Weak quarter for stock indexes dims prospects

Market Snapshot for September 30, 2011:

  • Closing Prices: DOW 10,913.38 (-240.60, -2.16%),S&P 500 1,131.42 (-28.98, -2.5%), NASDAQ 2,415.40 (-65.36, -2.63%), Nikkei 225 8,700.29 (-0.94, -0.01), DAX 5,502.02 (-137.56, -2.44%), FTSE 5,128.48 (-68.36, -1.32%)
  • OIL 79.20, GOLD 1,622.30, SILVER 30.083
  • EURO 1.3384, YEN 77.04, BRITISH POUND 1.5582, U.S. DOLLAR INDEX 79.075

The End of a Disappointing Quarter

It was a nasty summer for the markets with the indices posting their worst quarterly losses in nearly three years. The Dow Jones Industrial Average ($DJI) shed 6.03%, the S&P 500 fell 7.18%, and the Nasdaq Composite ($COMPX) ended the quarter lower by 6.36%. With the exception of the final quarter of 2008, the last time the S&P 500 had seen such a drop was nine years ago.

What will the Future Bring?

Back in 2008 I was asked by one individual a question seeped in hope: "When will this market recover?" My response was not quite what they wanted to hear: "It will likely take a good ten years or so before we see the Dow able to have a chance at truly breaking 'last' year's highs." It's been just over three years and about a third of the way to that point and we haven't seen anything yet to change that outlook.

Dow Jones Industrial Average (Figure 1)

Figure 1 displays a weekly chart of the DIA (Dow tracking stock), which shows the price action in the Dow over the past six years. In 2008 a modest correction in the Dow (and market as a whole) intensified after striking strong monthly resistance levels. The magnitude of the selloff was so extreme that it made it quite difficult for the index to mount a comparable reversal in terms of momentum or pace. Instead, the market has pulled higher, but the pace of that upside was almost half of that seen in the selloff.

This type of recovery tends to have an exceptionally difficult time breaking through prior highs without at least one more selloff on the same time frame that lasts as long as the previous wave of buying. When an attempt is made prior to that time, it generally serves as a bull trap and the prior high will "break" only briefly, but without conviction, before selling off sharply once again. This was seen on a smaller scale back in 2007 with the July and October highs whereby the October high was slightly greater than July's.

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