USMarketView

With the Washington budget drama/comedy/tragedy on the front burner, consider the 1996 situation, when the clock ran out on the federal government’s cash flow.  The stock market continued its bull market climb, with perhaps a minor pause around September 30.  It was business as usual for the country’s financial sector; it had no problem overcoming the frictions resulting from the spending drop.

While many individuals suffered hardships, suffered lay-offs, or faced a shortened workweek, most everyone escaped the consequences of no money to pay the bills.

The government’s actual halt did not come until November 14; it lasted 34 days, ending finally on January 6.

The diagram shows the S&P500 continuing its move to higher prices early on during that crisis.  Though prices slumped for a while, they soon regained these losses.  Later on though, between the end of January to mid-March 1997, the market did lose ground – yet that happened far after the shutdown, when government spending had once again resumed.

September 30, 2013  2:23 Eastern

Today’s losses, offsetting some of yesterday’s gains, seem an extension of the five-day decline by the DJIA and the S&P500.  Though the NASDAQ closed just short of its September 18 market high, the S&P500 has now declined to its lowest price in the seven trading days since that top.

The profile of the current market reveals many similarities to the waning days of the last two bull markets.  Consider our diagram.  It shows the last 50 trading days before prices turned down in 2000 and 2007.  For ease of comparison, these data points are not dollar numbers; instead, to provide a common basis, they are stated as the proportions of their respective highs.

For the basis of the current market profile, we use the most recent S&P500 high -of Wednesday a week ago- putting today’s close seven days past the previous bull market tops.

Though simplistic, and short of in depth analysis, these mirror images of market tops catch our attention.  Indeed, with the current expansion now in its 1,146^th day, while these earlier bull markets ended after 1,059 and 1,154 trading days, the outlook for still higher prices is far from certain.  

DJIA             -.46 percent

NASDAQ       -.15 percent

S&P500        -.44 percent

The good news is that the market finally closed out of the red, but this first up day in a week yielded only modest gains.  The DJIA’s  .36 percent gain comes considerably below its post 1996 median advance of .56 percent.  Similarly, the S&P500’s median of .60 percent is a good deal better than today’s  .35 percent.  Even the NASDAQ’s higher .70 percent failed to equal its  .75  percent daily median gain

Today’s combined performance of these three averages stands in 957^th        place from their best day since 1996.  Only 230 days had smaller gains.

Thus it is quite proper now to review the seven-day advance earlier this month, to consider whether those gains borrowed from the future; whether they have some meaningful responsibility for the last five losing days.

Today’s diagram compares this positive run -in orange- with this year’s three earlier seven-day advances.  It shows prices 12 days after the September sequence, now, at nearly the same level as in March and July, though it is lower than the January profile.

Thus it would not be meaningful to belief these recent losses the direct result –or pay back- of that earlier advance.

DJIA             .36 percent

NASDAQ       .70 percent

S&P500       .35 percent

Prices continued their decline with the DJIA and the S&P500 losing ground for the fifth day in a row; the NASDAQ posted its fourth successive drop.

Such long strings of negative are rare; they add up to less than one percent of all trading days.  Our diagram plots all of these -there are 18- since the start of the 1996 expansion.  It reveals only five days on which the negative count deepened to six.

Though three of these further losses happened in the current bull market, prices continued to move higher. 

However, as we have noted before, reliable projections based on so few data points are impossible.  That statistical limitation, though, is vexing when developments, as in these recent days, demand a peek into the future. 

Yet history provides two cautions:

As of today, the S&P500 stands at 250 percent of its 2009 low, whereas the last two bull markets topped after recovering 194 percent and 255 percent of their bottoms.

Further, consider this expansion’s length.  At 1,145 trading days since its 2009 low, it exceeds or borders on  the age of the  last two bull markets; they ended after 1,059 and 1,154 days.

DJIA             -.40 percent

NASDAQ       -.19 percent

S&P500       -.27 percent

Prices fell again, for the fourth day in a row – right on the heels of four successive gains.  Yet such contrary strings are far from unusual, occurring about five percent of the time, whether prices are trending up or drifting down.

Today’s diagram shows how frequently these strings occur.  They come almost back to back, happening almost once, on average, every three weeks.

Yet, despite these most recent ups and downs, prices have climbed more than three percent in the 16 trading days since the beginning of the month.  In fact, the September trading profile is one of successive changes in the same direction.  So far, we have seen one string of seven advances in a row, followed by a chain of four gains and now by four successive losses.

DJIA             -.43 percent

NASDAQ       -.08 percent

S&P500        -.26 percent

Lower prices opened the week: the DJIA and the S&P500 fell for the third consecutive session while the NASDAQ closed lower for the second day in a row.  Yet the September market shows just four losing days for the DJIA and the S&P500, with three hitting in the last three days.

Our diagram shows today’s closing pattern occurring three earlier times in 2013, in May, June and August.  All told, in this expansion, since March 2009,  two happened last year while 2009 had another two.  While rare –with just 20 since 1996- 17 took place during the last three bull markets. 

Though the record shows this combination associated with rising prices, we see a caution signal given the fact that three occurrences were near market tops.  The last one was 94 trading days before prices turned down in 2007;  while there were two others 112 and 94 days ahead of the 2000 bear market.

Yet with just these few data points, this falls far short of a confident projection.  Nevertheless, since a quite recent close showed a similar association with the end of  bull markets, this tendency deserves attention.

DJIA            -.32 percent

NASDAQ      -.25 percent

S&P500       -.47 percent

We’ve seen today’s pattern twice before this year: on August 6 and June 11.  Both happened after a run of positive closes.  In June, it came after three successive gains, while the August repeat followed five positive up days.  Similarly, the present repeat caps four up days in a row.

We map these as well as the other, some fifty, occasions when the DJIA and the S&P500 turned down two days in a row and the NASDAQ fell just one day.  Note that the majority of these closes happened during bull markets, but as our previous posts of June and August discussed, quite a few cluster near turning points.

Consider the March 2000 market top, when today’s pattern appeared 69 and 55 days before prices turned down.

We see this combination first 49 days prior to the October 2007 turning point, then three days before and a few days after prices started their long, nearly two year long, decline.

Accordingly, the frequency count of this combination happening most often during price expansion yields a favorable outlook.  This is offset though by the many incidents near bull market peaks.

DJIA            -1.10 percent

NASDAQ       -.38 percent

S&P500        -.72 percent

Prices remained almost unchanged after yesterday’s surge that followed the Fed’s surprising announcement that they would continue open market purchases in the same monthly amount.

Both the DJIA and the S&P500 slipped a bit whereas the NASDAQ added a fraction, moving ahead for the third consecutive session.  Today’s diagram shows the low frequency of this pattern and its recent relative decline. According to this history, the following day has about an even chance for gains and losses.

While many people know that interest rates and bond prices move in opposite directions, it is useful to describe the action underlying this relationship.   

When the U.S. Treasury borrows money, it issues an IOU in the form of a bond that matures, say, in ten years; it of course pays interest for this loan.  That rate of interest, as on most loans, remains constant over the life of the bond.  Using symbols, this transaction can be stated as

                    IOU Amount X Rate of interest = Annual income.

When the Fed wants to increase the money supply, it instructs brokers to buy bonds from the stock of existing U.S Treasury IOU’s.  This is exactly the same process that we all use to buy securities, and just like those purchases result in higher prices, the Fed’s buying spree increases the going, market price of the existing stock of U. S. Treasury bonds.

Though this results in raising the market price of the IOU, the Treasury continues to pay the same annual income as before, since that payment was contracted when the bond was issued.

Now, returning to the statement above,

                  IOU Amount X Rate of interest = Annual income,

With the bond’s market price now higher, while the annual income remains unchanged, the effective interest rate has to decline.  Further, since all financial securities are related, this increases interest rates across the board.

It’s just like floating on the ocean; any wave that comes causes all things to rise in its wake.

DJIA                    -.26 percent

NASDAQ               .15 percent

S&P500              -.18 percent

After the Fed’s midday announcement that, despite earlier hints to the contrary, its monthly $85 million purchases will not be pared, prices soared.  Consequently, the recent speculative surge paid-off.  

The Fed made this good news for higher stock prices even better by stipulating the economic targets to be achieved before tapering down.  These goals of unemployment at 6.5 percent and inflation no higher than 2.5 percent are far from around the corner.  Currently unemployment hangs above 7 percent and inflation remains below 2 percent.

Considering this market’s profile in view of the recent strong advances, note that at today’s close the S&P500 reached 255 percent of its last low in March 2009, some 1,140 trading days ago.   

This is not an extravagant position in view of the last two bull markets. The 2003/2007 expansion stopped at day 1,154  -after recovering 196 percent of its bottom’s low.  The earlier 1996/2003 cycle’s 1,059 days was shorter yet had regained 254 percent before it ended.

Today’s diagram displaying this remarkable consistency, allows comfort in terms of the strong gains of the current market.  But it raises a flag of caution on its longevity, being just 14 days short of the longest, most recent bull market.

DJIA                    .95 percent

NASDAQ             1.01 percent

S&P500              1.22 percent                  

All market averages moved higher today paralleling the anticipation, and speculation, that the Fed’s report, due tomorrow, will promise that its bond buying will continue so that interest rates will remain low for now.  And now that Lawrence Summers will not be the Fed’s next Chairman, the feeling is that rates will stay low, not just now, has spread to the longer term.

Today’s diagram continues the comparison of the S&P500 and the inverse of the interest rate on the Ten Year Treasury debt.  Since interest rates and capital values move in opposite directions, the rate’s inverse shows the worth, or cost, of assets.

Whereas the market realized this relationship all summer long –as the S&P500 and value moved in parallel- the S&P500 started to shoot up while the value index declined.  Surely such contradiction of financial fundamentals signals conjecture and guesswork; that is speculation replacing essentials.

Our analysis of yesterday’s closing patterns revealed their greater frequency during bear markets than when prices are trending higher.  Today’s results -the third successive gain for the DJIA and the S&P500, while the NASDAQ moved up after its earlier decline-  are consistent with that conclusion.  Yet, though the closes of the last two days occur less than one out of a hundred days, this development deserves attention.

DJIA                    .77 percent

NASDAQ           -.12 percent

S&P500              .57 percent