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May 16, 2009

Technical Market Report
by Mike Burk

The good news is:
• In spite of a pretty rough week for the major indices there were no new lows to speak of on either the NYSE or NASDAQ.

Short Term

I have often stated that the secondaries lead both up and down.

The Russell 2000 (R2K) index of small cap issues led the way up from the early March low and now appears to be leading the way down.

The first chart covers the period from the March lows through last Friday showing the major indices on semi log scales to show their relative performance. Dashed vertical lines have been drawn on the 1st trading day of each week and slightly darker lines have been drawn on the 1st trading day of each month.

The R2K shown in green led the way up while the Dow Jones Industrial Average (DJIA) shown in magenta was the laggard. The NASDQ composite (OTC) shown in blue was 2nd to the R2K followed by the S&P 500 (SPX) shown in red.

The next chart is similar to the previous one except it covers the last 2 weeks. This chart shows that the upward leaders have become the downward leaders.

A common topping pattern you should look for is a return to new highs by the blue chip indices, but, not the secondaries. If this pattern plays out, it should happen in the next month.

Intermediate term

On March 6 there were 827 new lows on the NYSE and 567 on the NASDAQ. Those numbers are big enough to suggest a high likelihood of a retest of the March 9 lows.

A ratio of new highs to new lows (NH / (NH + NL) is one of the best indicators we have for defining both tops and bottoms and the general health of the market.

I have been showing updates of the chart below for a couple weeks, it covers the past year showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs / (new highs + new lows) in red. Dashed vertical lines have been drawn on the 1st trading day of each month and dashed horizontal lines have been drawn at 10% levels of the indicator. The horizontal line is solid at the 50% level.

The indicator took a hit last week, but is still above the 50% level.

The next chart is similar to the one above except it shows the SPX in red and the indicator calculated from NYSE data in dark blue.

The indicator calculated from NYSE data took a much more severe hit last week and is at 18%, a level that would suggest caution.

Seasonality

Next week includes the week prior to the 4th Friday in May during the 1st year of the Presidential Cycle.

The tables show the daily return on a percentage basis for the week prior to the 4th Friday of May during the 1st year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and SPX data from 1953 - 2008. Prior to 1953 the market traded 6 days a week so that data has been ignored. There are summaries for both the 1st year of the Presidential Cycle and all years combined.

The week has, on average, shown a modest gain during the 1st year of the Presidential Cycle and a modest loss over all years.

Report for the week before the 4th Friday of May.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through the 4th Friday.

OTC Presidential Year 1
Year	Mon	Tue	Wed	Thur	Fri	Totals
1965-1	-0.33%	-0.73%	0.60%	-0.83%	-0.36%	-1.65%

1969-1	-0.53%	-0.40%	-0.15%	0.23%	0.54%	-0.31%
1973-1	-2.07%	0.82%	0.49%	2.14%	0.86%	2.24%
1977-1	-0.87%	-0.50%	-0.50%	-0.01%	-0.28%	-2.16%
1981-1	0.20%	-0.38%	0.70%	0.33%	0.40%	1.25%
1985-1	0.95%	-0.18%	-0.31%	-0.30%	0.00%	0.16%
Avg	-0.46%	-0.13%	0.05%	0.48%	0.30%	0.24%

1989-1	-0.06%	-0.37%	0.30%	0.32%	0.52%	0.72%
1993-1	0.06%	0.05%	1.30%	0.07%	-0.58%	0.90%
1997-1	0.04%	1.69%	0.73%	-0.09%	1.25%	3.61%
2001-1	4.85%	0.36%	-3.04%	1.72%	-1.36%	2.53%
2005-1	0.50%	0.24%	-0.56%	1.03%	0.22%	1.43%
Avg	1.08%	0.40%	-0.25%	0.61%	0.01%	1.84%

OTC summary for Presidential Year 1 1965 - 2005
Avg	0.25%	0.06%	-0.04%	0.42%	0.11%	0.79%
Win%	55%	45%	55%	64%	55%	73%

OTC summary for all years 1963 - 2008
Avg	-0.19%	-0.21%	0.03%	0.12%	0.14%	-0.11%
Win%	44%	41%	57%	59%	64%	54%

SPX Presidential Year 1
Year	Mon	Tue	Wed	Thur	Fri	Totals
1953-1	-0.36%	-0.20%	0.93%	0.52%	-0.12%	0.77%
1957-1	0.25%	0.13%	-0.40%	0.02%	0.13%	0.13%
1961-1	-0.62%	-0.25%	-0.63%	-0.38%	0.64%	-1.25%
1965-1	-0.74%	0.58%	-0.34%	-0.52%	0.66%	-0.36%

1969-1	-0.92%	-0.89%	0.41%	0.12%	-0.01%	-1.27%
1973-1	-1.09%	0.83%	0.47%	2.95%	0.75%	3.91%
1977-1	-1.31%	-0.49%	-0.92%	0.25%	-0.76%	-3.23%
1981-1	0.28%	-0.34%	-0.07%	-0.19%	-0.32%	-0.64%
1985-1	1.23%	-0.04%	-0.57%	-0.51%	0.37%	0.47%
Avg	-0.36%	-0.19%	-0.13%	0.52%	0.00%	-0.15%

1989-1	0.23%	-1.14%	0.26%	0.01%	0.76%	0.12%
1993-1	0.48%	0.19%	1.02%	-0.23%	-0.49%	0.98%
1997-1	0.42%	1.01%	-0.27%	-0.44%	1.36%	2.08%
2001-1	1.62%	-0.26%	-1.55%	0.32%	-1.18%	-1.06%
2005-1	0.39%	0.02%	-0.34%	0.64%	0.10%	0.80%
Avg	0.63%	-0.04%	-0.18%	0.06%	0.11%	0.58%

SPX summary for Presidential Year 1 1953 - 2005
Avg	-0.01%	-0.06%	-0.14%	0.18%	0.13%	0.10%
Win%	57%	43%	36%	57%	57%	57%

SPX summary for all years 1953 - 2009
Avg	-0.15%	-0.14%	-0.11%	0.02%	0.11%	-0.28%
Win%	45%	45%	49%	53%	64%	54%

Money supply (M2)

The chart below was provided by Gordon Harms. In spite of heroic efforts by the Fed, M2 growth has been falling.

Conclusion

I think the market is likely to consolidate for a week or two with the blue chips holding up better than the secondaries, followed by a run to new highs by the blue chips, but not the secondaries.

I expect the major indices to be lower on Friday May 22 than they were on Friday May 15.

This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html. If it is not for you, reply with REMOVE in the subject line.

Thank you,

Mike Burk

Mike Burk is an employee and principal of Alpha Investment Management (Alpha) a registered investment advisor. Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy. Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) and the Wall Street Journal (wsj.com). Historical data is from Barron's and ISI price books. The views expressed are provided for information purposes only and should not be construed in any way as investment advice. Furthermore, the opinions expressed may change without notice.