S&P 500: On a knife’s edge
by ilene - August 23rd, 2010 11:32 am
S&P 500: On a knife’s edge
Courtesy of Prieur du Plessis, Investment Postcards from Cape Town
Last Thursday was a so-called 90% down-day for American stock markets (and many other bourses also recorded downward dynamics). A 90% down-day is defined as a day when downside volume equals 90% or more of the total upside plus downside volume and points lost equal 90% or more of the total points gained plus points lost. The historical record show that 90% down-days do not usually occur as a single incident on the bottom day of an important decline, but typically on a number of occasions throughout a major decline. As far as the very short term is concerned, 90% down-days are often followed by two- to seven-day bounces.
The stock market is on a knife’s edge at the moment as seen in the chart below, showing the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (ROC) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and in 2007. And 2010? With the ROC delicately perched just above the zero line, the primary trend is still bullish, but barely so.
Source: StockChart.com.
Regarding seasonality, I have done a short analysis of the historical pattern of monthly returns for the S&P 500 Index from 1950 to August 2010. The results are summarized in the graph below.
Source: Plexus Asset Management (based on data from I-Net Bridge).
As shown, the six-month period from May to October has historically been weaker than the period from November to April as seen in the average monthly return of 1.05% for the “good six months” compared with 0.25%% for the “bad six months”. Importantly, when considering individual months, September (-0.18%) and October (-0.19%) have historically been the only two negative months of the year. (A word of warning, though: one should take cognizance of seasonality but understand that it is not a stand-alone indicator and it is anybody’s guess whether a specific year will conform to the historical pattern.)
Where does this leave us at this juncture? Considering an array of indicators, we are somewhat in no-man’s land regarding whether the bull or bear will…
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Historical PE Ratios: Marking the Tops of Economic Expansions
by Chart School - April 22nd, 2010 1:06 am
Historical PE Ratios: Marking the Tops of Economic Expansions (and Warning of Coming Economic Contractions)
Courtesy of Michael Clark
Robert Schiller recently posted a chart showing the history of American interest rates in the 20th Century and the history of PE ratios in American stocks.
Note the similarity between the historical PE ratios (blue line) and our contention that financial cycles run in 36-year periods, top to top. We don’t agree exactly with the dates of economic tops in this chart — but we’renearly in agreement.
We have American economic cycles in the Twentieth Century exhibiting tops in the following years:
TOPS
1893
1929
1965
2001
BOTTOMS
1911
1947
1983
2019
Interest rates should be lowered as we proceed toward economic bottoms and should be raised as we proceed toward economic tops. Had we begun raising interest rates slowly as we approached 2001 then we would have avoided all this mess of this decade — and the coming decade.
We need to realize that Nature has patterns and cycles — and we need to put our human ego aside (the human desire to control nature) and work WITH these cycles, instead of against them.
We CANNOT have perpetual economic expansion in a system that has dual movements of expansion AND contraction. Inflation needs to be followed (each time) by deflation. Our view that inflation is GOOD and deflation is BAD may be true for the rich in the nation but it is not true for the society as a whole.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site