Last Friday was a miserably cold day in Interlaken where I was attending an investment conference. It was also a so-called 90% down-day for American stock markets (and many other bourses also recorded downward dynamics). A 90% down-day is defined as a day when downside volume equals 90% or more of the total upside plus downside volume and points lost equal 90% or more of the total points gained plus points lost. The historical record show that 90% down-days do not usually occur as a single incident on the bottom day of an important decline, but typically on a number of occasions throughout a major decline. As far as the very short term is concerned, 90% down-days are often followed by two- to seven-day bounces.
At times like these it is useful also to cast an eye on longer-term data. Focusing on monthly data for the past 12 years, the chart below shows the trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (ROC) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and in 2007. And 2010? With the ROC still perched above the zero line, the primary trend is still bullish, but warrants close scrutiny.
Source: StockCharts.com
Where does this leave us at this juncture? Considering an array of indicators, we are probably in a phase which could see stock market indices reverting from extended rallies to their 200-day moving averages, or in some instances ranging for a while, to work off overbought technicals and overbullish sentiment. In the meantime, I am happy to sit on cash as I wait for Mr Market to show his hand as to whether we reenter longs or play it from the short side.
