USMarketView

The high optimism spreading through the financial world following the strong recovery of the last six days yields headlines such as Is the ‘correction’ over? in today’s Yahoo. That is why we repeat our caution flag of a few days ago. Remember prices did not collapse immediately after the last two bull market topped off.

Today’s diagram plots the S&P500’s closing prices twenty days before through 35 days after market tops. It reveals prices moving higher soon after these earlier bull markets ended. Moreover, even after these prices turned down- 20 to 21 days –after their highs, the market moved sharply higher.

Focusing on this history, and the paradigm that history tends to repeat itself, could prevent undue optimism and projections that this bull market will move prices to even greater heights before too long

DJIA -.19 percent
NASDAQ .24 percent
S&P500 -.03 percent

The market continues its recovery –the S&P500 now stands at 99.3 percent of its January 15 high- and also sticks to closing patterns that occur typically during bull markets.
Four straight up sessions are rare with just 37 in the 4,500 sessions since early 1995, and as our diagram reveals, all but three happened when prices were trending higher. In fact, none are seen during the 2007/2009 bear market.

Though prices are near to recapturing their all-time highs of January 15, this recent strength does not guarantee a resumption of this bull market. In fact, there was a surge ten days after the after the March 2000 top that returned the S&P500 to 99.3 percent of its high – but then reality set in, as prices fell for the following 700 trading days.

Looking at tomorrow, the chances of a fifth straight up day are not slim but at 50 percent, for that is the proportion of five up days in a row in the past.

DJIA 1.22 percent
NASDAQ 1.03 percent
S&P500 1.11 percent

Three gains in a row happen twice as often during expansions than when prices are heading down. Today’s diagram, locating these days, reveals they come in series, with five of these days happening within 100 days of the 2007 market top. The last happening of this pattern was last September – that is 90 days since this market’s high in January.

As for tomorrow, in the past gains barely outnumbered declines, though following day prices were lower 20 times out of 34 events during the 2003/2007 bull market.

DJIA .05 percent
NASDAQ .54 percent
S&P500 .16 percent

Wide spread optimism is surfacing now that the market has managed two successive gains exceeding one percent. A Yahoo headline claims the situation is similar to last year; then prices dropped six percent in June before heading back up to set new record highs. Therefore, it claims this ‘correction’ would be over already if the 2014 drop plays out as it did in 2013.

That could be so – yet the record casts doubt on this knee jerk reaction to several strong performance days. Today’s diagram compares this top with the end of the previous two bull markets.
It reveals a quite favorable situation: currently prices have fallen to 97.3 percent of their high, whereas the 2000 top declined to 91.7 percent in 16 days and the 2007 top hit 98.9 percent. It shows also that the declines were quite gentle.

Yet prices declined precipitously before these markets hit bottoms – four years later. At that point, they had dropped to 57 and 43 percent of their highs before finally moving higher.

DJIA 1.06 percent
NASDAQ 1.69 percent
S&P500 1.33 percent

Prices have now changed direction four times in the last five trading days, demonstrating quite understandably the uncertainty caused by sudden market decline. With today’s gains ranging between 1.14 and 1.24 percent, we consider the frequency and the placement of such days over the last five price cycles.

The diagram shows just seven of these – all happening during bull markets. Further, they all occur near a pause, or just after an interruption, in the trend of rising prices. Yet notice that two happened in quick succession just 15 days before prices reached their highest point and turned down in October 2007.

DJIA 1.22 percent
NASDAQ 1.14 percent
S&P500 1.24 percent

Though prices fell again, the closing pattern of the past four trading dates provides grounds for optimism. As our diagram shows, the combination of a losing day, that follows an update, which occurs after two successive increases, is not just a bear market happening. Its frequency, at .5 percent of the time, is the same whether prices are trending up or moving down.

Further, they appear more often at the end of a sequence of losing days, than they do at local market tops.

Therefore, these last four days provide reason for believing this market is at a pause, and not necessarily poised at an immediate and substantial decline.

DJIA -.03 percent
NASDAQ -.50 percent
S&P500 -.20 percent

Prices finally moved higher but today’s rebound recovered just a fraction of the large losses suffered over the previous days. Yet the uppermost concern is not on daily price changes, no matter how large, but on the more important focus: will this bull market continue or are prices now trending down.

Now at 1,234 days since the last market bottom, this expansion’s age deserves notice. It is the longest, outlasting the 1,154 and 1,059 bull markets that topped in 2007 and 2000.

Yet our comparison of these three periods shows a significant difference between today’s price changes and those occurring at the end of the two earlier growth tops. Consider the diagram; it plots S&P500 prices near market highs as the proportion of those highs.

The current market approached its highest price on January 15 gradually, whereas the S&P500 jumped sharply before both the 2000 and 2007 tops.

Similarly, recent price declines are shallower than after the two previous bull market highs.

However, the sharp mark downs of recent days bears an acute resemblance to the steep drop following the 2007 top.

DJIA .47 percent
NASDAQ .86 percent
S&P500 .76 percent

Substantial losses over the last twelve days -since prices hit their highest level ever- now come to minus 5.76 percent. Yet this cumulative drop –though seemingly exceptionally large- is far from unique: they account for some 4.5 percent of the 4,533 trading days since the beginning of 1996.

Though more such deep plunges happen in bear markets, they are far from infrequent during expansions.

The good news, though, as today’s diagram clearly indicates, is that they happen most frequently at bottoms; in fact, you can see just five –of these 204 incidents- at the 2000 and 2007 tops. Further, their cluster occurs when market corrections have bottomed out – and also just before prices resume their rise.

The news for tomorrow, however, is far from optimistic. In the past, prices fell further on the following day more often than they increased during bear markets – though the bull market average is not too comforting either, with price recoveries averaging only about 50 percent.

DJIA -2.08 percent
NASDAQ -2.61 percent
S&P500 -2.28 percent

Following three declines in a row, prices have now oscillated up and down for the last four trading days – a pattern occurring more often when prices are heading down. Though definitely a bear market event, it is rare even then, accounting for less than three percent of the days of the last two declines. Further, just 22 closes, of the more than 3,400 previous expansion days show this combination, and, as today’s diagram shows, none took place during the 2000/2003 bull market.

Yet it is disquieting to see their preponderance at the last market top, in October 2007.

Nevertheless, prices did not decline after the last eleven repeats of the current expansion, though a substantial correction did occur once, in 2011.
Still the fact that these days cluster close together, and occur in bunches, deserves attention. There are four in fourteen days in November 2007; these indeed followed three earlier episodes in July. With similar knots of recent repeats seen all over these years, anticipating further daily fluctuations is in order.

DJIA -.94 percent
NASDAQ -.47 percent
S&P500 -.65 percent

Anyone who thinks the Fed’s policy of taper –reducing its Treasury purchases as the economy improves- steams ahead despite the faltering stock market needs to consider the recent history of that interest rate. Our diagram reveals a sharp reversal –lower yields on the Ten Year Treasury- since the S&P500 peaked earlier this month.
The two lines on today’s figure compare the S&P500 closing prices with the ten day lagged value of the Ten Year Treasury paper. The ‘value’ being the inverse of the daily interest rate of that Treasury debt.

Note how the value changes direction just about where the S&P500 hit its recent top. None of this means that the Fed will allow stock prices to continue their record climb. However, it seems reasonable to assume that Bernanke –nor his new replacement- will let a sharp stock price decline tarnish their image, let alone allow financial markets to nip the economy’s weak recovery at this early stage of the business upswing.

DJIA .70 percent
NASDAQ 1.77 percent
S&P500 1.13 percent