Technical Market Report for May 1, 2010

By: Mike Burk | Sat, May 1, 2010
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The good news is:

• There was no build up of new lows during the markets first down week in 3 months.

The negatives

Aside from the very short term the market is still overbought.

NYSE volume showed its first signs of life in a long time during the last half of April. After hitting a 7 year low in mid April volume picked up sharply as the market flattened out during the last half of April.

The chart below covers the past year showing the S&P 500 (SPX) in red and a 5% trend (39 day EMA) of NYSE volume in black. Dashed vertical lines have been drawn on the 1st trading day of each month.

I think of total volume as a measure of interest. Over the past year the only time there has been any interest in this market has been when it is flat or going down.

SPX 1-Year Chart

New highs declined over the past week. The current period of weakness will end when new highs begin expanding again.

The chart below covers the past 3 months showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green. The current value of OTC NH is 224 so NASDAQ new highs exceeding 224 for several days (especially a down day) will mark the end of this period of weakness.

NASDAQ versus NASDAQ New Highs

The Positives

The highs of a week ago were confirmed by everything that matters so a change of trend is unlikely in the near future.

Over the past week new highs on both the NYSE and NASDAQ fell by at least half, but, there was no corresponding build up of new lows suggesting this is just an overdue pull back.

The chart below covers the past year showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by new highs + new lows (OTC HL Ratio). Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.

The indicator remained above the 90% level.

NASDAQ versus 4-Day EMA 1-Year Chart

The next chart is similar to the one above except it covers past 5 years to give you a longer term perspective on the behavior of this indicator. Dashed vertical lines have been drawn on the 1st trading of each year.

NASDAQ versus 4-Day EMA 5-Year Chart

The next chart covers the past year showing the SPX in red and NY HL Ratio, shown in black, has bee calculated from NYSE data. No problems visible here.

SPX versus New H/L Ratio 1-Year Chart

Seasonality

Next week includes the first 5 trading days of May during the 2nd year of the Presidential Cycle.

The tables below show the return on a percentage basis for the first 5 trading of May during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2009 and S&P 500 data from 1928 - 2009. There are summaries for both the 2nd year of the Presidential Cycle and all years combined.

On average the coming week has been very strong, however, the 2nd year of the Presidential cycle has been the exception.

Report for the first 5 days of May.
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 2
  Day1 Day2 Day3 Day4 Day5 Totals
1966-2 0.51% 1 -0.11% 2 -1.06% 3 -0.23% 4 -2.20% 5 -3.11%
 
1970-2 -0.29% 5 0.05% 1 -2.37% 2 0.26% 3 0.01% 4 -2.34%
1974-2 0.89% 3 0.39% 4 -0.57% 5 -0.18% 1 -0.74% 2 -0.22%
1978-2 0.68% 1 0.14% 2 0.08% 3 0.23% 4 0.68% 5 1.80%
1982-2 0.15% 1 0.53% 2 -0.04% 3 0.75% 4 0.46% 5 1.85%
1986-2 -0.41% 4 0.40% 5 0.74% 1 0.07% 2 -0.25% 3 0.55%
Avg 0.20% 0.30% -0.43% 0.23% 0.03% 0.33%
 
1990-2 0.42% 2 0.41% 3 0.44% 4 0.75% 5 0.61% 1 2.63%
1994-2 0.93% 1 -0.18% 2 0.13% 3 0.03% 4 -1.04% 5 -0.12%
1998-2 0.27% 5 0.20% 1 -0.66% 2 -0.44% 3 -1.16% 4 -1.79%
2002-2 -0.63% 3 -1.95% 4 -1.93% 5 -2.14% 1 -0.30% 2 -6.95%
2006-2 -0.77% 1 0.22% 2 -0.25% 3 0.87% 4 0.80% 5 0.87%
Avg 0.04% -0.26% -0.46% -0.19% -0.22% -1.07%
 
OTC summary for Presidential Year 2 1966 - 2006
Averages 0.16% 0.01% -0.50% 0.00% -0.28% -0.62%
% Winners 64% 73% 36% 64% 45% 45%
MDD 5/7/2002 6.78% -- 5/6/1966 3.58% -- 5/5/1970 2.60%
 
OTC summary for all years 1963 - 2009
Averages 0.32% 0.25% 0.10% 0.07% -0.06% 0.67%
% Winners 63% 72% 63% 60% 53% 66%
MDD 5/7/2002 6.78% -- 5/3/2000 6.34% -- 5/6/1966 3.58%
 
SPX Presidential Year 2
  Day1 Day2 Day3 Day4 Day5 Totals
1930-2 -2.41% 4 -3.00% 5 -3.10% 6 0.61% 1 3.39% 2 -4.50%
1934-2 0.00% 2 -2.01% 3 0.39% 4 0.29% 5 -1.55% 6 -2.88%
1938-2 -1.13% 1 2.71% 2 1.62% 3 -0.40% 4 4.61% 5 7.42%
1942-2 0.65% 5 0.52% 6 0.26% 1 0.39% 2 -0.13% 3 1.69%
1946-2 -0.27% 3 -0.48% 4 -0.86% 5 -0.27% 6 -0.81% 1 -2.69%
Avg -0.63% -0.45% -0.34% 0.12% 1.10% -0.19%
 
1950-2 0.83% 1 -0.60% 2 0.88% 3 -0.82% 4 0.55% 5 0.84%
1954-2 -0.18% 1 0.25% 2 0.04% 3 0.78% 4 0.49% 5 1.38%
1958-2 0.23% 4 0.34% 5 0.23% 1 0.50% 2 -0.18% 3 1.12%
1962-2 0.71% 2 0.44% 3 0.82% 4 -0.44% 5 -0.33% 1 1.20%
1966-2 -0.18% 1 -1.16% 2 -0.51% 3 -1.63% 4 -0.10% 5 -3.58%
Avg 0.28% -0.14% 0.29% -0.32% 0.09% 0.19%
 
1970-2 -0.10% 5 -2.54% 1 -0.97% 2 1.11% 3 0.45% 4 -2.05%
1974-2 2.11% 3 -0.14% 4 -0.87% 5 -0.19% 1 0.37% 2 1.29%
1978-2 0.87% 1 -0.43% 2 -1.02% 3 -0.34% 4 0.63% 5 -0.30%
1982-2 0.32% 1 0.56% 2 0.18% 3 0.86% 4 0.67% 5 2.58%
1986-2 -0.15% 4 -0.16% 5 1.25% 1 -0.21% 2 -0.49% 3 0.25%
Avg 0.61% -0.54% -0.29% 0.25% 0.33% 0.35%
 
1990-2 0.44% 2 0.67% 3 0.33% 4 0.84% 5 0.63% 1 2.91%
1994-2 0.47% 1 0.00% 2 -0.29% 3 -0.08% 4 -0.79% 5 -0.68%
1998-2 0.83% 5 0.10% 1 -0.58% 2 -0.96% 3 -0.89% 4 -1.50%
2002-2 0.89% 3 -0.17% 4 -1.03% 5 -1.93% 1 -0.30% 2 -2.55%
2006-2 -0.41% 1 0.61% 2 -0.41% 3 0.34% 4 1.03% 5 1.16%
Avg 0.44% 0.24% -0.40% -0.36% -0.06% -0.13%
 
SPX summary for Presidential Year 2 1930 - 2006
Averages 0.18% -0.22% -0.18% -0.08% 0.36% 0.05%
% Winners 55% 50% 50% 45% 50% 55%
MDD 5/3/1930 8.27% -- 5/5/1970 3.58% -- 5/6/1966 3.54%
 
SPX summary for all years 1928 - 2009
Averages 0.09% 0.21% 0.24% 0.02% 0.14% 0.71%
% Winners 55% 72% 66% 46% 46% 70%
MDD 5/3/1930 8.27% -- 5/4/2000 4.01% -- 5/5/1970 3.58%

Money Supply (M2)

The money supply chart below was provided by Gordon Harms. Money supply has been under trend all year and the deterioration has been accelerating.

M-2 Money Supply

May

Since 1963 the OTC in May has been up 57% of the time with an average gain of 0.5%. During the 2nd year of the Presidential Cycle May has been up only 27% of the time with an average return of -2.4%. A loss of 12.7% in 1970 skewed the average a little.

The average month has 21 trading days. The chart below has been calculated by averaging the daily percentage change of the OTC for each of the 1st 11 trading days and each of the last 10. In months when there were more than 21 trading days some of the days in the middle were not counted. In months when there were less than 21 trading days some of the days in the middle of the month were counted twice. Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that. The line is solid on the 11th trading day, the dividing point.

The blue line shows the daily average of all years since 1963 while the green line shows the daily average during the 2nd year of the Presidential Cycle.

Since 1928 the SPX has been up 56% of the time in May with an average loss of -0.1%, helped considerably by losses of 22.1% in 1932 and 22.9% in 1940. During the 2nd year of the Presidential Cycle the SPX has been up 45% of the time with an average loss of -0.9%. The SPX has not been up in May during the 2nd year of the Presidential Cycle since 1994 when it gained 0.8%.

The chart below is similar to the one above except it shows the daily performance over all years for the SPX during May in red and the performance during the 2nd year of the Presidential Cycle in cyan.

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 52% of the time in May with an average loss of -0.2%. During the 2nd year of the Presidential Cycle the DJIA has been up 55% of the time with an average gain of 0.3%. Measured by the Presidential Cycle the worst year for May is the 4th year with an average loss of -1.5% and up only 42% of the time.

The chart below is similar to those above except it shows the daily performance over all years for the DJIA during May in magenta and the performance during the 2nd year of the Presidential Cycle in cyan.

This chart looks backwards from the rest because May was a pretty good month until the 1960's.

Since 1979 the Russell 2000 (R2K) has been up 68% of the time in May with an average gain of 1.6%. During the 2nd year of the Presidential Cycle the R2K has been up only 29% of the time with an average loss of -1.5%. The R2K has not had an up year during the 2nd year of the Presidential Cycle since 1990 when it was up 6.6%.

The chart below is similar to those above except it shows the daily performance over all years for the R2K during May in black and the performance during the 2nd year of the Presidential Cycle in cyan.

Sell in May and go away

"Sell in May and go away" is a saying that has been around as long as I can remember. It appears to be based on the markets behavior during the 2nd year of the Presidential Cycle. It also has been more pronounced during recent times. The table below shows the collective average performance of several indices from May 1 through September 30 for all years and for the 2nd year of the Presidential Cycle. The average performance for the period over all years has been positive, however, the average performance during the 2nd year of the Presidential Cycle has been negative.

May 1 through September 30 average returns.

Index beginning All years 2nd year
R2K 1979 +1.5% -11.6%
OTC 1963 +1.2% -8.8%
SPX 1928 +1.5% -3.4%
DJIA 1885 +1.0% -1.2%

Conclusion

The highs a week ago were confirmed so the bull market is likely to continue. The resumption of the bull market will be marked by an expansion of new highs.

I expect the major averages to be lower on Friday May 7 than they were on Thursday April 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.

In his latest newsletter, Jerry Minton details some of the information available at the Alpha website, such as how to convert a taxable mutual fund portfolio into a 100% liquid tax-deferred portfolio. To find out about this and many more investment "goodies" go to www.alphaim.net to sign-up for a free subscription.

Thank you,

 


 

Author: Mike Burk

Mike Burk

Mike Burk independently publishes a weekly newsletter on the stock market from a technical perspective.

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.

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