Monday, September 15, 2008

How far can this selling go...

There is no surprise as to what dominates the news this morning; US Futures are taking a walloping. Looking at it from an Irish perspective (given its heavy financial weighting) it makes grim viewing even before today's news struck.

So I took a look at some market relationships. The relationships described below were calculated last week so there will be a few more percentage points to add. I used the S&P as one can get data all the way back to the 1950s.

At its worst for this year the S&P traded 15.2% away from its 200-day MA (July 15th). However, historically this ranks only 371st out of 14,310 trading days for the index. So what periods were worse?

In 1974 there were 101 trading days when the 200-day MA was greater than 15.2% away from its 200-day MA:

Seasonally, there is plenty of similarity to 2008; the reaction low in July undercutting prior Spring support. Then a capitulation through to the end of September before the eventual bottom was marked. From there it was up, up and away for the next 25 years.

2002 was another instance with a summer low, although the extent of its violation by October was not as great (maybe this scenario will play out?)

The worst loss for the S&P relative to the 200-day MA was 40% on October 3rd 1974. To put this in 2008 terms it would mean an S&P around 810; a good 400 points away from Friday's close.

1974 and 2002 weren't the only cases where the S&P traded 15.2% past its 200-day MA as the table below shows (with the number of trading days included for reference):

This takes us back to the ISEQ. If in 14,310 trading days for the S&P the biggest loss was 40% from the 200-day MA then the 54% drop on August 4th for the ISEQ should at least carry some long term significance.

Monday's discount can only play into the hands of the brave.

Around the globe these were some of the discounts to the 200-day MA available as of Sep 9th:

ISEQ: 30%
FTSE 100: 8%
Hang Sen: 17%
CAC40: 12%
DAX: 10%
Amsterdam: 14%
Brazil: 25%
Bombay: 13%

One could go on....

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts, and stock charts website