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Three losses in a row occur slightly more often in bear markets than when prices are moving up.  However, given the small difference in their frequency, as shown on our graph, today’s pattern is far from a robust signal that lower prices are ahead, that this bull market’s end is near.

This pattern accounted for 2.3 percent of all closes during the 2000/2003 decline; so far, it happened on 1.4 percent of the sessions, in our current bull market that began in 2009. Thus, because this pattern is more likely during price contractions, this configuration would yield to projecting a coming bear market.  However, our judgment is that these frequencies are too close together; that the differences are too small to make a call.

Nevertheless, given the continuing focus on interest rates, the ongoing declarations by the Fed’s officials, and the fact that the interest rate on the ten year Treasury debt keeps rising, the certainty of higher prices surely is in question.

Further, the age of this expansion, now 1,116 days since the last bottom, presents a risky outlook, given that the 1996/2000 bull market lasted just 1,059 trading days, and that even the longer 2003/2007 price gains ended after 1,153 days.  

DJIA              -.20 percent

NASDAQ       -.09 percent 

S&P500        -.33 percent

There are just ten other days when the DJIA, the NASDAQ and the S&P500 dropped this far – and seven of those occurred since 2009.  Our diagram reveals these to be quite recent – yet shows this bull market posting major gains without significant interruption.

Further, a similar adverse day happened just four months ago, on April 17 – yet prices weathered this interruption, climbing further, and achieved new record highs.

One other moderating circumstance, as today’s diagram shows, is that eight of these drops came concurrent with bull markets; only two are bear related.

We note, though, the present concern about if, and if when, the Fed will reverse its buying policy; and how rising interest rates will impact the stock market.  As noted yesterday, the  ten year Treasury has closed with higher interest rates for several days now … and today moved up again, for the eight session in a row.

DJIA            -1.47 percent

NASDAQ    -1.72 percent 

S&P500      -1.43 percent

Prices remain locked in, as the averages move up, then down without revealing a trend.  Yet today’s pattern is a seldom seen combination.  The DJIA, the NASDAQ, and the S&P500 declined, after yesterday’s count of NASDAQ up two days in a row while the DJIA and the S&P500 posted gains after losses the day before.

This combination occurred just 35 times since the beginning of 1950, with 22 happening since 1996.  Our diagram reveals no discernible alignment indicating next day prices over the last three price expansions and two declines.

 Today, as on recent days, another Fed official released his opinion of what will be done about the open market purchases program that continues to support asset values.  Here the president of the St. Louis bank expressed concern that too high a rate of price inflation will result.  Actually, that is nothing new, since the St. Louis bank’s bias concern inflation is well known and long standing.

We note that this ongoing policy debate in the open is quite rare, for the Fed’s history reveals a predilection for holding its cards close to the vest.  Moreover, despite these statements, the interest rate on the ten year Treasury bond has moved higher on each of the last seven trading days.

DJIA            - .74 percent

NASDAQ     -.41 percent 

S&P500       -.52 percent

The up-then-down days of August went up today – the fourth direction change in nine trading days.  So far this month, the market has moved higher four times and declined on the other four days.

Further, today’s pattern -two consecutive gains for the NASDAQ and one advance for both the DJIA and the S&P500- as the diagram illustrates, occurs without any discernible constancy over bear and bull markets.

Meanwhile the Fed’s officials continue their contradictory comments.  Today’s, from the Atlanta Fed’s president, projects further easing and postponing any decline in bond purchases.  Yet, interest rates on the ten year Treasury bonds are moving higher, though in small increments.

DJIA             .20 percent

NASDAQ      .39 percent 

S&P500      .28 percent

Prices have stayed in the same range of plus-or-minus ten points for more than a week.  During this same period, news has focused on the Fed and the statements of some of its regional bank presidents.  Obviously, there is a tug-of-war going on; not just about what to do about the open market purchases that have lowered interest rates but also who will head the Fed   next.

At the same time we have seen prices pause, stepping back from the strong bull market of recent weeks.  Many different reasons can explain this change of pace, but one not to be neglected is the impact of interest rates on asset values.  As discussed before, this linkage means that rising interest rates translate to falling asset prices – or that the inverse of interest rates and stock prices move in the same direction.

Today’s diagram reveals the recent parallel paths of the S&P500 and the value of the Ten Year Treasury Bond of ten days ago.  While these changes are not exactly step-to-step, the trend of falling bond values matches the fall-off in S&P500 increases.

Investors now must factor in the possible changes in Fed policy as well as the other, usual dynamic business and political influences that determine asset values.

DJIA            -.04 percent

NASDAQ     .27 percent

S&P500      -.12 percent

Sharply rising prices and today’s pattern go hand in hand.  There were just three of these since 1998.  Our  diagrams show the S&P500 just previous to, and several months after (1) a loss, that (2) followed a gain, that (3) came immediately after two losing days of the DJIA and the S&P500. (The NASDAQ had three down days.)

We note that each happened during bull markets; that today’s repeat is the patterns second occurrence this year.

While presenting these facts in today’s report, we add the caution that this finding is an empirical or technical finding.  We have made no attempt to find a theoretical reason that explains why prices accelerated after this pattern of closes.

DJIA            -.47 percent

NASDAQ    -.25 percent

S&P500      -.36 percent

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We focus on today’s small .39 percent gain of the S&P500.  Advances this small are rare.  While they account for just 20 percent of all closes since the 1996 market low, their frequency during bull markets is near twice their rate during market declines.

Today’s diagram summarizes the details of their timing over the last five price cycles.  Additionally it shows the almost identical advantage for gains on the following day; they also favor the three bull markets of recent times.

Using these characteristics to project the market’s future, yields the conclusion that we have been and are in a period of rising prices.  Further, these statistics are consistent with our earlier reports that show recent market closes mirroring features common to earlier expansions.

As for tomorrow, the diagram shows that in the past gains occurred slightly more often than declines during bull markets.  Losses during declines however, outnumbered increases almost three to one.

DJIA            .18 percent

NASDAQ     .41 percent

S&P500       .39 percent

The down count now is three declines in a row for the DJIA and the S&P500 as the NASDAQ took a decline for the second day in a row.  The last time we saw this pattern was in early June; then all three averages shot up more than one percent on the following day.

But in an earlier experience, in May of last year, three more down days followed today’s pattern.  Then prices shot up more than a full percent – after six successive losses.

Today’s diagram shows this pattern’s 19 previous recurrences over the three price cycles since 1996.  With just three happening during downturns, and the other sixteen distributed over bull markets, today’s pattern –as in many recent days- sees higher prices ahead.

Yet the clear uncertainty hanging over this hot market is the Federal Reserve’s intention on continuing its record open market purchases.  Just yesterday the presidents of two regional Federal Reserve Banks reported that the Fed could cut back its stimulus as early as next month.  This obvious negative impact will result in downward pressure on bond prices and of course all other asset values, including the stock market.

DJIA             -.31 percent

NASDAQ      -.32 percent

S&P500       -.38 percent

The NASDAQ finally declined after a string of five consecutive advances while the DJIA and the S&P500 fell for the second day.  Today’s close, the 51^st repeat of this pattern since 1996, occurs somewhat more often when prices are trending up.  Yet, as our diagram shows, though the difference is quite modest, it is clear that today’s combination of frequencies is definitely a bull market condition.

We need to pay attention, nevertheless to the number of happenings just before the 2007 peak.  It is similar, but not as frequent, as their appearance around the 2000 top.  Certainly this possibility deserves attention given the long stretch of rising prices, and the fact that recent closing patterns have also clustered near those peaks.

As for tomorrow, prices rose somewhat more often than they declined in the past on the day following this pattern.  We saw this in June, the most previous recurrence, when these averages lost near one percent on the next day.

Furthermore, when losses did occur, they exceeded, on average, the size of    gains.

DJIA             -.60 percent

NASDAQ     -.74 percent

S&P500       -.57 percent