USMarketView

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

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