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Thursday, February 6, 2014

90 percent days

In IDENTIFYING BEAR MARKET BOTTOMS AND NEW BULL MARKETS  Paul Desmond describes how 90 percent up and down days can be important signals of trend changes.  It is an interesting paper and I have found these days useful over the years.  Here is how he defined such days.

In reviewing these numbers, we found that almost all periods of significant market decline in the past 69 years have contained at least one,and usually more than one, day of panic selling in which Downside Volume equaled 90.0% or more of the total of Upside Volume plus Downside Volume, and Points Lost equaled 90.0% or more of the total of Points Gained plus Points Lost.

I don't have a data source for determining the points gained and points lost of all  NYSE stocks.  However, the up and down volume statistics are available in many places.  In practice I believe that nearly every time the volume is 90 percent up or down of the total volume the points gain will be very close as well.  Therefore I only look at the volume.  On 1/24 and on 2/3 we had 90 percent down days.  I should have noticed that at the time, but I didn't.  I usually don't look at the volume total unless the percent of stocks up or down on the day is in the upper 80% range.  On both those days the percent of stocks down was in the low 80s.  I had to read about the 90 percent down days somewhere else.  I guess I am slipping a bit in my analysis.  Sorry about that.  Here are a couple of snippets of what Desmond says about multiple down days.

Thus, our 69-year record shows that declines containing two or more 90% Downside Days usually persist, on a trend basis, until investors eventually come rushing back in to snap up what they
perceive to be the bargains of the decade and, in the process, produce a 90% Upside Day

Market declines containing two or more 90% Downside Days often generate a series of additional 90% Downside Days, often spread apart by as much as 30 trading days. Therefore, it should not be assumed that an
investor can successfully ride out such a decline without taking defensive measures.

This is the first decline in this bull market to have two 90 percent down days.  It is time to pay attention.  Also remember we had one of those back in June that I noted on the blog at the time.  We have had three of them in less then a year.  Here is another snippet about the down days.

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. But, because they show that investors are in a mood to
panic, even an isolated 90% Downside Day should be viewed as an important warning that more could follow.

This sell off has definitely raised some angst among investors.  I have seen a number of articles by market pundits telling me that there is no sign of a bear market because of some technical or fundamental reason.  The problem is that none of these people saw either of the last two bear markets coming.  Why should we believe them now.  Every top and bottom look somewhat different.  If there was a standard definition it would be easy to spot them.  When the market goes into a bubble it will be followed by a nasty bear market.  This market has gone into bubble valuation on small caps and over valuation on everything else.  There is another bad bear market coming.  Our job is to recognize it and get out of the way before everybody else does.  In Did the Dow top? I noted the three peaks and domed house pattern on the Dow. SPX has been forming what looks like a Sornette pre-crash bubble pattern that should have completed in Jan.  The first 90 percent down day came the day after I published that article (did somebody read the blog, LOL).  We now have had a second one.  The evidence that this bull market is over is mounting.  It is time for action.  Do not just sit there and watch the market crash.  The over valuation and huge margin debt guarantee a large decline is coming.  At the last two tops I told my friends and family to expect a 30-40% decline.  I was not bearish enough if you can believe that, LOL.  All I have told them so far is to expect another very large drop.  I hate to put a number on it.  I think there is a real possibility this one is worse then the last two.

I am sure a number of people are going to read this and think that is crazy talk.  If you think that is the case I ask only one question.  Did you recognize either of the other tops?


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