There have been various comparisons on this forum between this last weeks activity on the DJI, in particular Friday’s 390 point fall, and with past stock market crashes notably the 1987 crash. The conditions underlying these 2 events are quite different, so speculation that what happened in 1987 - is somehow a prediction for what will happen this week is questionable. One would be better looking at the history of bear markets.
I recently read an article that featured some comments by Paul Desmond from Lowry's Reports about the present situation in the context of previous bear markets.
Desmond looks at the forces of supply and demand – the buying and selling that takes place during the decline to the market low, as well as during any subsequent reversal point.
He suggests that common definitions of panic selling or capitulation like - high volume, large numbers of declining stocks, or lower lows do not stand up to critical examination. He believes panic selling should be measure in terms of the intensity of the selling pressure. He does this by measuring the trading volume:
Paul Desmond writes: “We broke the volume of trading down into two parts – Upside (buyers) Volume and Downside (sellers) Volume. We also compiled the full and fractional dollars of price change for all NYSE-listed stocks that advanced each day (Points Gained), as well as the full and fractional dollars of price change for all NYSE-listed stocks that declined each day (Points Lost). These four daily totals – Upside Volume and Points Gained, Downside Volume and Points Lost – represent the basic components of Demand and Supply, and have been an integral part of the Lowry Analysis…”
“…we found that almost all periods of significant market decline in the past 69 years have contained at least one, and usually more than one, day of panic selling in which Downside Volume equaled 90.0% or more of the total of Upside Volume plus Downside Volume, and Points Lost equaled 90.0% or more of the total of Points Gained plus Points Lost. For example, April 3, 2001 qualified as a valid 90% Downside Day. On April 3rd , Downside Volume equaled 90.8% of the sum of Upside plus Downside Volume:
April 03 2001 Upside volume - 146,576,520 Downside volume - 1,439,436,850 Points gained - 148 Points lost -1,447
1,439,436,850 / (146,576,520 + 1,439,436,850) x 100 = 90.8% AND, Points Lost equalled 90.7% of the sum of Points Gained plus Points Lost: 1447 / 148 + 1447) x 100 = 90.7%”
“The historical record shows that 90% Downside Days do not usually occur as a single incident on the bottom day of an important market decline, but typically occur on a number of occasions throughout a major decline, often spread apart by as much as thirty trading days.”
“For example, there were seven such days during the 1962 decline, six during 1970, fourteen during the 1973-74 bear market, two before the bottom in 1987, seven throughout the 1990 decline, and three before the lows of 1998. These 90% Downside Days are a key part of an eventual market bottom, since they show that prices are being deeply discounted, perhaps far beyond rational valuations, and that the desire to sell is being exhausted.”
“Thus, our 69-year record shows that declines containing two or more 90% Downside Days usually persist, on a trend basis, until investors eventually come rushing back in to snap up what they perceive to be the bargains of the decade and, in the process, produce a 90% Upside Day ….These two events – panic selling (one or more 90% Downside Days) and panic buying (a 90% Upside Day, or on rare occasions, two back-to-back 80% Upside Days) – produce very powerful probabilities that a major trend reversal has begun…”
Paul Desmond was also recently interviewed by CBS Marketwatch. On June 26, 2002 he noted that the 90 percent Upside Days that follow these capitulation events, if indeed they occur, signal a turning point. Yet in his research, he saw no signs during the September 2001 decline that investors had truly thrown in the towel on the stock market. (He had previously written about the September 2001 sell-off saying: "The selling during that decline never reached the panic proportions found near almost all major market bottoms in the past 69 years," he said. "Not even a single 90 percent Downside Day was recorded from May through September (2001). ... In short, the final market bottom had not been seen in September 2001.")
Paul Desmond said, "We measure the forces of supply and demand, based on the price and volume action of all stocks traded on the NYSE. The Selling Pressure Index is our primary measurement of supply. As of Tuesday (June 26 2002), the Selling Pressure Index (Supply) rose to a new all-time high, showing that investors are liquidating massive amounts of stock. The amazing thing is that the selling is taking place in a relatively orderly manner. Therefore, the probabilities drawn from the last 70 years strongly suggest that, despite the losses that have already occurred, the worst is still ahead of us."
Desmond concludes: "The highly selective rally that ensued from the September 2001 low through early January 2002 was, once again, not strong enough to produce a 90 percent Upside Day, thus adding to the evidence that the final low for the Dow Jones Industrial Average has not yet been reached, and that a period of investor panic, generating a series of 90 percent Downside Days, may still be ahead."
I would suggest that it is quite likely that last Friday’s 390 drop on the DJI may well be one of Desmond’s 90% Downside Days. I also expect Monday on the ASX to be pretty bad.
