USMarketView

Prices have stayed in the same range of plus-or-minus ten points for more than a week.  During this same period, news has focused on the Fed and the statements of some of its regional bank presidents.  Obviously, there is a tug-of-war going on; not just about what to do about the open market purchases that have lowered interest rates but also who will head the Fed   next.

At the same time we have seen prices pause, stepping back from the strong bull market of recent weeks.  Many different reasons can explain this change of pace, but one not to be neglected is the impact of interest rates on asset values.  As discussed before, this linkage means that rising interest rates translate to falling asset prices – or that the inverse of interest rates and stock prices move in the same direction.

Today’s diagram reveals the recent parallel paths of the S&P500 and the value of the Ten Year Treasury Bond of ten days ago.  While these changes are not exactly step-to-step, the trend of falling bond values matches the fall-off in S&P500 increases.

Investors now must factor in the possible changes in Fed policy as well as the other, usual dynamic business and political influences that determine asset values.

DJIA            -.04 percent

NASDAQ     .27 percent

S&P500      -.12 percent

Sharply rising prices and today’s pattern go hand in hand.  There were just three of these since 1998.  Our  diagrams show the S&P500 just previous to, and several months after (1) a loss, that (2) followed a gain, that (3) came immediately after two losing days of the DJIA and the S&P500. (The NASDAQ had three down days.)

We note that each happened during bull markets; that today’s repeat is the patterns second occurrence this year.

While presenting these facts in today’s report, we add the caution that this finding is an empirical or technical finding.  We have made no attempt to find a theoretical reason that explains why prices accelerated after this pattern of closes.

DJIA            -.47 percent

NASDAQ    -.25 percent

S&P500      -.36 percent

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We focus on today’s small .39 percent gain of the S&P500.  Advances this small are rare.  While they account for just 20 percent of all closes since the 1996 market low, their frequency during bull markets is near twice their rate during market declines.

Today’s diagram summarizes the details of their timing over the last five price cycles.  Additionally it shows the almost identical advantage for gains on the following day; they also favor the three bull markets of recent times.

Using these characteristics to project the market’s future, yields the conclusion that we have been and are in a period of rising prices.  Further, these statistics are consistent with our earlier reports that show recent market closes mirroring features common to earlier expansions.

As for tomorrow, the diagram shows that in the past gains occurred slightly more often than declines during bull markets.  Losses during declines however, outnumbered increases almost three to one.

DJIA            .18 percent

NASDAQ     .41 percent

S&P500       .39 percent

The down count now is three declines in a row for the DJIA and the S&P500 as the NASDAQ took a decline for the second day in a row.  The last time we saw this pattern was in early June; then all three averages shot up more than one percent on the following day.

But in an earlier experience, in May of last year, three more down days followed today’s pattern.  Then prices shot up more than a full percent – after six successive losses.

Today’s diagram shows this pattern’s 19 previous recurrences over the three price cycles since 1996.  With just three happening during downturns, and the other sixteen distributed over bull markets, today’s pattern –as in many recent days- sees higher prices ahead.

Yet the clear uncertainty hanging over this hot market is the Federal Reserve’s intention on continuing its record open market purchases.  Just yesterday the presidents of two regional Federal Reserve Banks reported that the Fed could cut back its stimulus as early as next month.  This obvious negative impact will result in downward pressure on bond prices and of course all other asset values, including the stock market.

DJIA             -.31 percent

NASDAQ      -.32 percent

S&P500       -.38 percent

The NASDAQ finally declined after a string of five consecutive advances while the DJIA and the S&P500 fell for the second day.  Today’s close, the 51^st repeat of this pattern since 1996, occurs somewhat more often when prices are trending up.  Yet, as our diagram shows, though the difference is quite modest, it is clear that today’s combination of frequencies is definitely a bull market condition.

We need to pay attention, nevertheless to the number of happenings just before the 2007 peak.  It is similar, but not as frequent, as their appearance around the 2000 top.  Certainly this possibility deserves attention given the long stretch of rising prices, and the fact that recent closing patterns have also clustered near those peaks.

As for tomorrow, prices rose somewhat more often than they declined in the past on the day following this pattern.  We saw this in June, the most previous recurrence, when these averages lost near one percent on the next day.

Furthermore, when losses did occur, they exceeded, on average, the size of    gains.

DJIA             -.60 percent

NASDAQ     -.74 percent

S&P500       -.57 percent

Bull markets and five straight gains for the NASDAQ go hand in hand.  Almost all happen when prices are moving higher.  Their count for the last three expansions stands at 80, whereas just 11 happened during the two previous bear markets.

Our diagram showing these days also displays the 54 succeeding sessions –orange-on-green- when the NASDAQ run extended to six consecutive positive days.  

Clearly these events signal that the current bull market should not be sold short.  Yet today’s strong plus indicator contradicts our last post that positioned Friday’s pattern as occurring before major price declines.

These opposing histories challenge forecasters to sharpen their tools while investors use their wits to be on the right side of coming price movements.

DJIA                - .30 percent

NASDAQ             .09 percent

S&P500            - .15 percent

The last time the NASDAQ advanced four days in a row while the DJIA and the S&P500 moved up twice was on May 15.  Then the market continued its move to new, record breaking highs.  This trend continues, with the S&P500 closing above 1700 just earlier this week.  Yet earlier repeats of this pattern happened near turning points.  While five occurred near lower turning points, foreshadowing long runs of increasing values, another five clustered just before -and shortly after- the October 2007 market top. 

Our diagram pinpoints these days. 

Turning to the following day, the S&P500 moved higher on eight of the next ten days in the past.  The DJIA and the NASDAQ have almost the same positive next day record, advancing seven times.

DJIA                    .83 percent

NASDAQ            1.36 percent

S&P500              1.25 percent

The S&P500 closed with a new, all time high of 1706.83, adding 1.25 percent today.  That up-beat news, though, comes with a negative connotation.  Daily gains this large and larger occur more often in bear markets than when prices are heading up.

Today’s diagram distributes all daily S&P500 closes above 1.25 percent over all recent bear and bull markets.  The heights of the graph’s columns reflect these frequencies as a percent of all trading days.  They account for 15 and 19 percent of the two bear markets.  The bull market proportions are 12, 6, and 13 percent for the expansions of 1996/2000, 2003/2007, and the present growth that began in March 2009.

As for tomorrow, the record shows prices continuing higher just about half the time in rising as well as falling markets.  Yet the median percent change is near .80 percent in bear markets, but declines to about .50 percent when prices are trending higher.

DJIA                    .83 percent

NASDAQ            1.36 percent

S&P500             1.25 percent