Today’s DJIA loss has triggered the fourth Down Friday/Down Monday (DF/DM) of the year and follows last week’s. In the nearly fourteen years since 2000, there have been 146 DF/DM. In all but 3, DJIA was lower sometime in the 90 calendar days following the DF/DM. Declines have averaged 7.8%. Since DJIA’s bottom in March 2009, the subsequent decline has been milder, averaging 4.9%. This is most likely due to the Fed’s highly accommodative monetary policy combining with the tendency for post DF/DM declines to generally be milder in bull markets.
In addition, several Cumulative Advance/Decline Lines are in decline. This cumulative measure of the sum of net advancing stocks over declining stocks on a daily basis is an indication of underlying weakness. This is especially concerning when the A/D Line declines as the broad averages advance. In the chart below DJIA is in black, S&P 500 is in red, NASDAQ is in blue and the Russell 2000 is in pink. Below that the R2K A/D line is in pink, NASDAQ A/D is in blue and NYSE A/D is in black.
You can see that during the recent advance, the NYSE A/D line has been selling since May, while NASDAQ and R2K A/D lines have been in decline since July. This combination of the DF/DM warning and deteriorating A/D lines is indicative of further weakness ahead. This should not come as a surprise during the worst two months of the year, September and August, and during frequently volatile and treacherous October.
By Jeffrey A Hirsch