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September 19, 2009

Technical Market Report
by Mike Burk

The good news is:
• The rally continued last week on increasing volume.

Short Term

The major indices are up 6% - 10% so far this month, overbought, as we go into one of the seasonally worst weeks of the year.

Intermediate term

One of the indicators showing remarkable strength in this rally has been the NASDAQ AD line (OTC ADL). This indicator is a running total of daily declining issues subtracted form advancing issues.

The chart below shows the NASDAQ composite (OTC) in blue and the OTC ADL in green. Dashed vertical lines have been drawn on the 1st trading day of each month. OTC ADL hit a new high on Friday.

The strength in this indicator is remarkable because it has a strong negative bias which can be seen in the chart below covering the past 5 years. In the chart below, dashed vertical lines have been drawn on the 1st trading day of each year.

As long as OTC ADL is making new recovery highs, risk will be limited.

Over half of the issues traded on the NYSE are fixed income related. As long as there are not significant changes in interest rates these issues accumulate value daily until they go ex dividend (usually monthly or quarterly). This gives the ADL calculated from NYSE issues a very positive bias.

The chart below covers the past 5 years showing the S&P 500 (SPX) in red and the NYSE ADL in blue.

Because of its strong positive bias, new recovery highs in the NYSE ADL are not as significant as the OTC ADL.

Seasonality

Next week includes the 5 trading days prior to the 4th Friday of September 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 4th Friday of September during the 1st year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and SPX data from 1953 - 2008. There are summaries for both the 1st year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.

The average returns over all periods have been negative.

Report for the week before the 4th Friday of September.
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	0.30%	0.26%	-0.22%	0.26%	-0.69%	-0.09%

1969-1	0.40%	0.41%	0.77%	-0.17%	-0.27%	1.14%
1973-1	0.21%	0.10%	0.75%	0.59%	-0.06%	1.58%
1977-1	-0.39%	-0.12%	-0.47%	-0.29%	0.10%	.17%
1981-1	0.08%	-0.62%	.78%	0.22%	-2.92%	-5.03%
1985-1	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%
Avg	0.07%	-0.06%	-0.18%	0.09%	-0.79%	-0.87%

1989-1	-0.15%	0.03%	-0.07%	0.06%	0.23%	0.11%
1993-1	0.01%	-0.90%	1.63%	0.90%	0.32%	1.97%
1997-1	0.54%	0.47%	-0.59%	-0.50%	0.20%	0.11%
2001-1	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%
2005-1	-0.70%	-0.65%	.16%	0.20%	0.29%	-2.02%
Avg	-0.07%	-0.26%	-0.05%	0.16%	0.26%	0.04%

OTC summary for Presidential Year 1 1965 - 2005
Avg	0.03%	-0.11%	-0.13%	0.14%	-0.31%	-0.38%
Win%	67%	56%	33%	67%	56%	56%

OTC summary for all years 1963 - 2008
Avg	-0.31%	-0.02%	0.13%	-0.31%	-0.20%	-0.72%
Win%	39%	52%	60%	39%	48%	43%

SPX Presidential Year 1
Year	Mon	Tue	Wed	Thur	Fri	Totals
1953-1	-0.31%	1.40%	0.13%	0.04%	0.26%	1.52%
1957-1	-2.29%	0.68%	.21%	0.26%	-0.05%	-2.61%
1961-1	-0.65%	-0.79%	0.42%	0.04%	-0.40%	.38%
1965-1	0.03%	-0.30%	0.46%	-0.40%	0.18%	-0.03%

1969-1	0.46%	0.00%	-0.14%	-0.76%	-0.64%	.08%
1973-1	0.15%	0.64%	0.72%	0.23%	-0.60%	1.15%
1977-1	-0.65%	0.04%	-0.82%	-0.01%	-0.05%	.50%
1981-1	0.84%	-0.48%	-0.88%	-0.55%	.95%	-3.02%
1985-1	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%
Avg	0.20%	0.07%	-0.28%	-0.27%	-0.81%	.11%

1989-1	0.48%	-0.05%	-0.02%	-0.22%	0.39%	0.58%
1993-1	-0.82%	-0.46%	0.72%	0.34%	-0.02%	-0.25%
1997-1	0.52%	-0.37%	-0.78%	-0.70%	0.78%	-0.55%
2001-1	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%
2005-1	-0.56%	-0.79%	-0.91%	0.37%	0.06%	.83%
Avg	-0.09%	-0.42%	-0.25%	-0.05%	0.30%	-0.51%

SPX summary for Presidential Year 1 1953 - 2005
Avg	-0.23%	-0.04%	-0.19%	-0.11%	-0.17%	-0.75%
Win%	50%	36%	42%	50%	42%	25%

SPX summary for all years 1953 - 2008
Avg	-0.46%	0.00%	0.02%	-0.16%	-0.19%	-0.80%
Win%	31%	49%	55%	40%	41%	37%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth picked up a little.

Conclusion

The market is overbought going into what has seasonally been a very weak week. There may be some short term weakness in the coming week or so, however, there is no sign of a developing top.

I expect the major indices to be lower on Friday September 25 than they were on Friday September 18.

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.