The Almost Daily 2¢ - Twin Peaks?

Subtitle: Sell Into the Rally?

It appears we have reached another critical juncture in the economic crisis.

Yesterday the S&P 500 broke through its 50-day simple moving average but whether it will defy the recent bear market “sell into the rally” trend and head notably higher or collapse to a new strikingly lower low is likely one of the most important Wall Street outcomes in generations.

Although the breaking of the “dot-com” bear market low was an important precedent, it was clearly definable… it was a completely logical level to retest given the assumption that the rally from October 2002 onward was without fundamental merit.

But that level having been breached by a good 20+ points we find ourselves in a bit of a predicament.

What was so fundamental about a level of 752 (741 intraday) on the S&P?

Buyers raced in to scoop up shares on the assumption that they were cheap but who’s to say… there was (and still is) significant turmoil ahead and the S&P 500 P/E ratio was still in the double digits.

More importantly, if 752 was the capitulation low, it seems to have come too easily and its pain was inflicted too briefly for the current economic realities.

For example, Citigroup’s $306 billion backstop bailout was announced after the 752 low… could the market have seen that coming? Could they have priced that in? If so, what did they price in?

We have yet to determine if the backstop will really hold and there is significant evidence to suggest that it won’t.

Also, what of the Feds inability to restore lasting confidence…

The Fed has quickly reached the end of the line in their rate cutting campaign and try as they might to insinuate additional control by suggesting that they will “employ all available tools”, we all know that they are down to creating money and attempting to engineer targeted inflation… hardly a convincing outcome.

Yet we are to believe that these and other significant oncoming traumas (double digit unemployment, inevitable auto industry collapse, 15-20% further decline in home prices, alt-a, jumbo ARM, prime jumbo and prime conforming mortgage default tsunami, record personal and corporate bankruptcies, elevated bank failures) are all priced in at a fundamental base of 752.

I’m skeptical.

My sense is that given the enormity of the economic crisis, a 70-80% peak decline in the S&P 500 with a historical low P/E (single digit) would not be a surprising outcome and further, it would be fitting.

As regular readers know, I have been following along the stock market decline for about a year now with this recurring “Twin Peaks” post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the “dot-com” collapse.

Be sure to study the charts well as they present several different ways of capturing market volatility and together compare past market performance to what we are seeing today.

I will continue to post the comparison to the “dot-com” era bear market for posterity but now that we have broken through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras are now one.

The “Percentage Up-Down” chart clearly shows that we have just entered a period of REAL volatility BUT also leads one to believe that we may have a long way to go in this market shakeout.

The “Up-Down Daily Closings” chart seems to indicate that although we have seen increased volatility and significant declines, we have yet to match the distribution of daily up closings and down closings (inverted red line).

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.





What follows below is now just maintained for old times’ sake… the second peak was obviously real and this series of posts identified it roughly a year ahead of time. Now that we have entered effectively into uncharted territory, we are at a loss for historical comparison.

THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
• H. It’s over Johnny… OVER! (Uncharted Territory)

Question(s) of The Day - Bounce or Bust?

So, today we bounced off of the dot-com bear market closing low of 776.76 (occurred on 10/10/2002 with an intraday low of 768.63) on the S&P 500… will the rally hold?

Where are we headed next?

UPDATE!! Obviously... we went lower... Ouch!

Question(s) of The Day - Secular Bear Market?

We are only about 55 points above the “dot-com” bust bear market low of 776.76 on the S&P 500…

Will we break through that level today?... tomorrow?

When we do, won’t the period since 2000 simply look like one huge secular bear market?

The Almost Daily 2¢ -Twin Peaks?

At this point, it seems pretty clear that the S&P 500 is attempting another run back up to the 200 day moving average but the real questions now are will it get there and if so, what happens next?

Will the rally break right through on its way to an end of the bear market pattern or will it fail and drop miserably back down for yet another sell “into the rally” defeat for the Bulls.

My money is on the latter for the following reasons:

First, Fannie (NYSE:FNM) and Freddie (NYSE:FRE) are headed back down to their July lows at breakneck speed as Wall Street finally begins, at least slightly, to recognize the sorry state of these two behemoths and what it will mean for the economy to have taxpayers fund their “wind-down”.

Next, we now appear to be headed straight into the worst of the job losses where unemployment will likely ratchet up another 1% in just the next 6 months.

Finally, with the spring selling season now firmly behind us, there is nowhere for home sales and prices to go but down bringing with it a general acceptance that the bottom has not yet been reached for the housing market.

Looking at the S&P 500 now though, there are a host of very interesting technical similarities (which are noted below) that indicates that we have fully entered into another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice also, that I’ve added both the “effective” federal funds rate (light grey line) and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.00% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.



THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

The Almost Daily 2¢ - Twin Peaks?

Subtitle: Bounce or Bust?

The S&P 500 bounced sharply off of the 1215 level on the euphoric but shortsighted notion that Fannie and Freddie had been successfully bailed out of their current predicament.

Of course, the GSEs are no better off now than before the latest panic but Paulson and Bernanke appear to have succeeded in, at least temporarily, restoring a measure of confidence and stemming the tide of anxiety and dread.

So the question is … Are we headed back up to the 200 day simple moving average or will the rally fail prematurely as the news-flow further illustrates the ongoing and worsening effects of the recession?

My take is that stemming panic will always lead to a continuation and even an amplification of panic in the future. … This is merely a postponement of the inevitable and is possibly even teeing it up for a larger crisis.

There were REAL reasons to panic about both Bear Stearns and Fannie Freddie … the economic deterioration continues and these institutions are, in fact, essentially insolvent.

Postponing a full recognition of that fact does nothing to address the actual problems at hand.

There are a host of very interesting technical similarities (which are noted below) that indicates that we have fully entered into another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice also, that I’ve added both the “effective” federal funds rate (light grey line) and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.00% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.


THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

Although the recent, highly optimistic, Wall Street rally appeared strong, it’s collapse indicates that the prospects of a protracted bear market selloff is very real especially given the steady flow of poor macroeconomic, housing, consumer, retail sales and employment data that will continue to flow throughout 2008.

The Almost Daily 2¢ - Goodbye March Lows

Intra-day, the S&P 500 has now broken well below the lows set in March during the emergency bailout of Bear Stearns.

As I have noted before, this bear market selloff has, thus far, been relatively orderly with only mild volatility especially when compared to past similar episodes.

The chart below (click for absolutely HUGE version) simply plots the percentage gained or lost (with moving averages) on consecutive up and down daily closings of the S&P 500 against the S&P 500 itself.

Percentage gains accumulate until there is a down daily closing after which percentage losses accumulate until there is an up daily closing.

This provides another view of market volatility and, I think, better allows for the visualization of the “tug of war” that goes on between Bullish and Bearish forces.

Probably the most striking detail disclosed in this chart is how little volatility has occurred during this current bear market selloff.

After nearly eight months of decline, the volatility registered during this episode appears muted compared to period surrounding the dot-com collapse of 1998 – 2004 or even the S&L meltdown of the early 90s.

Though the current selloff has been orderly to date, I fear we may be entering a period where we could see a significant market crash.

The lows from the Bear Stearns panic have been breached, the Asian markets are significantly off their October highs, most major world economies are slowing, U.S. auto sales are hideous, retail sales (especially inflation adjusted) are continuing to decline, home prices are continuing to collapse, foreclosures are soaring, oil and gas and food prices continue to climb… the list is endless.

We are clearly in the midst of a complex and sustained financial crisis and the broader stock market averages have simply not accurately reflected that fact.

The Almost Daily 2¢ - 1175 Or (and) Bust!

This post is an addendum to the regular “Twin Peaks” series as the recent retrenchment of the S&P 500 has been so dramatic that it deserves some additional attention.

It appears that the S&P 500, now poised just 48 points above the March “Bear Stearns” lows, is set to crash straight through that low level on its way to a destination somewhere in the 1100s.

Readers should take note of the charts below and fully contemplate what this selloff represents and how remarkably similar the current bear market period is to the episode that followed the dot-com collapse.

There is a host of very interesting technical similarities (which are noted below) that indicates that we have entered another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs (and lower lows!) yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice also, that I’ve added both the “effective” federal funds rate (light grey line) and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.00% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.



THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

Although the recent, highly optimistic, Wall Street rally appeared strong, it’s collapse indicates that the prospects of a protracted bear market selloff is very real especially given the steady flow of poor macroeconomic, housing, consumer, retail sales and employment data that will continue to flow throughout 2008.

The Almost Daily 2¢ - Twin Peaks?

Following up on a prior posts, take a look at the trend and most recent state of the S&P 500 index and compare it to the last major bear market conditions that followed the dot-com bust.

There are a host of very interesting technical similarities (which are noted below) that may indicate that we have entered another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice that I’ve updated the chart to reflect the fact that during the last month of trading the 200 day moving average broke through the 400 day moving average signaling a second “cross of death” that I will term the “cross of fiery gruesome death“ for all future posts.

Notice also, that I’ve added both the “effective” federal funds rate and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.00% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.



THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top?)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

Although the recent, highly optimistic, Wall Street rally appeared strong, it’s collapse indicates that the prospects of a protracted bear market selloff is very real especially given the steady flow of poor macroeconomic, housing, consumer, retail sales and employment data that will continue to flow throughout 2008.

The Almost Daily 2¢ - Twin Peaks?

Following up on a prior post, take a look at the trend and most recent state of the S&P 500 index and compare it to the last major bear market conditions that followed the dot-com bust.

There is a host of very interesting technical similarities (which are noted below) that may indicate that we have entered another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice that I’ve updated the chart to reflect the fact that during the last week of trading the 200 day moving average broke through the 400 day moving average signaling a third “cross of death” that I will term the “cross of fiery gruesome death“ for all future posts.

Notice also, that I’ve added both the “effective” federal funds rate and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.25% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.




THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top?)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

Although the recent rally appears strong and Wall Street is feeling very optimistic, the prospects of a protracted bear market selloff are very real especially given the steady flow of poor macroeconomic, housing, consumer and employment data that will continue to flow throughout 2008.

Needless to say then next few weeks will be white-knuckle time…

The Almost Daily 2¢ - Visualize The Volatility

As you know, in recent months I have been tracking the S&P 500 index as it has descended into a classic “Bear Market” trade down that appears remarkably similar to the nearly 50% selloff that it experienced in the wake of the “dot-com” bust.

But aside from technical similarities (that I will cover again in a later “Twin Peaks” post) I would like to share an interesting chart that I whipped up in an attempt to better reveal the trend and volatility inherent in the broad index and more importantly, the role volatility plays in signaling a bottom to a market selloff.

One important aspect to consider before delving into the chart is the true temperament of the bottoming process.

Reflecting a bit on markets and human nature, I believe that any real bottoming to the stock market must come with some significant struggle between market participants in an effort to establish value.

Unlike the current Wall Street consensus, I don’t believe that this struggle can take place in just a few trading days and further be founded on just a few key events, even substantial events such as the Bear Stearns debacle.

I see the market bottoming process as a prolonged and uncertain fight resulting in significant thrashing about, lasting at least as long as it takes to establish some “real” confidence about the outcome of the crisis that initially brought about the contraction.

In order to better visualize this market struggle I created two simple indices, one that plots the positive percent change of consecutive trading days and one that plots the negative.

So, for the “positive” index I add up the percent change on consecutive “up days” and if there is a “down day” the index goes back to 0.

For the negative index, on the other hand, I sum the percent change of consecutive “negative” “down days” and set it back to 0 if there is an “up day”.

Along with these indices I plot a 30 day moving average of each as well as the S&P 500 index itself.

This chart starts in 1969 and is simply huge (but loads well in the browser) so click the following to load it up and make sure it zooms in completely.

Notice, scrolling from left to right (1969 to today), that there have been six recessions in the U.S. since 1969 (indicated by the rectangular overlays) and that in general, the distribution of consecutive up and down days becomes more erratic and amplified during (and surrounding) the recessionary periods and noticeably more quite in-between.

Notice also that between 1992 and 1996 there was fairly even and essentially quiet trading leading into the dot-com boom but then the trading became markedly more volatile, eventually leading to the crescendo of the dot-com peak.

After the peak was established in 2000, the volatility continued only to be amplified dramatically during 2002 to early 2003, the period that would ultimately establish the bottom of the market downturn.

Now, study the period between 2004 and the middle of 2007 which appears to show very low volatility somewhat similar to, if not even a bit more quiet than, the period that preceded the dot-com boom.

Today though, the volatility has reappeared but it’s important to note that it is very new and still fairly low.

So, my contention is simply that the S&P 500 has not bottomed as the REAL struggle has yet to even take place and given the truly immense nature of our latest crisis (housing, mortgage, credit and consumer), it is altogether likely that we will see a considerable amount of thrashing and volatility resulting in a prolonged trade down that will last at least until there is some “real” confidence established.

The Almost Daily 2¢ - Twin Peaks?

Following up on a prior post, take a look at the trend and most recent state of the S&P 500 index and compare it to the last major bear market conditions that followed the dot-com bust.

There is a host of very interesting technical similarities (which are noted below) that may indicate that we have entered or are just about to enter another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice that I’ve updated the chart to reflect the fact that yesterday the 50 day moving average broke through the 400 day moving average signaling a second “cross of death” that I will term the “cross of far more death“ for all future posts.

Notice also, that I’ve added both the “effective” federal funds rate and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.25% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.


THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA.

NOW (Today’s Top?)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. TBD

Needless to say then next few weeks will be white-knuckle time…

The Almost Daily 2¢ - Grim Toppings

Although I don’t usually comment directly on the stock market or stock indexes and generally limit observations of individual stocks to those that are related to housing and real estate, I thought I might share some basic analysis that I have worked up concerning a pretty grim looking topping pattern now present in the S&P 500 index.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.


THEN (1998 – 2000 Topping)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA.
• F. 50 day SMA crosses 400 day SMA.
• G. 200 day SMA crosses 400 day SMA.

NOW (Today’s Topping?)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA.
• F. TBD
• G. TBD

Needless to say then next few weeks will be white-knuckle time… Be sure to check back as I will update the data in the coming days and weeks.