Have We Capitulated Yet in the Stock Market? We may break Records. Stock Chart Included.

The US Stock Market as represented by the S&P 500 index went down 78.5 points to 909.92 for a loss of about 7.9%.

We Are Near Record Levels

By almost any metric, we are extremely oversold and near historic levels.

Even before today's big drop, by many technical (related to looking at charts, and price and volume movements and other patterns) standards, we were in extreme oversold conditions.

We could also look at how overextended the S&P 500 Market is from the 52 Week High (and minimize the extension from the 52 Week Low), and we find that we are 42.30% below the 52 week high. In a previous study looking at the S&P 500 in relation to the 52 week high and low, from 1950 to March 2008, we are at the lowest levels since the great bottom of October 3, 1974 with the record of 44.11% HOLU value (mainly how overextended the market is from the 52 week high).

The previous study found that of the 59 trading days from 1950 to March 2008 with the HOLU value greater than 30%, the average one year forward annual return was a market beating 22.13%.


Stock Chart



Previously, we thought that the S&P 500 could hold at 1077, but if the stock market breaks this level, the Stock Market would truly be in trouble. This is the case today as the market sliced easily through 1077 and is now at 909 in a very short time.

We are nearing the congestion around the S&P 500 level 768 (the great bottom from 2002-2003 after the dot com bubble crash) to 936. We might have other support areas such as S&P 840, before we could reach the dot com crash bubble low of 768.63.

Perhaps we are headed towards a re-test of the dot-com crash bottom, and maybe we may form a bullish double bottom around 768.63.

Have we Capitulated and Surrendered Yet?

Common Wisdom States that Stock Market Bottoms often occur after we have Capitulation, where everyone gives up and surrenders on the market often with a crescendo massive sell off.

Today, you could really sense great concern. After visiting a bank, I heard someone say that it is official after looking at the business news program. I hear others talk about losing much of their money.

On common business programs on CNBC, shows such as Mad Money, and Fast Money, were replaced by world wide market news.

The word "crash" is heard all over the news programs. The word "Depression" and "Recession" is thrown around by many people.

The New York Times Internet Front Page talks about the "Markets in Europe and Asia Plunge" and "Nations weighing Global Approach as Chaos Spreads" and "Afternoon Turns Dark as Stocks Plunge."

Photos of traders in shock appear over all the newspapers.

News from around the world shows that many of the world markets are losing around 5% to 10% overnight.

Business programs keep talking about more problems in the future, hedge fund redemptions and record amount of mutual funds being sold as investors show real fear.

The Dow Jones Futures are down big, around 300 points.

There's a good chance that the market could open with a big gap down and continue to sell off. The Big Gap down is good, as this could often be an initial sign of capitulation.

Typically, massive buying comes in, shorts have to cover, and we establish an intermediate bottom and a tradable rally can continue.

But with all the problems all around the world, with all future redemptions still to come, and with traders not wanting to stay long before the weekend (October 10, 2008 is Friday), will we really have the capitulation bottom on Friday October 10, 2008?

But if one is truly a long term investor, this could be a great buying opportunity, or at least a good opportunity to continue accumulating index funds or ETFs for the long term.

Many times near market tops, we often hear that this time, it's different (to justify the market continuing to go up at a fast rate). We could apply this logic near market bottoms, where people proclaim, this time, it's different (to justify a much larger stock market fall).

One day, the stock market will stop falling. And for the patient, disciplined investor, now might be a good time to start or continuing accumulating.

Where's S&P 500 Support after Today's Big Drop? What should we do?

New Trading Range

Today, the stock market as represented by the Dow Jones Industrial Average dropped over 500 points for a loss of 4.41%. The S&P 500 dropped 59 points to 1192 for a 4.71% loss.

This drop was not unexpected. Around July of 2008, the S&P 500 hit a new low of 1200. Often, these lows are re-tested, and this is what we had today. We re-tested the lows and broke below previous support level.

We expect the S&P 500 to find a lower trading range.

Based on previous analysis, there's a good chance that the S&P 500 bottom could be between 1077, to 1172, a potential 10% drop from here.

Re-Evaluate Portfolio and Goals

So what should we do now? Over the long term, the stock market is the best place to be. However, this involves risk.

Have you looked at your goals and your portfolio and re-evaluated where you are? Do you need the money within the next five years? Do you have many decades to weather the storm? Do you have credit card debt? Do you have too much risk in your Discretionary Portfolio (as opposed to your retirement portfolio)?

Possible Ideas

So your main focus should be to re-evaluate your portfolio and your goals and your current financial situation. This should be the basis of many of your actions.

Depending on your high level game plan, here are a few tools:

1. Readjust allocation: Maybe you might want to have more cash or bonds, and less exposure to equity.
   
2. Stock or Sector Rotation: Maybe you might want to rotate away from sectors which are bad and rotate to the safer consumer staple names such as Procter and Gamble (PG).
   
3. More Diversification: Maybe you are too concentrated in your portfolio? Maybe you should readjust your portfolio to have better diversification.
   
4. Move towards ETFs, and Index Funds: Are you sure you can still keep up with your stock portfolio? Maybe you should consider just investing in broad based index funds, or ETFs. Or, you could do a combination of both for the Core and Explore method.
   

Expected Stock Market S&P 500 Bottom using Long Term (8 year) View and 50% Retracements

Many people are saying that the Stock Market (as represented by the S&P 500 index) is in Bear Market territory, being down over 20% from it's recent high of 1576 (today, the S&P 500 is at 1261. The annotated chart above is from March 2008, but it still shows important levels).

Where's the bottom?

In technical analysis (analyzing the stock charts), there's a school of thinking that uses Fibonacci Retracements. In nature and in the stock market, the ratios of 61.8%, 50% and 38.2% are important levels. If we take any uptrend or downtrend in the stock market, if we look at the retracement levels (the levels at 61.8%, 50% and 38.2%), these levels often coincide with resistance and support levels.

On March 24, 2000, the S&P 500 hit an intraday high of 1552.87. During that last bear market, the S&P 500 then lost almost 50% of it's value to an intraday low of 768.63 on October 10, 2002.

The most recent high today was set around with an intraday high of 1576 on October 11, 2007.

Over the last several months, the S&P 500 bounced nicely around the 1270 level, which coincides with the 38.2% retracement from the lows of 2002.

Now, it would appear that the S&P 500 could go lower. The 50% retracement from the 2002 S&P 500 lows would be 1172, and 1077 would be the 61.8% retracement.

Looking at the chart above, we also notice a lot of congestion from 2003 to 2006, in the range between 1077 to 1267. This is a good sign that we could find stronger support in this region.

Maybe 1077 could be a good lower target on the S&P 500.

In addition, many sources claim that the average bear market decline is 30%. If this is so, then a 30% decline from 1576 would give us an S&P index value of 1104, very close to the 1077 S&P 500 61.8% Fibonacci Retracement.

The S&P 500 longer term bottom looks to be around 1077 to 1172 based on the scenario above.

Of course, we can monitor the situation of the S&P 500 at each support and resistance level.

Today's S&P 500 Chart, Long Term View

Today's Three Year S&P 500 Chart

Original Article which used the Annotated Chart Above

Stock Market and S&P 500 Bottom Indicator Based on Extension from 52 Week Low and 52 Week High

Is there a stock market (or S&P 500) bottom indicator based on the current (S&P 500)index value in relation to the 52 week high and 52 week low?

After research, there appears to be a bottom indicator based on these values.

The Equation

The thesis we wanted to test involves this equation:

HOLU Function = (% Below 52 Week High) - (% Above 52 Week Low)

In order to find a bottom, we wish to maximize The HOLU Function (HOLU = High Overextended Low Underextended).

Theory Behind the Equation

The theory is that we want to:

1. Maximize the Percentage Below the 52 Week High:
   
   The Greater the Percentage Below the 52 week high, the more likely the market has overextended to the downside, and the bottom may be near.
   
   
2. Minimize the Percentage Above the 52 Week Low:
   
   The stock market axiom "Buy low, Sell High", appears to be true, and minimizing the percentage above the 52 Week Low is a goal.
   

So by combining both goals, we have created the HOLU Function above and we wish to maximize the value.

Method

We used data on the S&P 500 From 1950 to March 31, 2008. We looked at the HOLU Function values in relation to the forward one year return on the S&P 500. We averaged the one year forward return on the S&P 500 based on different cutoff values.

The Results



In the chart above, if we have a HOLU Value greater than 10%, the average one year forward S&P 500 return is 13.55%, many percentage points above the average one year forward S&P 500 return of 8.51% if the HOLU value is less than or equal to 10%.

When we use a larger cutoff HOLU value of 20%, we get even better results, 18.26% to 8.82%. If we have HOLU Values greater than 30%, we have the largest gain, an average one year forward S&P 500 return of 22.13% (compared to 8.97%).

So the HOLU Function/Equation above appears to generally true. With HOLU Values above 10%, 20% or 30%, we increase our chances of having a good one year forward return if we can assume that history holds. We can use a high HOLU Value above 20% or 30% as a stock market (S&P 500) bottom indicator.

Sample Bottom Days

Here is a sample of the 59 days where the HOLU Value is greater than 30%.

Date	HOLU	One Year Fwd Return	% Below 52WeekHigh	% Above 52WeekLow
10/9/2002	33.75%	33.79%	33.75%	0%
7/23/2002	34.65%	22.70%	34.65%	0%
9/21/2001	33.84%	-12.68%	33.84%	0%
12/4/1987	33.51%	22.23%	33.51%	0%
10/19/1987	33.24%	22.41%	33.24%	0%
12/6/1974	30.48%	34.75%	34.86%	4.38%
10/3/1974	44.11%	34.16%	44.11%	0%
9/13/1974	41.49%	28.51%	41.49%	0%
5/26/1970	33.03%	46.21%	33.03%	0%

Please note that October 19, 1987 is Black Monday!

Today's Value

As of March 31, 2008, the S&P 500 is 1322.70. 52 Week high is 1565.15 and 52 Week Low is 1273.37 (Closing Low).

HOLU = (% Below 52 Week High) - (% Above 52 Week Low)
= 15.49% - 3.87%
= 11.62%

While we would like HOLU values greater than 30%, 11.62% seems like a decent HOLU value if we look forward one year to the future.

Other Bottom Indicators

1. Stocks above 50 and 200 Day Moving Average
   
2. Put-Call Ratio
   
3. New High-Low Index
   
4. Ratio of Stocks Above 200 Day Moving Average to 50 Day Moving Average.
   
5. Bull Bear Ratio and Bullish Percentage
   
6. Oscillators
   

Are you a Bull or a Bear? Is this Stock Market Broken? Where's the Bottom?

The Battle Between the Bulls (those who think the stock market will go up) and the Bears (those who think the stock market will go down) continues.

Are you a Bull or a Bear?

The Bulls

On March 11, 2008, Investors Intelligence released their latest Bull Bear Ratio.

As of that date, there are 31.1% Bulls and 43.3% Bears. The Bull Percentage is very low (and even less than the Bear percentage) which suggests that we may have some sort of bottom. Many other metrics show that the stock market may be oversold.

In addition, the market as represented by the S&P 500 recently successfully re-tested the 1270 lows and may be poised for a double bottom reversal, if we breakout from current resistance.

Dean Reese, on the Trading Goddess Blog, makes an argument that the market is not broken based on rare relative strength levels (RSI) and the 38.2% Fibonacci Retracement off a five year trend.

The Bears

However, looking at the chart from many angles, the intermediate trend looks down.

The S&P 500 is still below both the 50 and 200 day moving averages.

While we appear to have a double bottom based on the bottoms on January 2008 and March 2008 at the 1270 level, we do not have a double bottom reversal just yet. We need to see strength first.

The S&P 500 also appears to be forming a possible inverted cup and handle bearish formation.

In addition, the three year (or more) uptrend appears to be over.

Looking from a non-technical perspective, there were nine recessions from 1950 to 2007, and the average length of the decline was around 10.3 months. If we use this average, and use the start of the decline as October 2007, then we estimate that the downturn will end around August 2008.

How deep will the S&P 500 fall?

Dean Reese in the same blog entry on the Trading Goddess Blog, claims we can have a tradable bounce based on the 38.2% Fibonacci Retracement Holding (S&P 500 is very near the 38.2% Fibonacci Retracement Levels based on a 5 year trend).

While 38.2% is a potential support area, the market could find support even lower.

I added more annotations and comments to Dean Reese's chart:


If we consider the 50% and 61.8% Fibonacci Retracements, they both coincide with other areas of support and appear to be valid areas of support.

In addition, if we look at the period from November 2003 to August 2006, we notice a lot of congestion (the box on the diagram). This suggest much stronger support in this area.

Investors and traders who started going long towards the end of 2006, did not have much time to get on board, and most likely have been shaken out. Those who were in the market from the end of 2003 to the end of 2006 are starting to get nervous.

But because of the congestion from November 2003 to August 2006, we can speculate that we can find a stronger bottom here, from around the 1070 level to the 1267 level. This happens to coincide with the 61.8% (1077) to 50% (1172) to 38.2% (1267) Fibonacci retracement area.

So yes, it is possible that we still have up to 17% downside on the S&P 500 (if 1070 is the estimated bottom).

Silver Lining?

But as with all recessions and bear markets, this too will end, and we could have a great investing opportunity sometime this year or next year.

Interesting Symmetry

I flipped over the annotated chart above. Compare the chart above and the chart below. Notice the amazing symmetry? And you know what happened from 2000-2002.