U.S. Stocks fell further last week, with the Dow Jones Industrial Average (DJIA.A) falling on Friday to 11,346.51, a level it hasn't seen since the third quarter of 2006. As of Thursday's 'very big' 3.0% decline in the Dow, the average had lost 609.67 points (5.1%) over the previous five trading days. The rout is in full force, with the Dow closing below all the trend-tracking averages we follow, and is in the lower third of all the n-day ranges as well. Things look about as bad as they can get. Meanwhile, investors have sought safety from falling equity prices in U.S. Treasury issues, which sent rates dropping, as the prices for government debt have risen. The yield on 10-year Treasury debt has fallen 19 basis points in the last week, and 30 basis points in the last two weeks, closing the week at 3.96%. The futures market which trades on the 10-year Note (CBT.TY) has risen concomitantly, gaining 1 11/32 points in the last five trading days to settle on Friday at 113-26 after trading as high as 114-05 intra-day.
Q: How have stocks performed in the past when the Dow Jones Industrial Average has seen a one-week percentage move in excess of -2.0% for two successive trading days when the yield on 10-year Treasury debt has fallen by at least 20 basis points in the last two weeks?
A: According to the 52 previous occurrences of this event, EventEdge indicates that DJIA.A has shown a strong bullish edge that peaks 37 trading days after the event. Thus, the projected date for the peak of the bullish edge relative to the current event date (Friday, June 27, 2008) is Wednesday, August 20, 2008.
DJIA.A rallies in 88% of the cases (46 of 52) by an average of 7.3% relative to the close on the event date. The average of the six declines is 1.7%. The overall return of the 52 cases is 6.3%, which, based on the close of DJIA.A on the event date (11,346.51), provides a target price of 12,061.34.
Looking at how the S&P 500 index (SPX) performs after this event, According to the 52 previous occurrences of this event, EventEdge indicates that SPX has shown a strong bullish edge that peaks 37 trading days after the event. Thus, the projected date for the peak of the bullish edge relative to the current event date (Friday, June 27, 2008) is Wednesday, August 20, 2008. SPX rallies in 85% of the cases (44 of 52) by an average of 7.4% relative to the close on the event date. The average of the eight declines is 2.0%. The overall return of the 52 cases is 6.0%, which, based on the close of SPX on the event date (1278.38), provides a target price of 1355.08.
This trading idea is a redux - we've seen several prior occurrences where we've published it before to generally good results. You can see those previous occurrences by clicking the links below.
Related Ideas:
Dow Jones Industrial Average - Longer Term Bullish Outlook - July 30, 2007
Dow - Diverging from Treasury Yields - March 12, 2004
Stocks - Taking it on the Chin as Government Yields Decline Further - May 21, 2003
Stocks - seasonal weakness is ending - October 23, 2000
Gibbons Burke is editor of MarketHistory.com.
