USMarketView

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

Another day of minor losses ended a weak August – the market ended the month with prices lower than on July 31.

Today’s losses result in a pattern of a single decline after the advances of the previous two sessions.  This combination occurred just 31 other times over the last five price cycles.

Our diagram shows these days happening somewhat more often during expansions than when prices are trending down.  Further, the following days show a distinct difference between bull and bear markets:  prices increased more often than they declined when the market was heading higher.

DJIA             -.21 percent

NASDAQ       -.84 percent 

S&P500       -.32 percent

While the NASDAQ rose .75 percent, the DJIA and the S&P500 added only smaller fractions.  Today’s pattern -two straight positive days following two consecutive declines- has occurred less than fifty times during the 4,436 trading days since the beginning of 1996.

Given their almost equal distribution over the last three bull markets and two declines, we suggest that this record leaves little to be said about the future direction of the current market.

Today’s pattern occurred last at the beginning of June, when the market posted its third largest advance of 2013.  However, a mix of small gains and minor losses followed on the next day.

But the event previous to that, on April 22, yielded one percent gains on the following day.   

DJIA             .11 percent

NASDAQ      .75 percent 

S&P500        .20 percent

Prices closed higher, ending their two day decline.  Yet the outlook for tomorrow favors another negative day, since the record shows that, in the past, there were 20 declines against 16 advances for today’s pattern.

The current interruption of recent gains prompts a look at the last two bull markets, to compare the profile of their peaks to the current high of August 2.  On that day, the S&P500 closed at 1709.67 – and prices have been in retreat since then.

The first vertical line at day zero indicates the highs of the 2003 and 2007 prices; we set our current top on that same time line.  That occurred 18 trading days ago.

It is easy to see that the 2013 record surpasses the others, though the profile of prices is quite similar.  While current prices remain below their high, note that at today’s close they remain at 95.6 percent of that August 2 record.

That performance outranks the previous bull markets: they fell to 92.6 percent of their highest level on the 18^th trading day after their tops.

That good news must be tempered though by the similarity of these price profiles and the fact that prices never recovered –but continued to fall- in the two earlier expansions.

DJIA              .33 percent

NASDAQ       .41 percent 

S&P500        .27 percent

The NASDAQ dropped more than two percent while the S&P500 fell 1.59 percent and the DJIA lost somewhat more than minus one percent.  Today’s pattern  -two losses following two straight gains- has repeated 38 times since 1996.  Nine of these happened this year.  The last just days ago, on August 16 – that turned into a further decline in the next session.  Earlier, in June, two other such days turned into gains on the next day.

Today’s diagram shows the distribution of these ‘two down after two up days’  over the last bear and bull cycles.  There is no immediate association with expansions or contractions.  Nevertheless note that the last,    2007/2009, bear market has the highest frequency.  Yet the second largest rate happened during the 2003/2007 bull market.

Price changes on the following day show the same lack of expansion or contraction consistency.  Whereas the current expansion phase’s history reveals eight next day advances and just one decline, losses dominate both the 2000/2003 and 2007/2009 bull phases.

Note: today’s declines are the deepest one day losses since April and June.

DJIA             -1.14 percent

NASDAQ      -2.16 percent 

S&P500       -1.59 percent