USMarketView

Is this bull market about to top-out? That concern, not unsurprising when prices spurt as in recent days, becomes even more important because we are just days away from the 1,059 day mark when a previous, the 1996-2000 market, collapsed.

Further, today’s S&P500 advance of 1.1 percent is its third greater-than-one-percent gain this month; there were only 29 in all of last year.

Our diagram reveals the close parallels of the last three bull markets. Note the steep spurts just before these expansions hit their tops in 2000 and in 2007.

The good news though is that the current growth spurt, while sharp, is not as steep as at the end of 2000 cycle. It resembles more nearly the longer and milder expansion toward the end of the 2007 top. That is promising, since if significant historical repeats exist, it implies that we are more likely to have a lengthier expansion, nearer 1,154 rather than 1,059 days.

Yet the comparison of the frequency of S&P500 daily increases larger than one percent shows a greater similarity between the current expansion and the 2000 top, than with the 2007 story. Whereas the greater-than-one-percent gains come 17 percent of all closes since the 2009 bottom, they are almost equal to the 18 percent 1996-2000 expansion. That’s is near double the 9 percent rate that happened in the longer, 1,154 day bull market between 2003 and 2007

DJIA             .80 percent

NASDAQ       .97 percent

S&P500       1.03 percent

What are the chances for a further decline tomorrow after today’s losses?  Are they different during price expansions, like the current bull market?

So far this year there have been 16 such cycles, and the news for the following day is good:  11 increases and only 5 further losses for the DJIA and the NASDAQ. The S&P500’s record is a bit better, with 12 gains and 4 declines,

The statistics for the last three bull markets and two bear markets reveal almost no difference in the direction of next day prices during periods of rising and falling prices.

Advances on the following day occurred between 52 and 63 percent in the last three expansions; they ran between 47 and 58 percent during the two earlier price declines.

That means, given the ongoing bull market, a good chance for a recovery and higher prices tomorrow.

DJIA             -.28 percent

NASDAQ        -.18 percent

S&P500         -.50 percent

While the DJIA and the S&P500 moved higher for the second day in a row, the NASDAQ posted its fifth straight gain. Thus we focus on the NASDAQ today.

Our diagram reveals that the NASDAQ enjoys five up days in a row quite often – but more importantly, these take place more frequently during bull markets. The rate for the current expansion is 4.2 percent; that is a little less than once in 20 days. In contrast, five up days in a row happened only 2.2 percent during the 2007-2009 bear market.

Similar proportions are also the rule for the three previous up and down price cycles.

Similarly, on the following day, the NASDAQ moved higher more often during times of rising prices than when prices were trending down. Indeed, prices increased more often than one out of two days in good times.

Further, we see this history as confirming the bull tendencies of the current market.

DJIA             .40 percent

NASDAQ        .26 percent

S&P500         .51 percent

The S&P500’s surge of more than four percent in the last ten trading days is by no means rare. In fact, today’s bull market performance lags the 1996-2000 expansion. Then the S&P500 gained more than four percent in ten days on 152 occasions. These amounted to 14.4 percent of the 1,059 days of that growth period.

So far, the current market has added this much on 126 other ten-day closes, or 12 percent of the time.

Indeed, though the current growth of the S&P500 lags that earlier advance it is much stronger than during the 2003-2007 period. Then it had only 39 such gains, accounting for just three percent of those days.

The NASDAQ’s record is even better – it has added almost five percent since May 1. Further, so far it has recorded such ten-day advances 122 other times since March 2009; these amount to 11.6 percent of all closes.

Putting these ten-day advances in perspective, note that these large gains occurred frequently also during market declines. The S&P500 record shows gains of more than four percent happening near ten percent of the time during both the 2000-2003 and 2007-2009 declines. These bear market frequencies persist also in the DJIA and the NASDAQ.

DJIA             .82 percent

NASDAQ        .69 percent

S&P500        1.01 percent

Prices stayed nearly the same, now for the third straight session. Though not unusual, it’s a change from the recent hot market.  Further, today’s pattern of single day declines of the DJIA and the S&P500 combined with the second advance in a row for the NASDAQ has occurred just 62 times in the 4,360 trading days since 1996.

Though the total happenings are just about as frequent in good as in bad times, gains on the following days are more frequent during bear markets. These positive next days average run more than 80 percent when prices are falling. But the advance average dropped to 58 percent and 53 percent in the 2003/2007 and 1996/2000 bull markets. The days following this pattern have shown increases 60 percent of time since the last low point of March 2009.

Continuing Friday’s analysis of the Fed and its impact on security prices, consider today’s diagram. It shows that the S&P500’s climb since 2009 coincides quite closely with the value of the ten year U.S. Treasuries.

These parallels were far from this adjacent before 2009; that is when the Fed began its aggressive purchases in attempting to buttress the weak economy.

DJIA           -.18 percent

NASDAQ        .06 percent

S&P500        -.04 percent

The Fed’s announcement of ‘planning’ to reduce its bond purchases –despite continuing high unemployment and an economy weakened by reduced federal spending- is puzzling. Surely, the laggard GNP growth while inflation is under control should allow –even spur- the Fed to continue its policy of bolstering the economy.

It could be that the policy mavens fear that this bull market is overheating and will result in a massive drop.

Whatever the Fed’s motivation, this announcement of ‘planning’ signals that the Fed’s future actions will limit the prospects of this bull market.

That is a matter of simple arithmetic. When the Fed buys bonds, its action results in higher bond prices. The Fed is a massive buyer, and its demand like any other buyer’s desire will increase bond prices . . . and other asset prices increase in tandem.

This same mechanism works in reverse when the Fed reduces, or stops its bond purchases. With less demand, bond prices will fall . . . so will other asset prices decline in tandem.

So regardless of the Fed’s motivation, the announcement of ‘planning’ to limit its bond purchases means that some of the bull will be taken out of the current stock market.

DJIA             .14 percent

NASDAQ        .77 percent

S&P500         .36 percent

Small losses after five straight advances cooled the market after the amazing gains of the past 14 trading days. The S&P500, yesterday at 1,632.69, added 5.2 percent between May 8 and April 17. That rate is more than triple the median 14 day increase –of 1.51 percent- in the more than thousand days since the March 2007 bottom.

This index outperformed the DJIA, which added some 3.91 percent over the last 14 trading days; it lagged the NASDAQ, however; it gained 7.80 percent since April 17.

As with the S&P500, these advances are far greater than the median 14-day rate in this expansion. These numbers over the last 1,045 trading days are 1.51 percent for the DJIA and 1.55 percent for the NASDAQ.

The strength of these last days is most unusual, to say the least! Moreover, this current expansion so far has outperformed the last two bull markets. The median 14 day S&P500 advance between 1996 and 2000 stands at 1.24 percent, while the 2007/2009 median is just .86 percent.

So it is not just that prices have been breaking new ground, advancing past previous highs that show this market’s unusual strength. The large margins of median gains, far above previous median 14-day increases, reveal the extraordinary strength of recent gains.

DJIA             -.15 percent

NASDAQ        -.12 percent

S&P500         -.37 percent

The DJIA joined the parade of positive changes, moving higher for the second successive session. Thus today’s pattern is +5/+2/+5 –that is, five positive changes in a row for the S&P500, two back to back gains for the DJIA, and five successive advances for the NASDAQ.

This rare combination occurred just seven other times over the last five price cycles. A further uniqueness is that five of these took place in this expansion, since March 2009.

The diagram pinpoints these days; it shows, more of a coincidence than cause-and-effect, that one repeat happened just before the 2007 market top.

Nevertheless, note that this pattern is associated with prices trending higher: with all seven taking place only during bull markets, we see today’s repeat confirming the current trend of higher prices.

History indicates a negative outlook for tomorrow. In the past, prices declined on the day following this pattern more often than they increased. The S&P500 fell five times and increased just twice. The DJIA and the NASDAQ, however, had three advances.

So far this year, the S&P500 had four streaks of five straight advances; the last one occurred just days ago on April 25.  

DJIA             .32 percent

NASDAQ        .49 percent

S&P500         .41 percent

The DJIA closing at 15056 continues to reach new highs, and the NASDAQ and the S&P500 closed up for the fourth straight day.  All this happening while the economic indicators lack the vigor usually seen when the nation’s business situation is improving seems contradictory.

Of course the often-cited fact is that the stock market leads the economy. Thus, the on-going stock rally is forecasting good times ahead, and, in this interpretation, the current gains are indicators of an improving business situation.

With prices continuing their march to new highs, we nevertheless, need to put this rally in historical perspective. Today is the 1,046^th trading since the market started its current recovery in March 2009. While mature, this expansion is still not as old as the previous two bull markets. The 1996/2000 market lasted 1,059 days and the one that ended in 2007 endured for 1,154 days.

Today’s diagram profiles these expansions; it shows the S&P500 closing prices for the 100 days before these rising markets hit their peaks. We are not suggesting that today’s market is copying these earlier tops; we are simply putting the current market in an historical perspective.

DJIA             .58 percent

NASDAQ        .11 percent

S&P500         .52 percent

Prices did not change much as the NASDAQ and the S&P500 stayed in the plus column for the third straight day. The DJIA, however, could not maintain the same momentum, and fell. Today’s is the 33^rd repeat of this pattern since 1996 – over the last four price cycles.

On the following day, declines dominate bear markets, but gains and decreases occur with equal frequency when prices are moving higher.

Our diagram reveals that the current upswing has 12 such days, while the other two bull markets have some seven and eight occurrences. While this dominance over declining markets is not large, it nevertheless seems a confirmation, however slight, that prices will continue to move higher.

DJIA            -.03 percent

NASDAQ        .42 percent

S&P500          .19 percent