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October 16, 2005

Rally Days are a Normal Part of Multi-Week Stock Market Crashes
by Robert McHugh

This week we want to explore the incidences of rally days inside market crashes. Have past crashes entertained rally days? Significant rally days? Or do the presence of rally days by their very nature cancel out the crash threat? The following chart is a summary of the panic selling events since the Bear began on January 14, 2000:

During Crash # 1, which began at the all-time top for the Dow Industrials on January 14th, 2000 and ended 36 trading days later on March 8th, 2000, there were 15 rally days (41 percent), of which five were huge - over 100 points. Day 10 saw a 201 point rally, day 11 saw another 100 point rally, day 20 tacked on 198 points, day 29 saw a 176 point rebound, and day 33 rose 202 points. Yet in spite of these attempts by the market to end the crash, the Dow fell 2,296.75 points, or 19.2 percent over 36 days. And yes, we had the presence of a Hindenburg Omen.

During Crash # 2, which started on 9/6/00 at 11,518.83, and lasted 30 trading days, and fell to 9,571.40 on 10/18/00, we saw 8 rally days, 25 percent of the days, totaling 573.07 points, including one day that rallied a huge 195.7 points. What trickery! Further, at one point inside the crash, the DJIA rallied four out of five days. This crash ended up dropping the DJIA 1,947.43 points, or 16.9 percent. And yes, there was a Hindenburg Omen present.

During Crash # 3, which started on 3/8/01 and lasted 10 trading days, there were 3 days the market rallied (30% of the time) and 7 the market declined. Rallies were day three (82 points), day five (58 points) and day seven (136 points). The other seven days lost a total of 2,169 points. The Dow fell 1,893 points, or 17.3 percent. Yes, it had a Hindenburg Omen.

Crash # 4 started on 8/27/01 and lasted 14 trading days. Inside that crash period, there were 3 days the market rallied (21%), days four, five, and six. Over these 3 days, the market rallied 114 points. Over the twelve declining days, the market fell 2,685 points. This crash included 9/11, and saw the DJIA fall from 10,498.03 to 7,926.93 on 9/21/01, a 2,571.10 point, 24.5 percent plunge. Yes, it had a Hindenburg Omen.

Crash # 5 began on 5/17/02 and lasted 46 trading days. During this lengthy crash period, there were 13 rally days (28%) interspersed evenly throughout. Some of these rally days were huge, up 213 points on day 20, up 325 points on day 33, with five days rallying over 100 points each. The decline from 5/17/02's 10,400.62 to 7/24/02's 7,489.53 took the Dow Industrials down 2,911 points, or 28 percent. Yes, there was a Hindenburg Omen present.

Crash # 6 began on 8/23/02, lasting 33 trading days and had eleven (33%) rally days. One of them, day # 26, rose a whopping 347 points. Five rose over 100 points. The DJIA fell 1,870 points, or 20.6 percent into its 10/10/02, 7,181.47 low. Yes, there was a Hindenburg Omen on the meter.

Crash # 7 began on January 13, 2003 and lasted 38 trading days. Inside this severe decline were 13 rally days (34%). Four of these rallies were 100 points or more. This event shaved 1,498 points off the DJIA, or 16.8 percent, to 3/12/03's 7,397.31.

The point here is that markets get oversold - even in crashes - and rally days are necessary to work off oversold conditions to sustain the downside momentum.

We currently have five Hindenburg Omens on the meter from September 2005, and thus remain in dangerous waters, regardless of what rallies occur over the next week or two.

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"For in Him all the fullness of Deity dwells in bodily form,
and in Him you have been made complete,
and He is the head over all rule and authority;
and in Him you were also circumcised with a circumcision made
without hands, in the removal of the body of the flesh by
the circumcision of Christ;
having been buried with Him in baptism,
in which you were also raised up with Him through faith in the
working of God, who raised Him from the dead.
And when you were dead in your transgressions and
the uncircumcision of your flesh,
He made you alive altogether with Him,
having canceled out the certificate of debt consisting of decrees
against us and which was hostile to us;
and He has taken it out of the way, having nailed it to the cross."
Colossians 2:9-14."

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.