Is stock market rally “real”?

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What a wild day on stock markets yesterday! At one stage the Dow Jones Industrial Average plunged to below 8,000, but staged a spectacular rally late in the session to close 553 points (6.6%) up on the day. The S&P 500 Index moved in tandem to finish the day 59 points (6.9%) higher.

I referred to the characteristics of the so-called descending triangle on the S&P 500 in a post of two days ago (“Stock Markets: Which Way José?”), mentioning that a reversal to the upside often leads to a strong countertrend rally. A move in that direction occurred yesterday on the highest volume in a month. Although one shouldn’t get too fired up about a one-day turnaround, the price and volume action was quite impressive, with the October 27 lows (8,176 on the Dow and 849 on the S&P 500) still intact.

The following daily graph summarizes the market action:

14-nov-1b.jpg

Importantly, the intraday lows of October 10, when the NYSE (red line in the graph below) made an “internal low” with 92.7% of stocks hitting new lows (blue area), have also not yet been violated.

14-nov-2.jpg

A further positive for the bulls is that, according to Jeffrey Hirsch (Stock Trader’s Almanac), the Dow has been up 12 out of the last 14 years during the week before Thanksgiving.

With the likelihood of further short-term gains a possibility (especially if the major indices record upside reversals on the weekly data by the end of today), it remains too early to tell whether a secular low has been recorded. The chart below shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (or momentum) indicator (blue 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 1991, 1994, 2000 to 2003, and again since December 2007.

14-nov-3b.jpg

Stock markets are caught between the actions of central banks, governments and the IMF frantically fending off a total economic meltdown on the one hand, and a worsening economic and corporate picture on the other. This situation has a “no-man’s-land” feel to it. By all means try to play a possible nascent rally, but be cognizant that, failing further technical and fundamental evidence, you are trading against the primary trend. Caution is still warranted!

 

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8 comments to Is stock market rally “real”?

  • Paul Benequista

    I respect your viewpoint quite a bit. I have a question: why is it that some people quote the closing low and do this analysis and others quote the low during the trading session and do this analysis; it seems like they generally use the figures that suit their argument – I see people saying the lows were Oct 10th then others say the closing low etc.

  • Paul: I prefer using closing prices as a matter of course. However, October 10 was such a key day in terms of the record number of stocks recording lows that I’m inclined to also pay attention to that day’s intraday movements.

  • PdP: We are still in a bear market and there is nothing from a technical perspective to suggest that we are on the cusp of a new bull market. You mentioned the 12 month ROC in your post and believe it or not that is a very useful indicator. While it may indicate a bear trend and it may be a poor timing tool, equity markets rarely show such poor year over year gains for such extended periods of time. In other words, the market has been depressed enough and long enough where one has to start thinking that a secular change is at hand — this is sort of a mean reversion phenomenon. This is reasonably consistent in many markets.

    Lastly, one of your recent posts had projections by noted commentators of S&P500 at 600 ish. Yes, this could happen but just like on the upside when there is nothing but clear skies the downside is often filled with nothing but storm clouds. The market likes to go to extremes but rarely do these predictions ever pan out. Of course, nothing goes in a straight line, so time will tell.

    By the way, your postings are appreciated from this part of the world!!

  • This is a sucker’s rally. We have just overlapped waves 1 and 4 of a Diag > clearly visible on the hourly charts….so the the count starts over again and must exceed the previous low, once it plays out, likely next Wednesday 19, we bottom and reverse dramatically to the upside.

    http://www.exceptional-bear-market-letter.com/2.html

  • john brims

    As a very old reader who cut his teeth on Edwards and McGee some 50 years ago I think I remember reading that a breakout to the downside of a symmetrical triangle needs to CLOSE ABOUT 2% OUTSIDE THE FORMATION to be valid. The latest daily rally violated the pattern but CLOSED INSIDE so technically bulls are still hanging by their fingernails.
    It is a matter of some comfort that even though the world has been turned upside down several times during my lifetime EDWARDS AND M’GEE’S teachings are still about as close as you can get as a guide to determining market direction best john

  • Frank Wordick

    Paul,
    As far as I know, it is universally accepted that the closing price is the correct price from which to do a technical analysis. Some analysts include a daily range, but my opinion is that this just beclouds the analysis. Also, ignore off-market trades that occur after the market closes. They are considered to be irrelevant.
    Prieur,
    Your momentum indictor is giving a very grim reading for the market. It is hard to see how a big lifesaving (for some) rally is going to occur at this point in time or even nearer the end of the year. I hope there is one for the sake of those who want to get out, but it doesn’t look like one’s coming. As for the positive effects of turkey or cranberry sauce on the market, I sincerely doubt it. As well as your ROC indications, there is Hussman’s chart on earnings which indicates an increase in volatility to the downside. This suggests that the earnings low in this cycle in going to be much lower than the one that occurred during the 2000-2002 downturn. That one was bad enough at around $25, but this next one is apparently going to be a doozy.

  • [...] summarized my current views in a post (“ Is Stock Market Rally ‘Real’ ”) on Friday: “Stock markets are caught between the actions of central banks, governments and [...]

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