One Way to Tell if We Are in a Bear Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Bull markets usually go up the first four trading days of the month. After giving a strong negative signal in May, investors should be watching this indicator in the early days of June. A second negative signal would be a confirmation that a new bear market has begun.

Money tends to get reallocated at the beginning of the month. The behavior is more pronounced at the beginning of the quarter and most pronounced at the beginning of the year. In bull markets, much of this money gets allocated on the buy side for stocks. In bears markets, a higher percentage of investing money will go to safe haven assets. So in a bull market the first four trading days (not five as many sources claim) of the month tend to see a nice rise in stock prices. The first couple of days are almost always positive.

Even in strong bull markets, not every month has to have an up move in the beginning days. Every so many months, investors are likely to grow cautious and take some profits. The bulls should regain control for the next several months however before profits get high enough again so that investors want to take some money off the table. So far, the rally that began in March 2009 has managed to just hold together.

The first negative signal for the rally was given in July 2009 for the Dow Jones Industrial Average. The next month was positive though and then another negative signal was given in early September. This was followed by a number of months that when stocks were up in the first four days. Then February 2010 gave another negative signal. March and April were once again OK and then came May.  The flash crash happened on the fourth trading day of May and the market was already down before it occurred. May was an ugly month.

Four negative signals on the first four trading days of the month indicator are a lot in just over a year. It indicates a rally that has weak underpinnings (as does the falling volume on the Dow during most of the rally). We still have not as of yet seen negative signals two months in a row. Maybe we will by June 4th.  If we do, it would be strong evidence that a new bear market has begun.

Disclosure: None.

Daryl Montgomery Organizer,
New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Market Continues Choppy Trading

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Choppy trading is a sign of a troubled market. Within the last ten days, U.S. stocks have had a great deal of difficulty deciding which way they wish to go. As of today, the Nasdaq has either gapped up or down seven days in a row on the open. Intraday gaps, which are very rare and indicate a great deal of volatility, have also occurred.  This type of trading usually takes place at market tops or bottoms.

The problems in the U.S. stock market began intraday on Thursday, May 6th with the sudden market drop and rise around 3:00PM. In a span of approximately 16 minutes, there were multiple gaps on the downside and then multiple gaps on the upside on the major U.S. market indices on the one-minute chart. The Dow Jones Industrial Average moved 700 points in both directions in that short period. Fewer gaps appear on the five-minute and fifteen minute charts, but they are more pronounced. This was followed by a noticeable intra-day gap on the downside on all the very short-term charts on May 7th. Then there was a massive gap up on the open on Monday, May 10th, with the Nasdaq opening around 100 points higher than its Friday close. The ECB (European Central Bank) has admitted to a massive liquidity injection at that time and this money flowed directly into the stock market. Other central banks were probably involved as well.

Looking at the charts it can be seen that Nasdaq then gapped down on Tuesday, up on Wednesday, and down on Thursday on the open. The gap down on Tuesday was significant, but the other two were relatively minor and not really out of the ordinary. Then last Friday, there was an almost 30-point drop on Nasdaq when stocks began trading. That is very much out of the business as usual range. After that, there was a small gap on Monday and a somewhat larger gap up today. The market suddenly turned around in the middle of the day yesterday while trying to fill the huge gap from May 6th. This is atypical behavior (the gap was only partially filled) and has all the earmarks of central bank interference.

Markets like to trade in continuous patterns. When gaps occur, they almost always get filled (trading takes place in the price range that was skipped because of the gap). This commonly happens within a few days, but it can take weeks, months or even years.  Investors in general don't like choppy markets, although they are a boon to short-term traders. Trending markets tend to have smoother price movements and investors should be on the lookout for a return to this type of less volatile environment.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Euro Problems Threaten World Markets

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


These days a trillion-dollar bailout just doesn't seem to go that far. Spending that amount to rescue the euro made the markets euphoric for only a couple of days. While stocks rose sharply immediately after the announcement, they are now selling off again. The euro itself is testing its low made in the fall of 2008.

The euro is being rattled today because of reports that French president Sarkozy threatened to pull France out of the currency union. This allegedly happened (the French deny that it did) at a May 7th meeting of ministers before the bailout plan had been worked out. If it did happen, it's old news. If you only read the press headlines though, you would think it had just occurred and is a new development. It didn't and it isn't. The source for this news item came from Socialist leaders in Spain. They may wish to see the euro system fall apart to further their own anti-capitalist agenda and to increase their personal power. So can you believe what they are saying?

So far in New York trade this morning, the euro (FXE) has traded as low as 123.24. This takes out the Credit Crisis low of 124.04 on October 27, 2008.  The euro has major technical support around the 125 area. A break of that level is a serious problem. The next step down is to around 120. A nose-diving euro is not just a problem for Europe however. In our globally interconnected economy, it will spread around the world like a financial tsunami. Not only is there a danger of dropping stock markets, but economies will be damaged as well. While the euro was falling this morning so were U.S. stocks. The Dow was down almost 200 points and the Nasdaq 60 points. The trade-weighted dollar (DXY) traded up as high as 86.24.

The euro has gotten to its current troubled state because of a complete lack of planning, an inability to face reality, failure to consider intelligent alternatives and a delay in taking action on the part of the eurozone leadership. Instead of making the hard decisions to handle the problems that began with the Greek debt crisis, they have engaged in stonewalling and dealing with the PR aspects of the problem, instead of solving the problem itself.  Unfortunately, this type of economic leadership is not unique to Europe, but is typical in most of the world today. If the euro blows up, Americans will be very much aware of it because of the big hole it leaves in the U.S. economy.

Disclosure: No euro or dollar postions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

A Problem With Volume for the New Rally

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


One of the most talked about aspects of the stock market rally that began in March 2009 was the lack of volume support. As the market continued to go up, buying continued to dry up. The rally that began on Monday is exhibiting this behavior to an extreme. Lack of volume support now makes stocks vulnerable to another sudden downturn.

The problem with volume is most evident on the Dow Jones Industrial Average. Around the low last March, the index was trading over 600 million shares a day. Within the last two months, there were many days when volume was frequently below 200 million shares. During 2010, there have been a few volume spikes around 400 million shares, but almost all of these took place on options expiration days. Rising volume on those days doesn't indicate increased investor interest in the market.  Volume finally did perk up considerably at the end of last week though - on big selling.  Over 400 million shares were traded on the Dow on both Thursday and Friday.

Buyers have not been as enthusiastic on the upside however. The volume on the big rally on Monday was around 300 million shares, much less than volume on the two preceding down days. The Dow dropped slightly on Tuesday and volume was somewhat over 200 million shares. In and of itself this was OK since you want to see lower volume on down days.  When the market goes up afterwards though, the volume must also rise.  This didn't happen on Wednesday, despite the 150 point rally. Volume was well below 200 million shares until the close when around 30 million shares traded at the end of the day. Despite all of those shares changing hands, stock prices barely budged. This would indicate equal amounts of buying and selling (also known as stalling or churning). Final volume on Wednesday came in at 195 million shares. So there was a big rally on pathetic volume.

Not only is the rally lacking proper volume support, but the Dow, S&P 500 and Nasdaq all bounced off their 200-day moving averages on Thursday (they actually pierced them for a short period) and they have now traded back up to their 50-day moving averages. This is now a key resistance level. So far, this is a normal bear-trading pattern.  For it to turn into a bull pattern, the stock indices must get above and stay above the 50-day moving averages. We should soon find out if this can happen.

Disclosure: None relevant

Daryl Montgomery Organizer,
New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Similarities Between the 2010 and 1997 Market Crashes

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


My blog post on May 4th mentioned the stock market was rolling over and on May 5th, I made the comparison between the problems in Europe today with those of Asia in 1997. I specifically pointed out that the Dow Jones Industrial Average had a one-day 7% drop because of the Asian crisis. The next day, the Dow was down 9.9% intraday on the current European crisis.

The Asian crisis in 1997, frequently referred to as the Asian contagion because it eventually spread from country to country, started with a currency crisis in Thailand. It soon engulfed most of East and South Asia. While Thailand's economy was small, it had been vibrant for many years. Its currency was overvalued though and this is where the problem began. Few people would characterize Greece as having a vibrant economy at the moment, though it is certainly represents a very minor part of overall eurozone economic activity. As the Asian situation in 1997 demonstrated, problems that show up in small countries can easily spread throughout an entire region and have global consequences.

So what did the EU leadership do? Despite this recent historical lesson, they decided to continually postpone dealing with the situation in Greece. Not surprisingly, contagion began to spread to the other PIIGS countries (Portugal, Ireland, Italy, and Spain), the euro tanked and this in now endangering the export based economies of currency union, and finally, world markets have sold off. Fortunately, EU authorities weren't faced with an outbreak of bubonic plague - otherwise we'd all be dead.

The U.S. stock market drop in 1997 mostly took place on October 27th.  The Dow Jones Industrial Average closed at 7715 on Friday the 24th. It then dropped 554 points on Monday, closing just off its low for the day. The loss was 7.2%. The bottom wasn't hit until intraday on the 28th however. At the low, the Dow had lost another 225 points and was trading at 6936. From top to bottom, the index was down 10.1% in a little over a day. On Thursday, May 6, 2010, the Dow at its intraday low was down 9.9% from the previous day's close. So far at least, the percent of the two drops is almost identical.

The 200-day moving average was an important barrier in 1997 and probably will be so in 2010 (at least for now).  The markets were trading way above the 200-day before the drop in 1997, as they have been recently. There was some piercing of the 200-day both times. It could happen again in the next few days, but the 200-day should be considered an important support level that the market will try to hold or return to quickly on a break.

The VIX, the volatility indicator, spiked into the high 40's in 1997. In 2010, it rose to 42.14. While the highs are somewhat different, the rallies of the VIX in both cases are very similar. In October 1997, the VIX had been slowly rising for almost two years from a low of around 10 and was trading around the 20 level. The low of 15.23 in 2010 was hit in early April. The VIX rose approximately 47 points from its value a few weeks earlier during both crashes.

The important question now of course is what is going to happen. The markets recovered rapidly in 1997, but this was during a long-term secular bull market. We are now in a low-term secular bear market and such buoyancy can't be assumed. The 1997 crash was not the end of the market's problems either. Regional financial crisis after all can easily cause problems for a couple of years. A deep, but short, bear market followed in August 1998 caused by the collapse of Long-Term Capital. Central banks reacted by pumping liquidity into the financial system and the tech stock blow-off followed. If they do that this time, and they most certainly will, expect a commodities blow-off instead.

Disclosure: None relevant.

Daryl Montgomery
Organizer, New York Investing meetup
 http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.