Sunday, February 16, 2014

Is the US market correction over?


Long term, we were expecting a correction, but breadth did not indicate the bull market is ending (1) (2).

Friday 24th was a 90/90 day. This Lowry Research paper (from TBP) is worth reading.  "Almost all periods of significant market decline in the past 69 years have contained at least one, and usually more than one," 90/90 day.

They may signify major declines:
  • They "typically occur on a number of occasions throughout a major decline, often spread apart by as much as thirty trading days."
  • Declines containing 2 or more 90/90 down days usually persist until a 90/90 up day (or rarely, 2 consecutive 80 upside days).
  • "Impressive, big-volume “snap-back” rallies lasting from two to seven days commonly follow quickly after 90% Downside Days", but for longer term investors they are a chance to sell.
Or short term corrections:
  • "A single, isolated 90% Downside Day does not, by itself, have any long term trend implications, since they often occur at the end of short term corrections....a 90% Downside Day that occurs quickly after a market high is most commonly associated with a short term market correction, although there are some notable exceptions in the record. This is also true for a single 90% Downside Day (not part of a series) that is triggered by a surprise news announcement." 
Assuming that this is a correction (until we see another 90/90 day), is it correction over?
  • In the bounce back from the 6th onwards, the pattern of down days on higher volume was broken.  Still, there is a divergence as volume trends down while the index goes up.
  • In the bounce back, breadth is wide.  Its not limited to the index stocks.
To be sure, we would need to see more of the favorable price/volume action.  Which would lead to the index making new highs.

No comments: