It was one year ago Thursday that both the Dow Jones Industrial Average and the S&P 500 reached their all-time high closes. At the time, we were subscribers to a myriad of reasons why the market was forming what we thought could turn out to be a very major top. Here we are, exactly one year later, and the Dow Jones Industrial Average has closed down 39.4% from that closing all-time high while the S&P 500 has outdone it by being down 41.9% on a closing basis.
No one who follows the stock market need be told that we are viewing historic market behavior. It was not unexpected behavior to our subscribers because, as it turns out, both the New York Composite Index and the S&P 500 Index were scraping at the bottom of their projection windows Thursday, projections which have been in effect for more than a few months. Because prices are at the lower end of the projection windows for the nominal four-year downside projections for these indicators, we should be looking for a potential market bottom of some kind. We emphasize that we do not believe this will be an important bear market bottom but we do believe the market is in a position where it can stabilize over the next few weeks and begin a rally which could last several months. The more probable cause of action from these levels is to see a very strong rally last for several days or longer and then begin to dissipate as the market tests whatever lows it makes over the next day or two. If that should occur, we could actually get even lower projections with what we call "loop" projections. We will describe that term more fully if such a loop appears to be occurring.
We are seeing some historic readings. Let's try and put this decline in historical perspective. One of the studies we did over the past two days was to compare the closing prices of the Dow and the S&P with their one-year (252 trading day) moving averages. For example at the 1974 major bear market low, the Dow closed 28.9% below its one year MA. Up to now, that has been the greatest percentage distance below the one year moving average that has occurred in the last 70 years. Today, the Dow broke the record of the past 70 years by closing 30.3% below its one year moving average while the S&P 500 closed 32.7% below.
What happens from here should provide us with important information about the character of the current market. The only time in the history of the Dow that its closing price moved more than the current magnitude below its one year moving average was in the period from 1929-1938 which most people would recognize as the historic dates defining the beginning of a great stock market crash and the decade of the Great Depression. If that pattern is indeed repeating itself here, then we might not see an intermediate-term bottom form at these levels. The market is truly at one of its most oversold levels of the past 100 years. How it reacts from here will tell us much about the market's long-term prognosis and what might happen to the economy.
Just Wednesday, in our daily update to subscribers, we noted that we would expect one of our own variations of a Trading Index moving average we call the New 10 TRIN indicator — see this report for a further explanation — to give historically high oversold readings before this decline ended. Just one day later, that reading occurred. The 2.22 New 10 TRIN reading on the York Stock Exchange was the highest reading in almost 30 years and the S&P 500 New 10 TRIN which we have dubbed our new favorite indicator closed at an even more oversold 2.27. Were it not for these two historic readings we would be very dubious about the possibility of any low of importance at these levels because the other TRIN moving averages are certainly not historically oversold. In fact, the Open 30 TRIN at 0.94 continues to suggest the market could be very vulnerable.