Stormy Conditions

09/04/2017 2:55 am EST


Ron Rowland

Editor, All Star Fund Trader

Hurricane Harvey grew from a simple tropical depression to a Category 4 killer storm. Experts are saying that its 42-hour metamorphosis was the fastest ever, notes Ron Rowland, editor of Invest with an Edge.

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While the change from a bull to a bear market does not tend to be as fast as Harvey’s speedy transformation, it still happens relatively quickly. The 1987 turnaround is an example.

The S&P 500 had hit an all-time high on August 25 of that year. By October 19, 39 days later, the market had lost 30% of its value.

In 2000, the top occurred on March 24, before a 50%-plus slide that ended in 2003. But it took just 15 days for the first 5% to be lost, and 16 days for the losses to exceed 10%.

The last 50%-plus slide in the S&P 500 began in October 2007 and ended in 2009. In just 21 trading days, the Index fell its first 5%—by day 62, it had lost more than 10%.

What signaled each of these precipitous declines? A failure to set yet another new high occurred relatively quickly in each case.

In 1987, an attempt was made just 29 trading days after the new high. It fell eight points short (0.25%) of doing so.

In 2000, the assault on a new high occurred 11 trading days after reaching these heights. It failed by 11 points (0.73%).

And in 2007, the unsuccessful attempt consumed just 16 days. It had but 13 points to go (0.84%).

Hence, most financial professionals are focused on whether the current market can recover and set a new market high. Each time it does delays the coming of the inevitable decline that follows every bull market.
If we look at the last three bull market tops, the failure to make a new high has come within 11 to 29 trading days. The last all-time high was hit by the S&P on July 27.

Four trading days later, the market sought to make another new high but fell just two points short (0.10%). It has now been 22 trading days since the last new index high was made.

Still, in the last three major market tops, a 5% loss had been incurred within nine (1987) to 21 (2007) trading days. We’re at 22 days—and we began today just 1.6% below the July 27 high. The lowest low since then registered a 2.31% decline. No 5% decline yet.

So while the jury is still out, we don’t seem to be following the pattern of past market tops. Although we might be experiencing “the big one” in hurricane terms, it appears that there is still a good chance that more new highs may be in our future before “the big one” returns to the financial markets.

The market indexes seemed to be signaling this last week: All of them were up, both foreign and domestic. Bonds and gold also were positive.

However, while the latter two have also been up for the whole month of August, only the Dow Jones Industrial Index has gained for all of August among U.S. stock indexes. International stocks have been much stronger.

We did not have any major news last week, as the Yellen and Draghi announcement on Friday were benign. Economic reports were about as expected, with seven below expectations and six above.

While the housing numbers were weak, the Service sector continues to soar, and non-seasonally-adjusted unemployment claim filings hit the lowest level since 1969.

But there was reason for caution as the hurricane blew in to Texas. Houston is the U.S.’s fourth-biggest city. If it were a country, it would be ranked 25th based on GDP.

Having Houston out of circulation for an indeterminate amount of time has got to be a negative. This is also the case with its oil-refining capacity, the loss of which is sure to add at least 20 cents onto the price of a gallon of gas. Both of these are likely to slow the economic recovery that still hungers for the stimulus of a tax cut.

The S&P’s turnaround last week, like the hurricane’s quick return to sea on Saturday, did not improve the immediate prospects.

The short-term technical condition of the market continues to come under assault: The number of new highs has been low, and the S&P remains below its 50-day moving average for the third straight Friday, its longest period underwater since before the 2016 election.

While Harvey was quick in forming, like the past three market tops, historical research on the markets does bring some good news.

I looked at the last 87 years of daily prices (over 20,000) and found that, on average, the worst days in the market were not right after a new high. Rather, the massive declines that define a true bear market tend to occur deep into the downturn.

On average, a 5% down day has not occurred until 222 trading days after the last high-water mark, giving investors plenty of time to evacuate and mitigate losses.

Or does it? Unfortunately, the range in occurrences is two to 724 trading days! Maybe using time-tested, quantitative strategies to get out of town is a better way to go.

Best wishes to the residents of Texas. Please say a prayer for them and their neighbors in these dark and stormy times.

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