USMarketView

With the DJIA and S&P500 closing higher for the second day but the NASDAQ falling, today’s pattern yields a close more typical of bear than advancing markets.  Though it occurs almost twice as often in declining markets, nevertheless this pattern happens only occasionally.

Our diagram shows just 41 since the beginning of 1996, accounting for about one percent of the 4,400 trading days since 1996.

Nevertheless, their frequencies of 1.48 and 1.70 percent in the two bear markets overwhelm their incidents of .85, .78, and .53 percent in the past three bull markets.

As for tomorrow, in the past prices increased 21 days and fell 20 times on the following day.  The frequency of bear market losses outnumbers the declines 10 to 7, whereas bull markets have the opposite tendency, with 13 gains and 11 declines.  Yet not much confidence surrounds these numbers, considering their narrow differences as well as the uncommonness of this pattern.

DJIA                    .77 percent

NASDAQ            -.12 percent

S&P500              .57 percent

Today’s close -leaving the S&P500 just below its level of two days ago, when the latest seven-day positive streak ended- raises the question: will future gains be lower.  How much, if at all, have these gains borrowed from the future?

Consider the price profile following three earlier runs this year.  Our diagram plots price changes for the thirty days following seven-day positive closes.  While each episode shows a somewhat different time profile, prices changes remain within a narrow range.  They never cross the plus or minus one percent mark. 

The first of these events (blue line), occurred in January.  While it started with a strong surge, that moderated and at the end of the thirty day term the S&P500 had advanced one percent.

The next event (green line), came just 31 days later.  It hovered near the zero change line before rallying, and then falling to close near its initial price.

The third, most recent happening (black line) began on July 12 with a similar sharp increase before turning down, losing near one percent 30 days after the initial seven positive day start.

This record provides an insight, suggesting that prices after this fourth seven-day upturn of 2013 will remain in the plus/minus one percent range for the near future.

Watch for further analysis of this unique chain of successive increases of the S&P500.  That, for example, such streaks are a bull market phenomenon with seven repeats in the 2003/2007 expansion and four during the 1996/2000 upturn, while only one such incident happened during the last two bear markets.

DJIA                    .49 percent

NASDAQ              .17 percent

S&P500               .27 percent

Finally, after seven consecutive gains, the S&P500 closed lower than the day before.  Previously, since 1996, there had been 15 such runs – three of these happened earlier this year.  The 2013 incidents were spaced 31, 86, and 42 days apart; the last seven day S&P500 winning streak started on July 12.

In the past, the time between seven consecutive up days ranged from 22 days to more than 1,500 trading sessions.  Yet prices failed to retain these gains only about half the time.  Prices thirty days later ranged from a low of 89 percent to a high of 109 percent of the seventh day closing price.  The only incident during bear markets, in August 2000, found the S&P500 unchanged after thirty days.

DJIA                  -.17 percent

NASDAQ            -.24 percent

S&P500              -.34  percent

The strong market continues with the S&P500 scoring the seventh successive advance. This many positive days in a row happened just 15 previous times over the last three price cycles.  Just as yesterday’s outlook -written after six consecutive gains- suggested the high odds of continuing this chain for another positive day, the chances for an eight day streak are even smaller: only six moved higher, sending the positive days count up to eight.

The diagram locates these 15 incidents; it reveals that prices on the following day moved higher as often as they declined.

Note that each of the three previous seven up days in a row of the current expansion happened this year and that twice prices continued higher on the following day – scoring eight consecutive gains for the S&P500.   

DJIA                    .89 percent

NASDAQ            -.11 percent

S&P500              .31  percent

The market posted its sixth straight gains for the DJIA, the NASDAQ, and the S&P500, closing with a pattern last seen three years ago.  That happened in July 2010, following two earlier six in a row days in June 2010 and December 2009. Today’s diagram shows these days occurring at a top, with prices then resuming their trek to this summer’s record high.

Of course, and not unexpectedly, these runs ended at six straight advances.  However, the record shows eleven previous six in a row days between 1950 and 1996.  Their following days extended the winning streak nine times for the NASDAQ, six for the S&P500, and on four next days for the DJIA.

There is not much to be said about the future given the infrequency of today’s pattern.  Surely, a negative reaction will follow before the market behavior returns to a more familiar pattern.

DJIA                    .85 percent

NASDAQ            .62 percent

S&P500             .73  percent

That prices added some one percent today is good news, yet the better news is that our three indices –the DJIA, the NASDAQ, and the S&P500– now have put together five increases in the last five trading days.  Such runs occurred just 35 times in the 16,000 trading days since 1950, with 13 happening since 1996. 

But there is even better news: these last 13 days all transpired during bull markets.  Alternatively, saying this another way, note that no bear market in recent history ever saw five positive days in a row.

Further, adding to this favorable outlook, today’s diagram shows the trend of rising prices was far from over when these five successive up days took place.  True, one did happen near the 2007 market top,  but that was in November 2006, some 223 trading days before the bull market’s end in October 2007 

It should not be surprising that the immediate outlook for tomorrow is not rosy.  As the diagram shows, prices fell nine times on the following day. 

Finally, this post does not dwell on the magnitude of today’s advance since there have been 461 closes this large since 1996.  Moreover, since a greater proportion of these good days happened during bear markets, this consideration puts a damper on the above view.

An explanatory note: While the NASDAQ and the S&P500 have a string of five positive closes, the DJIA, on Friday, declined.  But since that loss amounted to just .1 percent, our analysis shoulders the burden of this slight distortion.

DJIA                    .94 percent

NASDAQ          1.26 percent

S&P500            1.00  percent

Though the NASDAQ and the S&P500 advanced for the fourth session in a row, these gains of .03 and .01 percent are too small to allow reliable identification of future market direction.  Yet since such minor changes dominate recent closes, it becomes necessary to focus on their history.

Today’s analysis investigates small daily changes in the range of minus to plus .1 percent, with the goal of finding their placement in the daily up and down movements of the DJIA, the NASDAQ, and the S&P500.

The results, summarized in our graph, indicate that these small up, as well as, down changes occur with substantially greater frequency during bull markets than when the price trend is down.

These small change days amount to about six percent of the bear market closes; but in good times, when prices are heading up, they are near double that, ranging between 8 and 12 percent of all trading days.

This bull market advantage holds also for the following day, with the frequency of next day gains outnumbering those in bear markets.

These findings are counterintuitive; the comfort coming from large daily gains is immediate, yet it is these seemingly small fractional days that characterize bull markets.

DJIA                 -.10 percent

NASDAQ            .03 percent

S&P500             .01  percent

Lots of smiles today as the DJIA, the NASDAQ, and the S&P500 moved higher, posting their third advance in a row.  This, the sixth time for this pattern in 2013, means that so far they account for 3.5 percent of the 170 trading days this year.  In contrast, there were just 96 repeats over the 4,440 sessions since 1996, amounting to only 2.16 percent.

Our diagram shows that three straight up days are a bull market thing – with a frequency of more than two percent in the past three price expansions; they appear just 1.1 percent of the time when prices are heading down.

As for tomorrow, the positive bull market bias of three up days in a row often exists also for the following day.

There were none in the 355 sessions of the 2007/2009 decline, and only .40 percent between the 1996 and 2003 drop; but they accounted for .85 percent of the days during the previous two expansions – there have been more than 1.3 percent so far since the 2009 bottom.

So far, in 2013, this positive streak continued on four of the previous five strings of three-up-days in a row.  Indeed prices failed to continue to four straight up days only once for the NASDAQ and the S&P500, and twice for the DJIA.

Please refer to our commentaries of July 8, June 27, April 27, and March 5 for additional facts and analysis of three up days in a row.

DJIA                  .04 percent

NASDAQ           .27 percent

S&P500            .12  percent

The market, higher for the second consecutive session, scored the highest daily percentage gain since August 22.  But oddly, interest rates also increased to their highest level in the last eight days.  ‘Oddly’ because the math shows, and everybody knows, that interest rates and stock prices move in opposite directions.

Further, all this happened on the very day on which the Fed reported that GDP and the economy are growing at a “modest to moderate pace.”  Given the recent and continuing hints by the Fed that it would let interest rates float to higher levels once the economy’s pace picks up, the commonsensical expectation would for a retreat in the stock prices.

Today’s diagram plots the paths of the S&P500 and value of the Ten Year U. S. Treasury since July.  (This   ‘value’ is the inverse of the Ten Year Treasury interest rate; an increase in the interest rate is equivalent to a decrease in its value.) It shows very clearly their preponderant parallel movements.

Indeed, today’s stock gains and higher interest rates are a continuation of their divergence in recent days.  Nevertheless, expect an end to this conflicting combination; eventually, these two series will return to their historical and arithmetic relationship: higher interest rates translate into lower equity prices.

DJIA             .65 percent

NASDAQ    1.01 percent 

S&P500       .81 percent

Today’s up tick followed Friday’s decline; that combination came on the heels of two successive gains, these, in turn, came after two straight increases.  We find it easier to follow this chain using the shorthand expression of  +1/-1/+2/-2; the sign indicates the direction -that is up or down- and the numeral shows the number of days that prices moved that way.

Typically, USMARKETVIEW projects market conditions based on these chains of past price changes.  Accordingly, since Friday’s and today’s frequency combination of +1/-1, occurred in greater proportions during the last three bull markets, we consider this result to be consistent with further price gains.

Yet the data reveal an opposite conclusion for the entire six day sequence of +1/-1/+2/-2: this sequence occurred twice as often during bear markets than when prices were trending higher.

This odd mixture suggests ambiguity rather than certainty for the near term.

Today’s diagram reveals a fuller application of this sequence analysis.  It shows that recent negative closes cluster in ranges longer than two successive days.  It indicates also the decline and absence of the long positive day sequences, or runs, of earlier this year that accompanied the rally that sent the market to record highs.

DJIA             .16 percent

NASDAQ      .63 percent 

S&P500       .42 percent