USMarketView

Not unexpected after the NASDAQ and S&P500 streak of eight straight positive sessions, prices moved down today.  Yet the set back was quite modest: just 55 other days experienced smaller percentage losses over the more than 4,400 trading days since 1996.

Looking at tomorrow, in the past, prices moved higher just about as often as they fell on the day after a single losing session.  Yet the percentage size of positive changes exceeded the negative ones.   

Our diagram shows this next day changes distribution for the S&P500 over the last three price expansions.  While the median change came to .15 percent, the range of next day changes stretched all the way from -6.9 percent to 7.1 percent.

DJIA                       -.21 percent

NASDAQ                -.25 percent

S&P500                 -.37 percent

It’s eight advances in a row for the NASDAQ and the S&P500, while the lagging DJIA closed higher for the third straight day. This run of positives is a first – in the near 16,000 trading days since 1950.  Moreover, there are just two occasions when the DJIA also had an eight day positive streak.

More to the point, focus on the size of today’s gains.  There have been just 20 closes over the last five price cycles with advances smaller than .13 percent for the DJIA, .21 percent for the NASDAQ and .14 percent for the S&P500.

The good news is that all happened during bull markets!

Further, the diagram shows these days distributed all over the three expansions.  Because they do not cluster near bull market tops, we have a heartening indicator: in the past, falling prices have not followed such small positive days.

DJIA                   .13 percent

NASDAQ              .21 percent

S&P500               .14 percent

Momentum and steep gains continue as this expansion sets new record highs.  Today’s seventh positive close is the second such run in 2013.  There had been a similar seven day streak earlier this year, as well as one lasting eight days.

This is a hotter expansion than the two previous bull markets – neither had sequential positive runs this long.  Our diagram chronicles these cycles from day 961 to their end.  (With day 961 occurring on the first trading of this year, the top line summarizes the S&P500 daily closes for all of 2013.)

Clearly this best ever situation requires thoughtfulness. Enjoyment of the steep rise should not preclude concern for near term prospects, especially since both previous bull markets –and especially the 2000 top- ended after steep surges.

DJIA                   .02 percent

NASDAQ              .61 percent

S&P500               .31 percent

‘Bernanke’s Market’ is one way to describe the recent price gyrations.  Perhaps that’s not fair or accurate.  Yet his initial statement of possible Fed restraining its bond purchases, set near record prices back.  Then after yesterday’s opposite opinion, the market shot higher.

It’s easy to understand Bernanke’s original caution: prices were soaring to all-time highs.  Though the declines following that Fed view seemed quite moderate, they seemingly led to Bernanke’s reversal.

Today’s increases are the sixth advance in as many days for the NASDAQ and the S&P500.  It is the third repeat of a six-day positive streak over the last three bull markets.  More significant, as the diagram shows, all three occurred in this expansion, since 2009.

The DJIA and the S&P500 have never closed this high; they are at 109 and 107 percent above their all-time peaks of October 2007.  The NASDAQ, now at 128 percent of that high, has recovered 72 percent of its all-time, go-go years apex.  

Wary investors view this as a delicate time: do these facts signal opportunity or peril?  This bull market is now at day 1,091; the 2000 expansion topped out after 1,059 days, while it took 1,154 trading days for prices to hit their October 2007 maximum.

Nor does the record of six advances in a row provide definitive guidance – for declines followed all three occasions.  Then, before long, the market took off to higher levels first, for the next twelve months, and then after a pause, to today’s record highs.

DJIA                   1.11 percent

NASDAQ            1.63 percent

S&P500             1.36 percent

Today, after the market closed, the Fed Chairman announced that its massive bond purchases would continue – lasting at least until the jobless rate improves.  That flat contradiction of the declaration, of just a few days ago, that its bong buying would level off, has significant impacts on stock prices.

We have analyzed the close correlation between the S&P500 and the interest rate of the 10-year Treasury Bond several times in the past few weeks.  Today’s update confirms this relationship.

(Rather than plotting the converse link between higher interest rates and lower S&P500 prices, we use the inverse of the interest rate -that is, the value or market price of the bond- because that moves in the same direction as stock prices.)

Our diagram shows the how tightly the S&P500 has been paralleling the Ten year bond prices since the middle of June.  According to this map, we can expect a sharp S&P500 decline in a few days.

That is, until the Fed reversed its announced policy today.  That new Fed program surely means a deferral, and a shift in the parameters, between lower stock prices and the interest rates of ten days ago.

DJIA                  -.06 percent

NASDAQ           .47 percent

S&P500             .02  percent

Four straight advances for the DJIA, the NASDAQ and the S&P500 are rare; there are only 36 such closes in the 4,400 trading days since 1996.  With all but three happening during bull markets, the reasonable expectation is for the continuation of the current rally.  We caution, however, the downside risk of higher interest rates, even though the market is downgrading the scare from the recent Fed’s new policy announcement.

Consider today’s diagram; it locates these four in-a-row advances, showing that 14 took place in the current recovery.  The last such string happened just weeks ago, on April 11.

The NASDAQ continues to outperform the recovery of the DJIA and the S&P500.  Today the NASDAQ closed at 276 percent of its March 2009 low, while the S&P500 stands at 244 percent and the DJIA lags at 234 percent of their bear market bottoms.

Note, however, that these disparate recapture rates have existed all during the last four years.  Moreover, the NASDAQ advantage has accelerated during the year.  In January, when it stood at 260 percent, the S&P500 had regained 235 percent; that was an 11 percent advantage.  Today, that ratio has increased to a 13 percent lead for the NASDAQ.

DJIA                  .50 percent

NASDAQ           .56 percent

S&P500             .72  percent

Bull markets and three up days in a row go hand-in-hand.  They account for near three percent of all days when the price trend is up – but only one percent during bear markets. 

Yet the distribution of these runs over the last four price cycles, shown in today’s diagram, could signal a warning.  Note their frequency in 2007, just before that market hit its top; there were eight repeats before prices dropped in October.  There were eleven such days the year before, in 2006.

Similarly, the previous expansion, which ended in 2000, had ten of these three-day advances in the two years before prices turned down.

Yet if these are a bear market warning, they come with a substantial lead-time, resulting in lower prices only months after their occurrences.

As for tomorrow, the S&P500 moved higher on the following day every time on each of the four previous three-day advances this year.  The DJIA and the NASDAQ, however, had an even number of increases and decreases so far this year.

DJIA                  .59 percent

NASDAQ           .16 percent

S&P500             .53  percent

With the market advancing on three of the last four days while the yield on the Ten Year Treasury also rising, it seem the inverse relationship between these two prices no longer holds.  Yet such a conclusion would neglect and discount the time lags occurring and existing between the related elements making up the economic and market profile.

Our recent analysis finds a ten-day delay between increases in interest rates and decreases in the closing price of the S&P500 Index.  We first presented this evidence in our June 25 post – with subsequent market action verifying that   relationship.

We update that projection today: it shows that the recent stock market increases continue to follow the ten days ago capital values of the Ten Year Treasury Bonds.

Accordingly, the latest stock advances fail to contradict this association; moreover, expect reversals in the near future, given the current increases in interest rates.

Remember, that the price of a bond with a constant income payout is the inverse of its interest rate.  Accordingly, the recent decrease in the bond’s value reflects the rise in the interest rate of the Ten Year Treasury Bond.

DJIA                 .98 percent

NASDAQ           1.04 percent

S&P500             1.02  percent

While prices declined, continuing the recent scattering of losses after gains, the more pertinent fact is their very small size.  Losses this small happened just eight times in the near 16,000 trading days since 1950. 

The crucial factor is this week’s July 4 holiday and its focus on vacation time.  Gains usually predominate on July 3, in bull markets as well as when prices are heading down.

Yet for all other July days, price increases are only slightly ahead of the number of declines.

DJIA                -.28 percent

NASDAQ           -.03 percent

S&P500            -.05  percent

Today’s gain following Friday’s decline is the 19^th direction change since the market’s high on May 21.  That amounts to nearly every other day over the last 28 trading days.

It is also the 16^th pair, so far this year, of an up day following a down day; there were just seven such twosomes in 2012, and ten the year before.

As a result, prices have stagnated, even declined a bit, since May 21, resulting in a profile quite similar to those following the last two bull market highs, in 2000 and 2007.

Our diagram plots these prices for the 20 days before, and the 50 days after, these market tops.  It also adds the current profile, using the last, May 21 S&P500 high as a provisional peak.

This comparison reveals a stunning similarity of these three different periods that could indicate the topping out of this market.  It certainly does not show an energetic  difference between today  and the previous two tepid contours.

DJIA                  .44 percent

NASDAQ           .92 percent

S&P500            .54  percent