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October 31, 2009

Technical Market Report
by Mike Burk

The good news is:
• The market is deeply oversold going into a seasonally strong period.

Short Term

For the last few weeks I have been showing charts that defined a rhythm that has been apparent over the last few months. These charts can be calculated from any breadth data on any major index and they all look pretty much the same.

This weeks chart was calculated from the component issues of the Russell 2000 (R2K).

The chart covers the past 165 trading days (from the March low) showing the 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 has been in decline for the past 2 weeks and is at its lowest point since June. It is still moving downward, but, if it follows the recent pattern, is due for a turn upward that should coincide with a tradable rally.

Intermediate term

Last week, for the first time since early July, new lows exceeded new highs on the NASDAQ. Fortunately the NYSE did not match that dismal statistic.

The chart below is an update of one I have been showing regularly. The NASDAQ composite (OTC) is shown 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) is shown in red.

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

New lows exceeded new highs for the last 3 days of last week pulling the indicator below the 50% level for the 1st time since early July. The run up since March is in jeopardy if this indicator does not advance above the 50% level soon.

The chart below is similar to the one above except it shows the S&P 500 (SPX) in red and the indicator has been calculated from NYSE data.

The indicator fell sharply last week, but is still well above the 50% level.

The secondaries lead both up and down so it is good when a small cap index like the R2K moves down less than a large cap index like the SPX or Dow Jones Industrial Average (DJIA) in a down move. That is how it was working until very recently.

The chart below covers the past 2 weeks showing the DJIA in magenta, the SPX in red, the OTC in blue and the R2K in green. The indices have been plotted on log scales so you can see their relative performance.

The DJIA has been the strongest, down 3.8% while the R2K has been the weakest down 9.8%. Not the pattern we like to see.

All of the major indices hit multi month highs around mid October as well as many of the breadth indicators. A typical topping pattern would be the blue chip indices hitting another high while the secondaries and breadth indicators did not hit new highs.

In July we saw that pattern and the market blasted out of it.

Seasonality

Next week includes the first 5 trading days of November during the 1st year of the Presidential Cycle.

The tables show the daily return on a percentage basis for the first 5 trading days of November during the 1st year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and SPX data from 1928 - 2008. There are summaries for both the 1st year of the Presidential Cycle and all years combined.

On average the coming week has had a positive bias. However, large losses in1929 and 1931 skew the SPX average for the 1st year in the Presidential Cycle negatively.

First 5 days of November.
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.

OTC Presidential Year 1
	Day1	Day2	Day3	Day4	Day5	Totals
1965-1	0.29% 1	0.36% 3	0.22% 4	0.29% 5	-0.13% 1	1.04%

1969-1	0.08% 1	-0.18% 2	0.11% 3	0.62% 4	1.24% 5	1.87%
1973-1	-0.50% 4	-0.63% 5	-1.66% 1	-0.77% 2	0.40% 3	-3.16%
1977-1	-0.80% 2	-0.24% 3	-0.02% 4	0.75% 5	0.66% 1	0.35%
1981-1	1.03% 1	0.78% 2	0.48% 3	0.15% 4	-0.02% 5	2.40%
1985-1	0.54% 5	0.04% 1	0.35% 2	0.50% 3	0.25% 4	1.67%
Avg	0.07%	-0.05%	-0.15%	0.25%	0.50%	0.63%

1989-1	0.22% 3	-0.77% 4	-0.04% 5	-1.09% 1	0.31% 2	-1.37%
1993-1	0.58% 1	0.24% 2	-1.62% 3	-2.03% 4	0.76% 5	-2.07%
1997-1	2.28% 1	0.07% 2	0.37% 3	-0.85% 4	-1.29% 5	0.59%
2001-1	3.32% 4	-0.03% 5	2.74% 1	2.31% 2	0.13% 3	8.47%
2005-1	-0.29% 2	1.43% 3	0.74% 4	0.43% 5	0.41% 1	2.71%
Avg	1.22%	0.19%	0.44%	-0.25%	0.06%	1.67%

OTC summary for Presidential Year 1 1965 - 2005
Averages	0.61%	0.10%	0.15%	0.03%	0.25%	1.14%
% Winners	73%	55%	64%	64%	73%	73%
MDD 11/4/1993 3.61% -- 11/6/1973 3.52% -- 11/7/1997 2.13%

OTC summary for all years 1963 - 2008
Averages	0.30%	0.23%	0.23%	0.11%	-0.03%	0.84%
% Winners	65%	52%	67%	59%	52%	72%
MDD 11/6/2008 9.63% -- 11/7/2007 3.86% -- 11/4/1993 3.61%

SPX Presidential Year 1
	Day1	Day2	Day3	Day4	Day5	Totals
1929-1	-5.26% 1	-9.92% 3	3.69% 4	-0.89% 5	-6.23% 1	-18.61%
1933-1	1.79% 3	1.10% 4	3.47% 5	-0.31% 6	-0.63% 1	5.41%
1937-1	-2.27% 1	-4.64% 3	-0.52% 4	0.00% 5	-2.88% 6	-10.30%
1941-1	0.42% 6	0.52% 1	0.73% 3	-0.83% 4	-0.31% 5	0.53%
1945-1	1.32% 4	-0.06% 5	-0.06% 6	0.53% 1	1.18% 3	2.92%
Avg	-0.80%	-2.60%	1.46%	-0.30%	-1.78%	-4.01%

1949-1	1.00% 2	0.80% 3	-0.24% 4	-0.49% 5	0.06% 6	1.13%
1953-1	0.49% 1	-0.61% 3	0.53% 4	-0.12% 5	0.20% 1	0.49%
1957-1	-1.51% 5	-0.17% 1	0.15% 3	0.59% 4	-1.18% 5	-2.12%
1961-1	0.16% 3	0.55% 4	0.52% 5	0.78% 1	1.23% 3	3.24%
1965-1	-0.21% 1	0.09% 3	0.16% 4	-0.10% 5	-0.15% 1	-0.21%
Avg	-0.01%	0.13%	0.22%	0.13%	0.03%	0.51%

1969-1	-0.09% 1	0.06% 2	0.44% 3	0.03% 4	0.60% 5	1.05%
1973-1	-0.55% 4	-0.58% 5	-1.45% 1	-0.53% 2	0.80% 3	-2.31%
1977-1	-1.07% 2	-0.70% 3	0.06% 4	0.90% 5	0.78% 1	-0.04%
1981-1	1.90% 1	0.48% 2	-0.05% 3	-0.96% 4	-0.70% 5	0.66%
1985-1	0.90% 5	-0.15% 1	0.59% 2	0.20% 3	-0.07% 4	1.47%
Avg	0.22%	-0.18%	-0.08%	-0.07%	0.28%	0.17%

1989-1	0.25% 3	-0.80% 4	-0.25% 5	-1.48% 1	0.66% 2	-1.63%
1993-1	0.27% 1	-0.14% 2	-1.16% 3	-1.19% 4	0.45% 5	-1.77%
1997-1	2.66% 1	0.19% 2	0.21% 3	-0.50% 4	-1.12% 5	1.44%
2001-1	2.29% 4	0.29% 5	1.44% 1	1.45% 2	-0.27% 3	5.20%
2005-1	-0.35% 2	1.00% 3	0.43% 4	0.02% 5	0.22% 1	1.31%
Avg	1.02%	0.11%	0.13%	-0.34%	-0.01%	0.91%

SPX summary for Presidential Year 1 1929 - 2005
Averages	0.11%	-0.63%	0.43%	-0.15%	-0.37%	-0.61%
% Winners	60%	50%	65%	40%	50%	60%
MDD 11/11/1929 17.76% -- 11/6/1937 9.95% -- 11/6/1973 3.08%

SPX summary for all years 1928 - 2008
Averages	0.25%	-0.04%	0.26%	0.00%	-0.09%	0.37%
% Winners	62%	56%	65%	52%	49%	65%
MDD 11/11/1929 17.76% -- 11/6/2008 10.03% -- 11/6/1937 9.95%

November

Over all years since 1963, the OTC, in November, has been up 65% of the time with an average gain of 1.3% making it, on average, the 4th strongest month of the year behind January, December and April. During the 1st year of the Presidential Cycle the OTC has been up 64% of the time with an average gain of 1.2% making it 6th best month of the year based on average return. The largest OTC loss in November was14.7% in 1973 while the largest gain was 10.6% in 2001.

The chart below shows the OTC average November over all years in blue and the average during the 1st year of the Presidential Cycle in green.

On average there are 21 trading days in a month. The chart has been calculated by averaging the daily gain of each of the 1st 11 trading days and the last 10. When there have been more than 21 trading days in the month some of the days in the middle were omitted. When there have been less than 21 trading days in the month some of the days in the middle have been counted twice. Dashed vertical lines have been drawn on the 1st trading day of the month and at 5 trading day intervals after that. A solid vertical line has been drawn on the 11th trading day, the dividing point.

Over all years since 1928, the SPX, in November, has been up 54% of the time with an average gain of 0.3%, making it tied with March as the 6th strongest month of the year.

During the 1st year of the Presidential Cycle the SPX has been up 60% of the time with an average gain of 0.1% making it the 8th strongest month of year in the 1st year of the Presidential Cycle. The largest November loss was10.9% in 1973 while the largest November gain 8.3% in 1933.

The chart below is similar to the one above except it shows the average performance for the SPX in November. The average for all years is shown in red and the average for the 1st year of the Presidential Cycle is shown in green.

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth has flattened out a little under the elevated trend of the past couple years.

Conclusion

The market is at an oversold extreme and the first 3 days of next week (month) have been seasonally strong.

I expect the major indices to be higher on Friday November 6 than they were on Friday October 30.

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.

The market extended its downward move a little further than I expected making last weeks positive forecast a miss.

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.