise.

Yet the characteristics of today’s changes correlate more with a bull market than with declining prices.

Our diagram illustrates that bear markets have a higher proportion of two losing days in a row than when prices are trending higher.

It shows also that the average S&P500 loss, when prices decline two straight days, is near twice as sharp in bear markets than bull markets.

These facts allow a more upbeat outlook, offsetting the pessimism in the face of possible rising interest rates.

DJIA               -1.43 percent

NASDAQ         -1.27 percent

S&P500           -1.38 percent

These rare corkscrews of prices moving in the opposite direction four days in a row occurred just 25 times since 1950.  Yet today’s close is the fifth in this expansion, with the last two happening in late May and early April – just weeks ago.  Despite this turbulence, prices have remained near their record setting highs.

We should not minimize this feature because it reflects the strength of the current market.  It contradicts the forewarnings of declines in the near future.

Major losses in the last two bull markets happened only after substantial drops in daily prices.  Today’s diagram shows the dots –which are the daily percentage changes of the S&P500- in narrow bands.  They disperse before every substantial setback.

These happened even in the current expansion, when prices declined before continuing to escalate.

So far price changes remain moderate which, according to past market behavior, should provide some encouragement while considering the future with  caution.

DJIA                 -.50 percent

NASDAQ          -.58 percent

S&P500            -.55 percent

Projections of significant price declines, based on the ‘Hindenburg Omen’ are making the rounds today.  Yet our diagram shows that the market did not fall after the last four of these technical signals.

True, there was a correction in 2005 following this omen but prices recovered then moved higher shortly thereafter.

As for the other three warnings, shown by the red vertical lines, there were strong gains – there were no losses.

The ‘Hindenburg Omen’ so named after the instant fiery explosion of that airship in the 1930’s bases its forecasts on new highs and new lows. It forecasts price declines when both occur together and when other technical factors align with this signal.

Its underlying logic claims that such opposite price changes are contradictory and therefore indicates a lack of direction that ultimately leads to a bear market.

This logic bears a similarity to our concern when prices swing up and down on successive days, as today’s fourth direction change in as many days.  Yet of the 11 such happenings in this, since March 2009, expansion only one significant decline followed.

DJIA                  .92 percent

NASDAQ         .27 percent

S&P500           .59 percent