Friday, August 17, 2007
Multiple-day declines breathe life into the stock market.
I first read about this thesis back in 1987, shortly after the stock market crashed. It was an obscure article in an obscure journal that I'm certain only me and the author's mother took the time to read.
The article was about "life-runs" and "death-runs" – multiple-day declines and advances that lead to the beginning or the end of bull markets. I've searched and searched for it. I've Googled the terms "life-run" and "death-run" and yet, I still can't find the original article...
But, I remember it well because the idea made a lot of sense to me at the time.
The premise is that five consecutive rally days that push the market up more than 5% (cumulative) is a "death-run" that signals the end of a bull market. Conversely, five consecutive declines that pummel the market more than 5% signal the end of a bear market or a correction phase.
Back in July, as the Dow approached the 14,000 mark, I was on the lookout for a death-run. But, it didn't happen. The day the Dow closed over 14,000 was only the fourth consecutive up day, and the cumulative gains were just about 4%.
So, even though I was cautious and I advised against getting too caught up in the bullish fervor, I didn't think we were on the verge of a bear market.
And I still don't think that. In fact, I'm thinking quite the opposite.
At Wednesday's close, the S&P 500 had declined for five consecutive days and the cumulative loss was more than 6.1%. This qualified as a life-run, and it should mark the end – or the near end – of a decline.
So, when the futures market sold off strongly Wednesday night, I made sure S&A Short Report subscribers knew what I was thinking before the market opened on Thursday.
Two weeks ago, as this correction was just getting underway, I targeted 1,375 as a potential support zone for the S&P 500. I told subscribers that if and when we got there, we should "start buying like a teenage diva with daddy's credit card."
The market hit that level yesterday and actually dropped a few points below it. But by the close, the S&P 500 was at 1,411 – a full 36 points above our downside target. Anyone with the intestinal fortitude to step up to the plate and take a few swings was looking pretty good at the end of the day.
There is tremendous upside potential in this market. Overly aggressive short sellers are looking at yesterday's reversal and questioning whether or not they're still on the right side.
Also, bargain hunters, who've shied away from the stock market lately, might find some encouragement in yesterday's reversal.
I don't know if we're completely out of the woods here or not. But, yesterday had all the look and feel of a "washout" decline that exhausted all of the sellers. The potential for a rally of several hundred points from here is huge... and I wouldn't want to be on the other side.
It may indeed be a matter of life and death.
Best regards and good trading,
S&P 500 trades at 10% correction point for a moment, closes up yesterday... down 9.2% from this year's high.
Shorts continue to pay off: UltraShort Real Estate, UltraShort Consumer, and UltraShort Financials all at 52-week highs.
Nation's second largest mortgage lender Countrywide Financial at another new low... down 39% this week.