Dow closes above 10,000 for 1st time in a year

DJ comeback: Stock market’s best-known barometer closes above 10,000 for 1st time in a year

By Sara Lepro and Tim Paradis, AP Business Writers
5:08 pm EDT, Wednesday October 14, 2009

NEW YORK (AP) — When the Dow Jones industrial average first passed 10,000, traders tossed commemorative caps and uncorked champagne. This time around, the feeling was more like relief.

The best-known barometer of the stock market entered five-figure territory again Wednesday, the most visible sign yet that investors believe the economy is clawing its way back from the worst downturn since the Depression.

The milestone caps a stunning 53 percent comeback for the Dow since early March, when stocks were at their lowest levels in more than a decade.

“It’s almost like an announcement that the bear market is over,” said Arthur Hogan, chief market analyst at Jefferies & Co. (JEF) in Boston. “That is an eye-opener — ‘Hey, you know what, things must be getting better because the Dow is over 10,000.'”

Cheers went up briefly when the Dow eclipsed the milestone in the early afternoon, during a daylong rally driven by encouraging earnings reports from Intel Corp. and JPMorgan Chase & Co. (JPM) The average closed at 10,015.86, up 144.80 points.

It was the first time the Dow had touched 10,000 since October 2008, that time on the way down.

“I think there were times when we were in the deep part of the trough there back in the springtime when it felt like we’d never get back to this level,” said Bernie McSherry, senior vice president of strategic initiatives at Cuttone & Co.

Ethan Harris, head of North America economics at Bank of America Merrill Lynch (BAC), described it as a “relief rally that the world is not coming to an end.”

The mood was far from the euphoria of March 1999, when the Dow surpassed 10,000 for the first time. The Internet then was driving extraordinary gains in productivity, and serious people debated whether there was such a thing as a boom without end.

“If this is a bubble,” The Wall Street Journal marveled on its front page, “it sure is hard to pop.”

It did pop, of course. And then came the lost decade.

Stocks: A Range-Bound Recovery in 2009

S&P’s chief investment strategist says a bear-market bottom may already be in place—and tells why 2009 could be a better year for stocks

By Sam Stovall From Standard & Poor’s Equity Research Investing
Excerpted from a report published by Standard & Poor’s Equity Research Services on Dec. 22

Investors will remember 2008 as a year of change. Not just change in the White House, but also the pocket change that they used to call their portfolios.

Let’s face it. This bear market started as the perfect storm of popping bubbles—commodities, emerging markets, hedge funds, and real estate. From Oct. 9, 2007 through Nov. 20, 2008, the S&P 500 (SPX) declined 52%, making it the third-worst bear market since the 1929-32 crash. One of the more amazing characteristics of this decline was its speed. The average “mega-meltdown,” or bear market decline of more than 40%, traditionally took 21 months to play out. This one took 13 months.

Not surprisingly, all 10 sectors within the “500” fell, from a 22% slump for Consumer Staples to a 74% thrashing for the Financials. Finally, 125 of the 128 subindustries in the S&P 500 declined.

Factors Backing a Bottom

Where do we go from here? Probably not lower, in our opinion. A few months ago, I wrote that 700 on the “500” might be a worst-case scenario for a decline, citing the trendline drawn off of the 1932 low, the average bear-market retracement of prior bull market advances, and the applying of a bear market P/E ratio on a conservative “top-down” EPS estimate. We got close to that level, as the S&P 500 closed at 752 on Nov. 20. Since then, it rose 21%—technically signaling the start of a new bull market. So I say why quibble? What’s 50 points among friends? Besides, we believe there are several reasons that a bear-market bottom may already be in place.

We’re sure scared now…bringing it all together

A historic level of fear, even panic, has developed as forced liquidation is removing some players from the market completely. Another difficult lesson in leverage and risk management for some really bright folks. Brings to mind one of my favorite quotes, compliments of John Maynard Keynes, “The market can stay irrational longer than you can stay solvent”.

Irrational may be a mild description for what we’re seeing in the markets currently.  After a 1,000 point range on Friday from top to bottom, the Dow Jones Industrial Average added almost another 1,000 points Monday.  Clearly the selling was overdone on the downside and the market was drastically oversold after a 3,000 point decline from top to bottom in the previous eight trading sessions.  Thankfully, those nasty shorts decided to take some profits and get the rebound started Friday morning.

We wouldn’t consider this the all clear signal however.  Historically, a retest of the lows develops within a few months to verify the strength of the bottom.  Hitting the exact lows again is not a necessity, but a second significant down move usually at least comes close.  This offers a great time to pick up relative strength leaders as they separate from the pack.

The correlation noted in Here we are again? 2001 vs. 2008, Is it really 2001 again? and Back to the future again and it’s not pretty has finally culminated in the fear based washout we have been looking for.  Admittedly, it was at much lower levels than we expected, but the timing was almost perfect.  The rebound in 2001 started on the morning of Friday, September 21 at 944.75 on the Standard & Poor’s 500 (SPX).  The rally continued on Monday and Tuesday of the next week, covering a respectable 75.54 points or 8% from the lows.  Another 20 points were added by the close of the week after a brief rest on Wednesday and Thursday. By the end of the following week, another 30 points had been added (for a total of 126.63 points or 13.4%, from the lows).  Two weeks later, the net gain was flat after a brief run over 1,107.  Sideways trading then developed until a clear break over 1,100 in the first week of November.  Around Thanksgiving, the new high of 1,163 had brought the market back from the lows by over 23%.  The rest of the year saw a peak gain of only 10 more points in the first week of December.  A final 3.5 points was all that was left for the first week of the new year, as an intermediate top at 1,176.97 was found.  That top was tested again in late March of 2002, after a 100 point (8.7%) drop into late February.  That was all she wrote for that bounce however, as the SPX found new lows at 768 in October, finally the low for the entire bear market.  Patient buyers were rewarded as the final retest of the lows completed a massive head and shoulders bottom in March of 2003 at 789.

In 2008, the rebound started on the morning of Friday, October 10 at 839.80 on the SPX, almost three weeks behind schedule.  So far, the monster rally of Monday, October 13 has added 167.13 points or 19.9% from the lows.  A morning look at the futures market suggests another 20 or so points may be in the works for Tuesday.  In just three trading days, this bounce has covered almost the entire distance of the rebound in 2001-02, on a percentage basis.  The preceding decline was also much more violent as the SPX dropped from 1,300 to the lows at 839.80 (35.4%) in just six weeks.  In 2001, the fall drop was 28.2% over 16 weeks.

What Does it All Mean

If history holds, only a small portion of this bounce is behind us and there will be plenty of opportunities to get in at decent prices.  The first leg of this rally is past, but the second leg could be just as profitable.  At the very least, consolidation will develop following these monster gains.  This will give nimble traders the ability to buy the dips.  Long term investors are almost guaranteed to get another chance at prices near the lows in the coming months.  The key is to watch overhead resistance, and there is a ton of it.  Fibonacci retracements, moving averages and previous lows all will take their bite from the rally.  Don’t forget The Significance of the 400 day (80 week) moving average indicates we are still in a bear market.  No other long term indicators have given buy signals either.

One more market comparison to consider is the crash of 1987 which found its low on Tuesday, October 20.  This price action may actually be more appropriate considering the violence of the decline.  This October “crash” market dropped 35.9% in 8 weeks, bounced 19.8% in two days, then dropped back to within a few percentage points of the low in early December.  The market then totally recovered within two years.

Back to the future again and it’s not pretty

This post is the latest in a series covering the correlation of S&P 500 price movement during the bear markets of 2001 and 2008.  Previously, Is it really 2001 again? highlighted a number of similarities for both indicators and chart patterns in addition to the timing and relative resistance levels observed by both markets.  This expanded on the first entry Here we are again? 2001 vs. 2008 which started the discussion by showing the two markets spending a similar amount of time above the 1400 level, meeting resistance at a similar level in the area of 1560, forming a similar double top including a final fall retest followed by an extreme decline and culminating in a spring washout setting up an early summer bounce.

The correlation remained tight as both markets failed their early summer bounce by late May in the area of the 200 day moving average and the 50% retracement level of the fall to spring decline.  The correlation weakened over the summer as the current market started a much more drastic decline from the May top than occurred in 2001.  This time the spring lows were broken by July instead of waiting for September as in 2001.  A solid bounce from the July lows this year brought the S&P 500 back to just above the March lows where resistance was encountered around the 50 day moving average in the month of August.  Suddenly the correlation has returned as the market failed in August of 2001 at the 50 day moving average also.  As the calender turned to September in 2001, volume picked up as the market went into free fall.  Of course the 9/11 attacks affected the market as the month progressed and forever after.

But this year, the month of September has not started off any better despite the Feds attempt to stop the bleeding in the credit markets by taking control of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).  High volume distribution has been the theme with the exception of some serious short covering following the announcement this past weekend (and late Friday for those in the loop).  The bad news for the Feds and everyone else is, even as impressive as the short covering rally was Friday/Monday, it still never reclaimed the 50 day moving average nor the March lows.  If the July lows at 1200 don’t hold here, a repeat of 2001 may yet be in the cards.  The S&P 500 didn’t bottom until dropping under 950 in 2001 and the final bottom in 2002 saw intraday trading under 775.  We’re not ready to say it will get that bad this time, but taking out the July lows would suggest scary days ahead.

For those brave longs an entry at the July lows around 1200 is a good place to start.  Lows for the year are regularly made in September/October.

The Death of Crude Oil and the Commodity Rally?

The current correction in crude oil (and most commodities) has developed into more than just a normal pullback, taking out several primary support levels. The last major drop like this was in the summer of 2006, when crude dropped 36.1% from almost $80 to just above $50. A similar drop this time would take crude all the way back to $94.51; but we think the real battle will take place at the all important, round number $100 level. It took 5 attempts and much media hype to break $100 on the upside, and this was immediately followed by 5 weekly tests from above as support. Crude then rallied 50% in four months (eventually almost tripling from the lows) before topping out just under $150 at the beginning of July. A similar rally from the lows this time would put crude near the high level target of $250 on its next leg up.

Confirming this support are the commodity indices themselves. These show very similar targets to the one suggested by crude. First, the CRB, the most widely watched commodity index; with a heavy energy weighting. The daily chart shows the various support levels including the key retracement levels and the moving averages. First retrace support at 38.2% held for a while and we even had a minor bounce. Next up was the 200 day which held for two days before falling on Friday thanks to a strong showing by the dollar (see this chart below). We closed Friday right on the 50% retrace level, but we think we may ultimately be headed for the 61.8% retrace (the last support level in a bullish correction) because of what we see on the other charts including crude above and those below.

Is it really 2001 again?

I thought this would be a good time to revisit our 2001 vs 2008 Comparison of the S&P 500 from late April.

So far, the correlation is quite high both in timing and in respect to the technical indicators. We have seen the SPX fail at the 50% Retracement after only an intraday spike above the 200 day moving average. In 2001, the failure was short of the 200 day and never penetrated the 50% Retracement. Both failures occurred around May stock options expiration in late May.

The weekly 13/34 exponential moving average indicator (a favorite of John Murphy at Stockcharts.com) has recently confirmed its first sell signal since 2003. Additional similarities are present in the monthly indicators like MACD, RSI and ROC which are also all on sell signals for the first time since 2003.

Finally, the SPX has completed a test of the 80 week moving average from below as resistance. This is a critical level as described in The Significance of the 400 day (80 week) moving average. Just this past week the SPX also closed back below the 160 week moving average for the first time since early April. The last major break of the 160 week moving average before this, was of course early 2001.

Those who traded or had investments in the market in 2001 have vivid memories of what came next I am sure. The SPX dropped almost vertically from late May to late September shaving off 28% from top to bottom. The markets were closed for a full week during that time following the tragedy in New York. They opened in panicked fashion with many professionals talking of patriotically buying; yet most were selling with a fear they had never known in their lifetimes. The fear was so great that in just 5 days it was over. The SPX had dropped a staggering 150 points.

But then it bounced hard, rising over 24% by the first week of the new year and completely erasing the 150 point drop with a 232 point advance. That is a severe example of a fear based washout buying opportunity.

The Significance of the 400 day (80 week) moving average

Once the 80 week fell late in 2000, it was quickly tested from below twice, but never overtaken until the bear was dead.

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For the prior 20 years up to 2000, the 80 week was a great support level. It was only broken significantly in 1981, 1987 and 1990.

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This level has also provided solid support since 2003 when it was overtaken, declaring the bear dead. Now we have another significant break with what so far looks like a test of resistance from below. Until this level is left behind, the smart trade is to buy fear only and fade greed, especially in the area of the 80 week moving average. It only helps that this is also the site of the 50% retrace from the recent high to the low.

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