USMarketView

The NASDAQ continues to soar as it added more than one percent for the third day in a row.  Today’s diagram reveals just how much the NASDAQ has grown relative to the overall market appreciation as measured by the S&P500.  It is well beyond twice the value of the S&P500 – though it remains far below the 3.6 ratio of the market collapse in 2000.

Yet given many other facets of recent days, a cautious attitude may be the preferred mode as this bull market goes higher and higher.  Today’s close comes some 1,206 trading days since the last market bottom in 2009.  That is far greater than the last expansion, which lasted 1,153 days before prices collapsed.

Then there is the rising interest rate on the Ten Year Treasuries.  It has added 8.5 percent since the end of November, causing its yield to rise from 2.7 percent to today’s 2.9 percent. At the same time, the S&P500 added 1.4 percent.  While this pattern may be a short term market dislocation, it nevertheless bears scrutiny because in the long run, interest rates and asset values move in opposite directions.

Nevertheless, the market continues to register new highs, as it did once more today.

DJIA             .45 percent

NASDAQ     1.08 percent

S&P500        .53  percent

Though the Dow’s recent up day record is better than the NASDAQ and the S&P500, its advance is substantially less than those two averages.  Further, the pattern of three consecutive gains for the DJIA combined with just one up day for the NASDAQ and the S&P500 is quite rare.  Only 11 occurred over the last five price cycles, since early 1996.  While four of these came during the 2000/2003 decline, and today’s is the first for this bull market, they averaged  .28 percent of the time in the two previous expansions.

Our diagram plots these closes; it fails to reveal any consistency with respect to turning points.  Yet the outlook for Monday is favorable; in the past prices moved higher on nine days, and declined only once.

DJIA             .26 percent

NASDAQ     1.15 percent

S&P500        .48 percent

Today’s decline following yesterday’s surge is quite small compared to the S&P500′s mean change when prices, on the next day, move in the opposite direction of the previous close.  These daily changes averaged near one percent in this bull market. That is far greater than today’s S&P500 decline of -.06 percent.

The diagram shows that bull market price variations, when the S&P500 changes direction,  are far smaller than those occurring when prices are trending down.

DJIA             .07 percent

NASDAQ      -.29 percent

S&P500       -.06 percent

The Fed’s decision to unveil its buying policy – to cut its bond purchases every month until it falls to zero by the end of next year- sent prices to new highs.  The surge surely is contrary to fundamentals –because the Fed’s stepping back   means higher interest rates, and those in turn will lead to reduce the price of all assets.

Nevertheless, this policy shift played well with investors for two reasons.  First, it eliminated uncertainty.  The question of when and how much the Fed will cut back on its purchases had dominated financial commentaries for too long.  Now with that ambiguity removed, the uncertainty resolved, buy, sell and hold decisions will depend only on personal and business fundamentals.

The second, even more telling result is its dampening of inflationary expectations.  Whether correct or not, there are many who believe the Fed’s buying activity results in higher commodity prices.  Now with the Fed’s turn around, the resulting boost in confidence supports expectations of higher security prices.

Yet today’s surge signals caution, for gains this large accompany market declines more often than occur in bull markets.  The diagram shows these large gain days clustering at market bottoms.  Indeed, they account for 6.7 percent and 10.7 percent of all closes during the last two bear markets.  In contrast, this proportion falls to 3.9 percent in the current expansion.  Further, today’s combination is only the third this year, though there were 20 in 2009.  That number has declined in each of the following years.  There were 12 in 2010, 7 in 2011, and just 2 last year.  All told, these early happenings account for nearly a third of the 38 large gain days in the current bull markets.

DJIA             1.84 percent

NASDAQ     1.15 percent

S&P500       1.66 percent

Three declines in a row are not that uncommon, occurring about two percent of the time.  Their frequency is somewhat larger during bear markets –with a range from 2.02 percent to 2.75 percent- while they go from 1.49 percent to 1.82 percent in bull markets.

This combination was seen last in mid-August; prices continued lower for another day then, before the NASDAQ and the S&P500 turned positive.  The DJIA decline, however, persisted; it failed to recover until the losses ran for six days in a row.

Yet there is an optimistic aspect in today’s configuration: their declines are far smaller than they have been on average.  The S&P500’s daily loss, for examples, has a mean of -1.23 percent with this pattern – about three times deeper than today’s -.38 percent.

Looking at tomorrow, prices in the past on the day following this pattern moved higher more often than they declined.

DJIA               -.66 percent

NASDAQ       -.14 percent

S&P500         -.38 percent

Prices fell again, posting deeper losses than yesterday.  The NASDAQ was off  -1.40 percent – suffering its worst loss since early November.  Further, this day ranks as the ninth most serious decline in 2013.  Similarly, the S&P500 decline ranks as the 15^th deepest this year. 

Today’s pattern of two losses following two successive gains occurred 39 times over the last five price cycles. While our diagram shows that they cluster in falling markets, nevertheless these days also frequent bull markets.

It could be significant that several days happened near cycle turning points. In 2003  there were two , 12 and 2 two days before that cycle hit bottom.  In 2007, one took place 13 days after that expansion hit its top.  Finally, one materialized just 10 days after the 2009 bottom.

Prices fell on the following day more often than rising – in both expansion and declines.  The record shows 20 losses offset by only 12 gains in good times, while there were 7 declines compared to just 5 increases during the two bear markets. 

DJIA               -.81 percent

NASDAQ     -1.40 percent

S&P500       - 1.13 percent

Prices declined following gains on the previous two days.  While changes came to less than a third of one percent, more critical is the sequence of gains and losses over the last eight trading days.  Focusing on the DJIA and the S&P500 –because of their parallel daily ups and downs- consider their recent direction changes.  They declined today, following two consecutive up days, that came after five straight declines.

Only nine other closes have this pattern since the beginning of 1996; the diagram reveals that six occurred during the last two bear markets; only two such days are in the current, since March 2009, upturn.  This history reveals this combination of daily changes is associated principally with declining prices.  This inference results from the fact that none appeared during the 2003/2007 bull market.

Looking at the following day, while the bear markets had four gains and two losses, this ratio falls to one advance and two declines for the two bull markets.

DJIA            -.33 percent

NASDAQ      -.26 percent

S&P500       -.32 percent

Prices moved higher for the second day in a row, a pattern seen almost as often during expansion as in contractions.  There is a significant difference though: on the following day, prices continued higher for a third day more frequently during bull markets.

Today’s gains, though, are quite small, with the S&P500 adding just .18 percent.  There are just 403 days with lesser gains, but 2000 have increased more over the last five price cycles.

December trading days, though, are marked by changes smaller than during the other eleven months of the year.  Our diagram reveals that the average positive change in December is only .12 percent. It also shows the change for each trading day of this month since the beginning of the 1996 price expansion.

Note that price changes are far smaller during bull markets; they are also less variable when prices are heading higher, with the bear market December variance more than double the bull market’s.

DJIA            .03 percent

NASDAQ    .15 percent

S&P500      .18 percent

Sharp increases of The DJIA and the S&P500 followed five consecutive declines.  The DJIA exceeded today’s 1.26 percent advance on only seven days this year.  The S&P500 has 13 days with closes higher than 1.12 percent in 2013.

Yet this performance has negative dimensions.  The diagram locating the S&P500’s 13 strong closes this year, reveals that six of these days preceded significant market declines.

Another adverse factor comes from reviewing the incidents of these large S&P500 gains over recent bull and bear markets: they occurred more frequently when prices were tending down.  In the 2007/2009 downturn, for example, one of every five days saw the S&P500 closing with gains larger than today’s 1.12 percent.  In contrast, that rate in the earlier 2003/2007 expansion was only half that, averaging less than once every 13 days.

DJIA          1.26 percent

NASDAQ     .73 percent

S&P500    1.12 percent

It’s a long way from McDonalds’ kitchen to Wall Street, yet once Congress enacts a higher minimum wage, stock prices are bound to suffer.          The process would start in the fast-food industry; it is the major business sector affected by, and paying its employees, the minimum wage.  While this higher labor cost will be absorbed at first, it will be passed on in higher prices eventually.

Consider the entire industry right now is in‘equilibrium.’  While every individual outlet would like to post higher prices, the fear is that rival franchisees might not go along, that they will keep prices unchanged.  That possible reaction motivates each eatery from trying to increase prices.

Yet once every vendor faces the identical cost increase that results from the higher minimum wage, each franchise can pass on that expense – and perhaps a little more – confident that all other rival establishments will follow.

Naturally, once started, it will continue; every vendor knowing that customers will consider higher prices that result from the higher minimum wage to be a reasonable escalation.

Thus the country has a new business environment – one in which every business can raise prices having found that consumers willingly go along.  And that’s when the minimum wage increase affects the stock market.

Price increases now rolling through the economy will compel the Federal Reserve to switch its policy of open market buying to open market selling.  Interest rates will shoot up and asset prices will decline.

Of course, that possible scenario does not mean the nation is satisfied with the current ‘inequality of income distribution.’  It does mean however that we must find a better way than raising the minimum wage to effect a more equitable society. 

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The DJIA and the S&P500 closed lower for the fifth straight session. Only 18 other days have this profile; further never before has the market experienced such a combination: a single decline for the NASDAQ joining the five losses of the other two indices.

DJIA         -.16 percent

NASDAQ     .02 percent

S&P500    -.13 percent