June 13th, 2009

Summers, 2003 and 2009: Market Similarities and Differences

“Is this a turning point, or simply a detour — a few good months in a 30-month recession that has robbed the city of 242,000 jobs? Is the city’s economy on the brink of recovery, or has the topography of New York’s distress simply flattened out?…..’If the recovery is under way, and we believe it is, then the future of New York City is starting to brighten,’ he said. ‘These things tend to feed on themselves.

As optimism starts to pick up, as all types of businesses are starting to see marginal improvements, it’s a better climate and consumer spending begins to improve.’….’I think the economy is in absolute disarray. I really, really don’t think that things are going to get better for a long time.” At best, she said, the recession is hitting bottom. ‘People are getting used to being miserable. Out of stability comes a certain amount of confidence. But I don’t see any growth happening.’ There remains plenty to be gloomy about.”

You would think that was quoted from a recent NY Times article describing the current economic environment. Actually, though, it was from “A Few Rays of Light Pierce New York City’s Economic Fog” that appeared on August 10, 2003. At that point, the market had just experienced an excellent bounce off the bottom that started March 11, 2003. By the time the article was published, the market had been retreating for nearly two months from an interim peak of 1015 on June 17 (almost exactly the same level as today, exactly six years later). Only a few days after the article appeared, the market started surging ahead to what would be an 18% move to the next consolidation plateau that ultimately stretched over most of 2004.

So is there anything we can learn from the 2003 Bear Market bottom? In a piece entitled “Comparing Market Crash Bottoms: 1975, 2003 and 2009” written on May 9, I wrote:

  • There doesn’t appear to be any significant ratcheting up of trading volume. Furthermore, volume trails off during the summer months. If there’s going to be a significant volume increase, in all likelihood, it will come around Labor Day.
  • The 60- and 90-day moving averages haven’t turned yet and there’s too much of a gap (13%) between them and the 180-day before they can cross. It could take several of months before that cross will occur.
  • The pattern conflicts with symmetry sensibilities; the earlier bottoms were nearly perfectly symmetrical. The symmetry in this base would result from the formation of a right shoulder.
  • Time would allow the 300-day to continue its descent aiming at a convergence and the Index crossing above it around October.

About a month and a half has passed and nothing seems to have changed. The S&P 500 Index has satisfied all prerequisites for continuing an upside moving up: 1) crossing above the 200-day moving average, 2) apparently crossing above (though barely) the neckline of the inverse head-and-shoulder and, soon, 3) a “golden cross” (90-day crossing above the 180-day moving average). The market’s internals look even better now with 86% of stocks above their 90-day, 70% above the 180-day and 36% having made “golden crosses”. But we’re still waiting for the right shoulder.

Here’s what the chart currently looks like:

But look carefully at the bottom of the chart, the volume bar charts. The key element to the market’s future continues to be in the trading volumes. The red line tracks the declining trend of volume since mid-March. All the time, however, On-Balance-Volume (a cummulative value of volume on up days less volume on down days) has been trending up as indicated by the dashed blue line. Unfortunately, OBV isn’t much higher today than it was in October, 2008 when the Index was also around 946.

So is there anything we can learn from the 2003 Bear Market bottom? What did the Index performance look like in 2003?

After straight up 26% over 4 months, the market lost steam and started to consolidate, a pause that lasted two months through the summer to the end of August. During that time, also, volume started to dry up (the red line in the volume bars) but OBV continued to move ahead indicating that demand continually exceeded selling. Over the summer, not only did the moving averages continue to improve but at the beginning of August, the 180-day crossed above the 300-day creating a perfect “Bull Cross” where the Index and its 4 moving averages were perfectly bullishly aligned.

This year, trading volumes trend will signal whether:

  1. the market consolidates as it did in 2003 (the retreat will finally create a more perfectly formed right shoulder to that inverse head-and-shoulder) building for a surge in the fall or
  2. what we’ve experience was actually that bull trap suckers’ rally the perma-bears have been contending all along.

I don’t think we’re seeing the bears come out of hiding to sell to unwitting buyers; I think we’re seeing bulls pulling back and being unwilling to buy at these prices. To me, the declining volumes don’t indicate sellers holding back and waiting for higher prices in order to dump (hasn’t everyone who wanted to run for shelter already done so?). It instead looks to like buyers deciding to catch their breaths and waiting before putting more money to work (that’s what I’m doing).

What will I do with my holdings? First, I have to decide whether emotionally I can take a 10-15% correction over the next couple of months. Then I have to look at each stock I own and:

  • assess the strength of their upside momentum (if strong, they’ll weather the consolidation; if not, they’ll decline to old lows)
  • see how their price and moving averages are aligned (over 300-, over 180-, golden cross or merely over 60-day moving average)
  • determine where resistance and support levels are relative to the current price (how far down are clear support levels and can I withstand that amount of decline; is it below my cost).

I just may decide to take a summer vacation, lock in some profits and start from scratch again after Labor Day. Or maybe I’ll just put off the decision until I see how this week goes. Let’s hope that history repeats itself again with a terrific rally in the fall.

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