Turning to the stock market, for the past few months I have likened the current decline, and subsequent bottoming process, to that of the October 1978/1979 bottoming sequences. Recall the 1978 affair took six to seven weeks to complete, while the 1979 pattern took four to five weeks. In both of those instances the DJIA tested the selling-climax âlowsâ multiple times and in both cases actually marginally broke the âclimax lows.â To be sure, the process of forming a bottom is designed to leave participants fearful and despondent, as can be seen in the attendant Fear, Hope, and Greed chart. I have argued for five weeks the August 8 and 9 âlowsâ were the capitulation points referenced in said chart and that we are now in the despondency, or âGet Me Out,â phase. That view is reinforced by the flow of funds, which shows net outflows from domestically centric mutual funds totaling $48.8 billion between May â July; and Iâm sure the outflows are even greater now.
All of this is the backdrop of which bottoms are made. Yet, bottoming processes are often scary and frustrating. Indeed, they tend to be formed in a whippy, violent manner and thatâs exactly what is happening now. For example, over the last 22 trading sessions there have been ten 90% Days, six 90% Upside Days, and four 90% Downside Days. As the Lowryâs Organization points out:
âYet, all these 90% Days have failed to produce any sustained trends in either Supply or Demand. Of the six 90% Up Days, three have been immediately followed by a market decline, while the longest rally following a 90% Up Day was just three days (Aug. 29th-31st). But, 90% Down Days have been similarly unsuccessful in signaling the start of a sustained trend in selling, as two of the four days have been followed by market rallies, while the other two days were followed by just one more day of decline.â
One possible âtellâ about if a bottom is forming would be the KBW Banking Index (BKX/36.23). It is approaching its August 23 selling-climax low of 34.57. If the BKX holds above that low and turns up, it would be a step in the right direction since it is difficult to envision a sustainable stock market rally without the help of the Financials. Whatever the outcome, the S&P 500 (SPX/1154.23) should resolve itself either on the upside, or the downside, over the next few weeks. While my hope is that it will be on the upside, a decisive break below 1100 would suggest the rally since the March 2009 âlowsâ is over.
The call for this week: Over the weekend Greece did not default, although for over a year I have expressed the view that Greece has to default; a stance I continue to embrace. This morning, however, rumors are swirling again about a Greek default along with hints that Germany is not going to prevent it. That leaves the pre-opening futures down over 20 points, which would represent a retest of the selling-climax âlowsâ (1101 â 1120 basis the SPX). While I am hopeful this will be a successful retest, consistent with the October 1978/1979 bottoming sequence, if 1100 is decisively broken it would imply the rally from the March 2009 âlowsâ is over.
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Copyright © Raymond James
