Stock markets – a reversal of fortune?

By Prieur du Plessis, on October 14th, 2008 posted in: Investment, Markets, Money

My first day back in office after a visit to Geneva and Dublin coincided with the best day ever for European stock markets and the biggest points increase in the Dow Jones Industrial Average’s history. A pattern has started developing that the good days occur when I am in the office, whereas the sharp sell-offs tend to happen when I am travelling. I will keep you posted on my travel plans in case you want to factor that into your trading models!

The table below shows yesterday’s strong movements on a number of global stock markets.

The sheer magnitude of yesterday’s rally makes for interesting reading when put in historical context. Considering the entire history of the Dow Jones Industrial Average since 1896, yesterday’s surge of 936 points ranks as the largest points increase ever (see top table). Seven of the top 15 points increases have occurred in 2008 (one in October, three in September, one in April and two in March).

Yesterday’s percentage increase of 11.1% ranks sixth in history (see bottom table). Besides yesterday’s rally, and the large increases in October 87 and September 1939, the remaining 12 of the 15 largest increases all occurred in October 1929 and April 1933.

Interestingly, after the 1929 crash (October 28 and 29) the Dow’s movements over the following five days were: +12.3%, +5.8%, -5.8%, -9.9% and +2.6%). Subsequent to 1987’s Black Monday (October 19), the Dow’s changes were as follows: +5.9%, +10.2%, -3.8%, +0.02%, -8.0%. The stock market, of course, behaved quite differently during the years following these two crashes.

Source: Plexus Asset Management (based on date from I-Net Bridge and Dow Jones Indexes)

Have we seen the bear’s corpse? Will October live up to its promise of being a “bear killer” (as has happened in 11 post-WWII bear markets according Stock Trader’s Almanac)?

I mentioned in a post on Sunday that I was looking for a 90% up-day as a signal of the completion of the selling climax. That did not happen yesterday, with upside volume only 73% of up plus down volume. One swallow does not make a summer, but a better performance on this front, together with a retracement in the Ted spread (i.e. three-month dollar Libor less three-month Treasury Bills), a measure of risk aversion and illiquid repo conditions, could indicate that stock markets have reached important lows of at least medium-term significance.

Correction:
Monday, according to Lowry’s using later data, was indeed a 90% up-day rather than a 73% up-day as reported above. I use Richard Russell’s Dow Theory Letters as source for these statistics and I apologize for the error. He commented as follows: “If yesterday was the long-awaited turn to the upside, we’ll have to watch the market action closely. Lowry’s Selling Pressure Index should decline steadily as the urge to sell subsides, and breadth should stay on the positive side for weeks on end. In other words, if yesterday’s action signaled the turn, we should have excellent confirming action to the upside for quite a while.”

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Read more on Dow Jones Industrial Average (DJI) at Wikinvest

Meg

October 15, 2008 at 1:15 am

I found this posting very interesting. Thanks.

Frank Wordick

October 15, 2008 at 3:42 am

Thank you very very much, Prieur, for mentioning that Monday was NOT a 90% upside day. I assumed it was and, consequently, was wondering about how to deal with it as it comes on the tail of quite a number of 90% downside days according to Richard Russell. I was confused because it appears that we are looking forward to a number of quarters of earnings degeneration due to a general slowing of major economies. This should insure further declines in major markets.

Jean Ross

October 15, 2008 at 6:14 am

Sorry, according to Richard Russell, he stated today that he was incorrect about Monday being only 73% of up plus down volume. He said today that Monday was indeed a 90% up volume day. He also added “if yesterday’s action signaled the turn, we should have excellent confirming action to the upside for quit a while. “

ThePowerStocks.com Team

October 15, 2008 at 6:20 am

This blog is really nice and informative. We are pleased to know this blog is really helping people and it’s our pleasure to post informative content on this useful blog created by webmaster.

Here’s our market view on American stock market for 13th October, 2008

You all know my opinion – we have the characteristics of at least “a” bottom. Look at the scoreboard – Dow and S&P 500 down 18% last week, in only a week. If that doesn’t show irrational dumping the only other environment that probably would is an official end of the world pronouncement from on high.

The VIX Index (69.96) soared to a record high; bears at extreme high levels, bulls no where to be found; valuation levels the best since Black Monday, October 19, 1987. And back then you could buy AAA long term munis yielding 10% or better vs. around 4.75% today.

No one can call bottom in advance with confidence, but we can correctly report that the conditions for at least a bounce are in place, assuming we are not headed for a 1929 depression.

We are not, but don’t take my word on this. Last Tuesday, Oct. 7, Gary Becker the 1992 Nobel economic laureate, professor of economics at the University of Chicago stated in the Wall Street Journal – “we’re not headed for a depression.”

He states, “World economic growth will recover once we are over the present severe difficulty.” Also he states, “Although it is the most severe financial crisis since the Great Depression of the 1930′s it is a far smaller crisis, especially in terms of the effects on output and employment.”

ThePowerStocks.com Team
http://www.thepowerstocks.com

Alex Wilson

October 15, 2008 at 7:54 am

The ASX went up around 7% in the space of 1hour.

I know a few people who personally gained around $50,000AUD in that time via quick trades.

Do you see any future spikes in the ASX in your opinion? Seeing as though the US is going into Recession I would assume we are destined for lots of small spikes but none as big as 7% on the ASX again.

Drop me a comment sometime on my Australian blog.

Alex.
http://www.savingsguide.com.au

October 17, 2008 at 2:05 am

Thanks very much, Jean (comment 3), for the Russell update. Why should you be sorry for clueing us in? I am grateful! Richard not only appears to have typing problems, but doesn’t handle add and subtract too well either. Maybe it’s the same problem in hitting the right buttons (on the adding machine). The revised figures are more believable. However, we are not having any big follow-up upside action, are we? Markets DO NOT always go up in the fourth quarter! And how could they this time with most cluey people seeing some kind of earnings decline — some predict a massive one — as the credit crisis eats into the general economy. It looks to me like an erratic sideways holding pattern for a while until there is some new big news and/or the next quarterly earnings reports come out. I am not too sure that those of the third quarter are all that relevant as they refer to economic activity taking place before most of this massive government intervention.