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October 17, 2009

Technical Market Report
by Mike Burk

The good news is:
• All of the Major indices hit a multi month highs last week.

Short Term

Since the July low there has been a rhythm in the market that shows up, to varying degrees, in many indicators.

The charts below cover the past 155 trading days (from the March low).

The 1st chart shows the Russell 2000 (R2K) in red and an indicator that is the difference in momentum of new lows subtracted from the momentum of new highs of the component issues of the R2K. New highs and new lows have been calculated over the trailing 3 weeks for the calculation of this indicator rather than the trailing 52 weeks as reported by the exchanges. Dashed vertical lines have been drawn on the 1st trading day of each month.

The indicator turned down Friday suggesting some weakness over the next week or so.

Intermediate term

Last week, new highs picked up enough to assure us the rally is likely to continue.

The chart below shows the NASDAQ composite (OTC) in blue and an indicator showing a 40% trend of the ratio of NASDAQ new highs to new highs + new lows.

OTC HL Ratio = (OTC NH / (OTC NH + NL)

Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.

As long as the indicator (currently at 95%) remains above the 50% level, nothing really bad is likely to happen.

The secondaries lead both up and down.

The chart below shows the S&P 500 (SPX) in red, the OTC in blue, the R2K in green and the S&P mid cap (MID) in black.

The indices have been plotted on log scales to show their relative performance. The R2K has been the strongest index during this rally while the SPX has been the weakest.

The next chart is similar to the one above except it covers the past month. Dashed vertical lines have been drawn on the 1st trading day of each week.

Over the past month the performance ranking has been reversed with the SPX the strongest and the R2K the weakest.

All of the major indices hit new highs last week suggesting, at least, one more high before a final top. However, the relative deterioration of the secondaries indicates the rally is weakening.

Seasonality

Next week includes the 5 trading days prior to the 4th Friday of October 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 October 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. The market traded 6 days a week prior to 1953 so that data has been ignored.

The coming week is the anniversary of the 1987 crash (the Monday prior to the 4th Friday of October) reducing average returns over all years (1987 was in the 3rd year of the Presidential Cycle). Average returns over the 1st year of the Presidential Cycle have been modestly positive.

Report for the week before the 4th Friday of October.
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	0.41%	0.13%	-0.15%	0.29%	0.16%	0.85%

1969-1	1.07%	0.34%	0.73%	2.26%	0.86%	5.26%
1973-1	-0.85%	-0.43%	0.29%	0.16%	0.43%	-0.40%
1977-1	-0.66%	-1.08%	0.03%	0.22%	0.43%	-1.06%
1981-1	-0.25%	0.77%	0.60%	0.03%	-0.27%	0.88%
1985-1	-0.23%	0.29%	0.27%	0.44%	-0.38%	0.39%
Avg	-0.18%	-0.02%	0.38%	0.62%	0.21%	1.01%

1989-1	-0.73%	-1.18%	0.26%	-1.02%	-1.18%	-3.86%
1993-1	-0.57%	-1.81%	-0.06%	0.39%	0.18%	-1.87%
1997-1	1.12%	1.78%	-0.43%	-2.15%	-1.22%	-0.91%
2001-1	2.20%	-0.21%	1.59%	2.54%	-0.37%	5.75%
2005-1	1.61%	-0.30%	-0.45%	-1.73%	1.26%	0.41%
Avg	0.72%	-0.35%	0.18%	-0.39%	-0.26%	-0.10%

OTC summary for Presidential Year 1 1965 - 2005
Avg	0.28%	-0.16%	0.24%	0.13%	-0.01%	0.49%
Win%	45%	45%	64%	73%	55%	55%

OTC summary for all years 1963 - 2008
Avg	-0.03%	-0.45%	0.15%	-0.18%	-0.14%	-0.64%
Win%	46%	39%	58%	46%	52%	48%

SPX Presidential Year 1
Year	Mon	Tue	Wed	Thur	Fri	Totals
1953-1	0.08%	0.04%	0.08%	0.45%	0.21%	0.87%
1957-1	-2.93%	-0.43%	4.49%	-0.05%	-0.29%	0.79%
1961-1	-0.61%	-0.12%	0.53%	0.18%	-0.18%	-0.20%
1965-1	0.33%	0.13%	-0.02%	0.17%	0.04%	0.66%

1969-1	0.21%	0.77%	0.65%	-0.38%	0.68%	1.92%
1973-1	-0.96%	0.54%	0.47%	0.21%	0.80%	1.06%
1977-1	-0.75%	-0.69%	1.21%	0.26%	0.29%	0.33%
1981-1	-0.18%	1.09%	-0.15%	-0.38%	-0.87%	-0.49%
1985-1	-0.04%	0.58%	0.56%	-0.31%	-0.52%	0.26%
Avg	-0.34%	0.46%	0.55%	-0.12%	0.08%	0.62%

1989-1	-0.67%	-0.33%	-0.35%	-1.33%	-0.85%	-3.53%
1993-1	-0.22%	-0.48%	-0.03%	-0.15%	-0.45%	-1.33%
1997-1	1.21%	1.75%	-0.39%	-1.84%	-0.95%	-0.22%
2001-1	1.53%	-0.47%	0.04%	1.37%	0.41%	2.88%
2005-1	1.68%	-0.24%	-0.43%	-1.05%	1.65%	1.62%
Avg	0.70%	0.05%	-0.23%	-0.60%	-0.04%	-0.12%

SPX summary for Presidential Year 1 1953 - 2005
Avg	-0.09%	0.15%	0.48%	-0.20%	0.00%	0.33%
Win%	43%	50%	57%	43%	50%	64%

SPX summary for all years 1953 - 2008
Avg	-0.21%	-0.06%	0.20%	-0.28%	-0.05%	-0.39%
Win%	54%	45%	60%	34%	45%	45%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth fell off last week.

Conclusion

Last week, when the indices hit new highs many of the indicators did not confirm those highs and there has been a cyclicality over the past few months that suggests last weeks high was a short term top.

I expect the major indices to be lower on Friday October 23 than they were on Friday October 16.

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.