Global Stock Markets: A Reversal of Fortune?

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 |  Includes: DIA, EEM, EFA, EWA, EWC, EWG, EWJ, EWK, EWL, EWN, EWO, EWP, EWS, EWT, EWZ, EZA, IFN, INP, IWM, QQQ, RSX, SPY, TSXPF
by: Prieur du Plessis

The table below shows yesterday’s strong movements on a number of global stock markets.

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The sheer magnitude of yesterday’s rally makes for interesting reading when put in historical context. Considering the entire history of the Dow Jones Industrial Average since 1986, yesterday’s surge of 936 points ranks as the largest points increase ever (see top table). Seven of the top 15 points increases have occurred in 2008 (one in October, three in September, one in April and two in March).

Monday’s percentage increase of 11.1% ranks sixth in history (see bottom table). Besides yesterday’s rally, and the large increases in October 87 and September 1939, the remaining 12 of the 15 largest increases all occurred in October 1929 and April 1933.

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Interestingly, after the 1929 crash (October 28 and 29) the Dow’s movements over the following five days were: +12.3%, +5.8%, -5.8%, -9.9% and +2.6%). Subsequent to 1987’s Black Monday (October 19), the Dow’s changes were as follows: +5.9%, +10.2%, -3.8%, +0.02%, -8.0%. The stock market, of course, behaved quite differently during the years following these two crashes.

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Source: Plexus Asset Management (based on date from I-Net Bridge and Dow Jones Indexes)

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Source: Plexus Asset Management (based on date from I-Net Bridge and Dow Jones Indexes)

Have we seen the bear’s corpse? Will October live up to its promise of being a “bear killer” (as has happened in 11 post-WWII bear markets according Stock Trader’s Almanac)?

I mentioned in a post on Sunday that I was looking for a 90% up-day as a signal of the completion of the selling climax. That did not happen on Monday, with upside volume only 73% of up plus down volume. One swallow does not make a summer, but a better performance on this front, together with a retracement in the Ted spread (i.e. three-month dollar Libor less three-month Treasury Bills), a measure of risk aversion and illiquid repo conditions, could indicate that stock markets have reached important lows of at least medium-term significance.

Correction:
Monday, according to Lowry’s using later data, was indeed a 90% up-day rather than a 73% up-day as reported above. I use Richard Russell’s Dow Theory Letters as source for these statistics and I apologize for the error. He commented as follows:

If yesterday was the long-awaited turn to the upside, we’ll have to watch the market action closely. Lowry’s Selling Pressure Index should decline steadily as the urge to sell subsides, and breadth should stay on the positive side for weeks on end. In other words, if yesterday’s action signaled the turn, we should have excellent confirming action to the upside for quite a while.