Stock Market Analysis

Tuesday, August 02, 2011

8 Straight Down Days... What Does It Mean?

It was a blood bath in the market today as the Dow collasped into its 8th straight down day, closing down by 265 points.

Fundamentals
It was a slaughter today in stock markets around the world following Monday's dismal US ISM Index. The recent economic data seems to suggest that the economic engine that was driving the recovery since 2009 seems to have disappeared all at once, leaving the US economy where it was back in 2009 once again. This brought back fears of a "Double Dip" recession which a lot of analysts seem to be talking about lately even though it has never quite happened before. Indeed, all economic recovery phase go through a period of uncertainty and volatility following the initial push. We saw the same thing back in the last economic crisis. However, its short term effects cannot be overlooked as it can last as long as a couple of years, like we saw back in 2004 to 2005. In fact, today's mixed retail sales numbers really didn't help improve sentiments. Investors rushed back into bonds, pushing bond yields to low levels unseen since Oct 2010. But its has yet to reach the kind of low level we saw back in August 2010 which resulted in a market turn around. Yes, when bond yields are too low to satisfy investors' investment objectives, they will return to equities which will always be selling at a discount then. The next hammer to drop would be this Friday's Jobs Report. If it turns out poorly, we could see this market go much lower. Yes, the economy is almost back down to where it was in 2009... would the stock market do so as well?

Technicals
The Dow made its first 8 straight down days today since Oct 2008 when the bear market at last found a bottom and came to a halt. In fact, 8 consecutive down days are so rare that the last time the Dow did so before Oct 2008 was when the market found a bottom during the last crisis at Sep 2001 and the last time before that was in August 1982, which also found a bottom! Yes, all three times over the past thirty years the Dow made 8 straight down days, the market finds a significant bottom. Could it happen again this time round? Odds are very good due to several reasons; Firstly, the Dow is now at the bottom of its volatile intermediate neutral channel and chances are still good that it will turn around from here. Secondly, the huge dip in the bond yields might encourage investors to return to equities. Thirdly, as I mentioned to paid subscribers yesterday, the VIX dropping in the same direction as the market almost always lead to a turn around within the next few days. Fourthly, the Dow is currently in a deep short term oversold condition so we should see at least a few small up days from tomorrow onwards.

For now, the Dow remains in a short term bear trend within an intermediate term neutral trend within a primary bull trend.
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