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July 04, 2009

Technical Market Report
by Mike Burk

The good news is:
• Seasonally next week has been one of the strongest of the year.

Short Term

I will start with a happy chart.

The chart below covers the past 100 trading days showing the S&P 500 (SPX) in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month. The indicator hit a multi month high on Thursday suggesting prices are heading higher.

Unfortunately there is a problem with NYSE data. Over the years the number of fixed income issues on the NYSE has been increasing. Without outside influence (such as changing interest rates) fixed income issues accumulate value daily until they pay their dividend (monthly or quarterly) when they decline in value by the amount of the dividend. Over the past 29 years that I have been watching the NYSE breadth indicators I have seen them go from having a slightly negatively bias to a wildly positive bias.

The next chart is similar to the one above except is shows the NASADAQ composite (OTC) in blue and the indicator (OTC NH) calculated from NASDAQ new highs in green.

OTC NH is unremarkable.

The next chart is pretty ugly, it shows the Russell 2000 (!RUT - R2K) in red and an indicator showing new lows calculated from the component issues of the R2K (NL) over the past 15 trading days in blue. NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good). Unfortunately NL has been trending downward.

Intermediate term

The next chart is also an update of one I have shown for the past 2 weeks covering the past 100 trading days showing the OTC in blue and an indicator showing a 40% trend (4day EMA) of the ratio of NASDAQ new highs to new lows (NH / (NH + NL)) in blue. Dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50% level. The indicator fell on Thursday after rising in the early part of the week. Nothing really bad is likely to happen as long as the indicator is above the 50% level.

Seasonality

Next week includes the 5 trading days prior to the 2nd Friday of July during the 1st year of the Presidential Cycle.

The tables show the daily return on a percentage basis for the 5 trading days prior to the 2nd Friday of July during the 1st year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and S&P 500 (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 coming week has to be one of the best of the year. The averages have been up by all measures over the coming week and the OTC has only been down only once during the 1st year of the Presidential Cycle, in 1969.

Report for the week before the 2nd Friday of July.
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.

OTC Presidential Year 1
Year	Mon	Tue	Wed	Thur	Fri	Totals
1965-1	0.00%	0.82%	-0.28%	-0.06%	0.83%	1.31%

1969-1	-0.01%	-0.87%	-0.44%	0.37%	0.79%	-0.15%
1973-1	0.53%	1.17%	1.49%	0.47%	-0.14%	3.53%
1977-1	0.00%	0.22%	-0.16%	0.32%	0.53%	0.91%
1981-1	0.15%	-0.46%	0.46%	0.56%	0.35%	1.05%
1985-1	-0.26%	-0.22%	0.46%	0.67%	0.62%	1.27%
Avg	0.10%	-0.03%	0.36%	0.48%	0.43%	1.32%

1989-1	0.06%	0.41%	0.52%	0.24%	0.23%	1.46%
1993-1	0.00%	-0.32%	-0.49%	0.56%	0.44%	0.19%
1997-1	1.42%	1.19%	2.50%	-0.74%	-1.33%	3.04%
2001-1	1.13%	-3.15%	0.47%	5.26%	0.44%	4.14%
2005-1	0.00%	1.04%	-0.49%	0.34%	1.79%	2.69%
Avg	0.87%	-0.17%	0.50%	1.13%	0.31%	2.30%

OTC summary for Presidential Year 1 1965 - 2005
Avg	0.43%	-0.02%	0.37%	0.73%	0.41%	1.77%
Win%	71%	55%	55%	82%	82%	91%

OTC summary for all years 1963 - 2008
Avg	-0.02%	-0.13%	0.24%	0.26%	0.37%	0.72%
Win%	67%	48%	58%	65%	74%	65%

SPX Presidential Year 1
Year	Mon	Tue	Wed	Thur	Fri	Totals
1953-1	0.08%	0.53%	-0.04%	-0.29%	-0.08%	0.21%
1957-1	0.43%	-0.37%	0.68%	-0.39%	0.45%	0.80%
1961-1	-0.09%	-0.03%	-0.56%	-0.70%	0.65%	-0.74%
1965-1	0.00%	-0.20%	-0.38%	0.85%	0.37%	0.65%

1969-1	-1.27%	-0.33%	1.00%	0.61%	-0.85%	-0.84%
1973-1	0.85%	1.35%	2.20%	-0.28%	-1.34%	2.78%
1977-1	0.00%	-0.01%	-0.51%	0.35%	-0.14%	-0.31%
1981-1	0.21%	0.01%	0.46%	0.07%	0.32%	1.07%
1985-1	-0.31%	-0.46%	0.69%	0.30%	0.18%	0.40%
Avg	-0.13%	0.11%	0.77%	0.21%	-0.36%	0.62%

1989-1	0.65%	0.54%	0.31%	0.04%	0.57%	2.12%
1993-1	0.00%	-0.99%	0.32%	1.31%	-0.11%	0.53%
1997-1	0.19%	0.80%	1.17%	-0.53%	-1.75%	-0.12%
2001-1	0.69%	-1.44%	-0.11%	2.37%	0.62%	2.13%
2005-1	0.00%	0.88%	-0.83%	0.25%	1.17%	1.46%
Avg	0.51%	-0.04%	0.17%	0.69%	0.10%	1.22%

SPX summary for Presidential Year 1 1953 - 2005
Avg	0.14%	0.02%	0.31%	0.28%	0.01%	0.72%
Win%	70%	43%	57%	64%	57%	71%
SPX summary for all years 1953 - 2008
Avg	-0.05%	-0.04%	0.18%	0.13%	0.27%	0.49%
Win%	58%	45%	56%	60%	68%	64%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth turned down last week.

Conclusion

Brief sharp declines occur in up markets and, although nasty, I think that is what Thursday's move was. Seasonally the pattern for next week has been a little weakness early in the week with a strong finish. I think the seasonal pattern is likely to be followed.

I expect the major indices to be higher on Friday July 10 than they were on Thursday July 2.

Last weeks positive forecast was a miss. 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.