Stock Market Extreme Oversold Level Points to Bear Market Rally
Stock-Markets / Stocks Bear Market Mar 08, 2009 - 11:50 AM GMTBy: Mike_Burk
The good news is: The dollar is on a tear, closing at a 2 ½ year high Friday.
Short Term - In the past 6 months all of the major indices have fallen between 40% and 60%. This includes 3 brief, but impressive 20+% rallies following the 2 October lows and the November low.
Here are some historical comparisons for 6 month periods:
| High date | Low date | Amount of decline | Comments |
| 8/2008 | 3/6/2009 | 47.5% | Most recent 6 months of a 56% decline that began 10/2007. |
| 2/2002 | 7/23/2002 | 31.8% | Last 5mo of a 48% decline that began 3/2000. |
| 5/2001 | 9/11/2001 | 26.4% | |
| 7/1998 | 8/31/1998 | 19.3% | |
| 7/1990 | 10/11/1990 | 19.9% | |
| 8/1987 | 12/4/1987 | 33.5% | Brief |
| 4/1974 | 10/1/1974 | 33.1% | Last part of a 2 yr. 48% decline |
| 11/1969 | 5/26/1970 | 26.1% | Last part of a 1.5 yr 36% decline. |
| 4/1966 | 10/7/1966 | 20.8% | |
| 12/1961 | 6/14/1962 | 25.2% | |
| 7/1957 | 10/21/1957 | 20.3% | |
| 5/1946 | 11/22/1946 | 26.6% | |
| 10/1941 | 4/28/1942 | 26.8% | |
| 5/1940 | 25% | One of the sharpest 1 mo declines ever. | |
| 11/1938 | 4/10/1939 | 24.3% | |
| 8/1937 | 11/22/1937 | 40.8% | Last part of a 45% decline that began in March. |
| 2/1933 | 7/27/1934 | 27.2% | |
| 9/1932 | 2/27/1933 | 40.6% | Followed a 2mo 110% advance from the July 1932 low. |
| 3/1932 | 6/1/1932 | 51% | Last part of a 2.5 yr 83% decline. |
| 3/1930 | 6/24/1930 | 25.3% | Followed a 19% advance from the crash low and was followed by a 1 mo 16% advance. |
| 9/29 | 11/13/1929 | 44.7% | Still the mother of all crashes. |
Measured by the SPX, the current 6 month decline has been exceeded only once by the 51% decline going into the 1932 low. All major bear markets have accelerated to the downside in their later stages. Maybe we are nearing the end.
Intermediate term
Last Friday there were 827 new lows on the NYSE and 567 on the NASDAQ, the highest numbers since the November 21 low. Although these numbers were substantially less than the November 21 numbers (1527 NYSE - 1109 NASDAQ) they are high enough to imply, at least a retest (assuming a rally from here).
The chart below covers the past year showing the SPX in red and a 10% trend (19 day EMA) of NYSE new lows (NY NL) in blue. NY NL has been plotted on an inverted Y axis so decreasing new lows moves the indicator upward (up is good). Dashed vertical lines have been drawn on the 1st trading day of each month.
The indicator is falling sharply and currently has a value of 389 so it will take less than 389 NYSE new lows to move the indicator upward. There will be no tradable rally until that indicator begins to move upward.
The chart below is similar to the one above except is shows the NASDAQ composite (OTC) in blue and OTC NL calculated from NASDAQ new lows in black.
The value of OTC NL is 314 so it will take less than 314 NASDAQ new lows to turn that indicator upward.
Seasonality
Next week includes the week prior to the 2nd Friday of March during the 1st year of the Presidential Cycle.
The tables show the daily return on a percentage basis for the week prior to the 2nd Friday of March during the 1st year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and SPX data from 1953 - 2008. There are summaries for both the 1st year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.
Historically next week has been unremarkable, a little weaker during the 1st year of the Presidential Cycle than the overall averages.
Report for the week before the 2nd Friday of March
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1965-1 | -0.37% | 0.10% | -0.04% | 0.17% | 0.33% | 0.19% |
| 1969-1 | 0.44% | 0.42% | 0.73% | 2.12% | -2.07% | 1.64% |
| 1973-1 | 0.37% | 1.13% | 0.30% | -0.14% | -0.10% | 1.56% |
| 1977-1 | 0.10% | 0.06% | -0.50% | 0.20% | 0.14% | 0.00% |
| 1981-1 | 0.13% | -0.55% | -0.44% | 1.27% | 0.75% | 1.15% |
| 1985-1 | -0.03% | 0.01% | -0.57% | -0.79% | -0.29% | -1.68% |
| Avg | 0.20% | 0.21% | -0.09% | 0.53% | -0.32% | 0.53% |
| 1989-1 | 0.56% | -0.02% | 0.05% | -0.18% | 0.06% | 0.47% |
| 1993-1 | 0.86% | 0.25% | 0.57% | 0.20% | -0.22% | 1.67% |
| 1997-1 | 0.78% | -0.39% | -0.96% | -0.83% | -0.02% | -1.43% |
| 2001-1 | 1.19% | 2.87% | 0.88% | -2.48% | -5.34% | -2.88% |
| 2005-1 | 0.95% | -0.80% | -0.59% | -0.08% | -0.88% | -1.40% |
| Avg | 0.87% | 0.38% | -0.01% | -0.67% | -1.28% | -0.71% |
| OTC summary for Presidential Year 1 1965 - 2005 | ||||||
| Avg | 0.45% | 0.28% | -0.05% | -0.05% | -0.70% | -0.06% |
| Win% | 82% | 64% | 45% | 45% | 36% | 64% |
| OTC summary for all years 1963 - 2008 | ||||||
| Avg | 0.01% | 0.28% | -0.02% | 0.29% | -0.12% | 0.43% |
| Win% | 48% | 58% | 61% | 65% | 50% | 70% |
| SPX Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1953-1 | -0.04% | 0.31% | 0.81% | 0.04% | 0.19% | 1.31% |
| 1957-1 | 0.73% | 0.36% | 0.25% | -0.27% | -0.32% | 0.76% |
| 1961-1 | 0.16% | -0.91% | -0.05% | 0.09% | -0.03% | -0.73% |
| 1965-1 | 0.03% | -0.16% | -0.17% | 0.42% | 0.36% | 0.47% |
| 1969-1 | 0.34% | 0.33% | -0.27% | -0.67% | -0.40% | -0.66% |
| 1973-1 | 0.36% | 1.26% | 0.31% | -0.19% | -0.39% | 1.35% |
| 1977-1 | 0.05% | -0.38% | -0.76% | 0.57% | -0.02% | -0.54% |
| 1981-1 | 0.98% | -0.50% | -0.39% | 2.49% | -0.06% | 2.52% |
| 1985-1 | -0.64% | 0.09% | -0.87% | -0.63% | -0.23% | -2.27% |
| Avg | 0.22% | 0.16% | -0.40% | 0.31% | -0.22% | 0.08% |
| 1989-1 | 1.25% | -0.32% | 0.07% | -0.05% | -0.36% | 0.59% |
| 1993-1 | 1.93% | -0.07% | 0.42% | -0.57% | -0.86% | 0.86% |
| 1997-1 | 1.08% | -0.28% | -0.87% | -1.83% | 0.46% | -1.45% |
| 2001-1 | 0.59% | 1.00% | 0.65% | 0.23% | -2.48% | -0.02% |
| 2005-1 | 0.26% | -0.48% | -1.02% | 0.19% | -0.76% | -1.81% |
| Avg | 1.02% | -0.03% | -0.15% | -0.41% | -0.80% | -0.37% |
| SPX summary for Presidential Year 1 1953 - 2005 | ||||||
| Avg | 0.51% | 0.02% | -0.14% | -0.01% | -0.35% | 0.03% |
| Win% | 86% | 43% | 43% | 50% | 21% | 50% |
| SPX summary for all years 1953 - 2008 | ||||||
| Avg | -0.02% | 0.16% | 0.04% | 0.13% | -0.09% | 0.22% |
| Win% | 55% | 55% | 54% | 60% | 44% | 59% |
Conclusion
The market is as oversold as it has been at any time since June 1932. There have been three 20+% rallies since the early October low and another is long overdue, but, the extreme number of new lows suggest a retest so whatever we get will be a bear market rally.
I expect the major indices to be higher on Friday March 13 than they were on Friday March 6.
Last weeks positive forecast expecting a bounce from extremely oversold conditions was a miss.
Thank you,
By Mike Burk
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Disclaimer: Mike Burk is an employee and principal of Alpha Investment Management (Alpha) a registered investment advisor. Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy. Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) and the Wall Street Journal (wsj.com). Historical data is from Barron's and ISI price books. The views expressed are provided for information purposes only and should not be construed in any way as investment advice. Furthermore, the opinions expressed may change without notice.
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