Technical Market Report for July 31, 2010

By: Mike Burk | Sat, Jul 31, 2010
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The good news is:
• New lows held to non threatening levels all week.


The negatives

The negatives are mostly seasonal. The first few days of August during the 2nd year of the Presidential Cycle have not been good.

There have been good numbers of new highs on the NYSE, but, most of the issues on that list are fixed income. On the NASDAQ the numbers have been less impressive.

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

It could be worse, but, this is not a picture of a surging market.

NASDAQ NH


The positives

Last week prices were mostly flat and so were the breadth indicators.

Although not buy much, new highs out numbered new lows on the NASDAQ every day last week, except Wednesday.

The chart below covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of the ratio of NASDAQ new highs to new highs + new lows in red. Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.

The indicator held above neutral line all week.

NASDAQ HL Ratio

The next chart is similar to the one above except is shows the S&P 500 (SPX) in red and NY HL Ratio has been calculated fro NYSE data.

This chart is extraordinarily positive, but, the NYSE new high list is heavily populated with fixed income issues.

SPX and NYSE HL Ratio


Seasonality

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

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

Average returns for the 2nd year of the Presidential Cycle have been negative while average returns over all years have been modestly negative for the OTC and modestly positive for the SPX.

First 5 days of August.
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 0.00% 1 -1.26% 2 -0.09% 3 0.39% 4 0.62% 5 -0.34%
 
1970-2 -0.83% 1 -1.25% 2 0.17% 3 0.07% 4 -0.44% 5 -2.28%
1974-2 -0.51% 4 -0.33% 5 0.39% 1 1.23% 2 1.63% 3 2.41%
1978-2 0.39% 2 1.06% 3 0.67% 4 0.53% 5 0.39% 1 3.04%
1982-2 0.61% 1 -0.24% 2 -0.84% 3 -0.85% 4 -0.94% 5 -2.26%
1986-2 -0.19% 5 -1.08% 1 0.02% 2 -0.55% 3 0.09% 4 -1.71%
Avg -0.11% -0.37% 0.08% 0.09% 0.14% -0.16%
 
1990-2 -0.53% 3 -1.61% 4 -2.67% 5 -4.17% 1 0.51% 2 -8.47%
1994-2 0.37% 1 -0.01% 2 -0.15% 3 -0.49% 4 -0.21% 5 -0.48%
1998-2 -1.14% 1 -3.54% 2 0.15% 3 2.29% 4 0.97% 5 -1.28%
2002-2 -3.63% 4 -2.51% 5 -3.36% 1 4.44% 2 1.70% 3 -3.36%
2006-2 -1.41% 2 0.82% 3 0.65% 4 -0.35% 5 -0.60% 1 -0.89%
Avg -1.27% -1.37% -1.08% 0.34% 0.47% -2.90%
 
OTC summary for Presidential Year 2 1966 - 2006
Averages -0.63% -0.90% -0.46% 0.23% 0.34% -1.42%
% Winners 27% 18% 55% 55% 64% 18%
MDD 8/5/2002 9.20% -- 8/6/1990 8.72% -- 8/4/1998 4.64%
 
OTC summary for all years 1963 - 2009
Averages -0.06% -0.13% -0.16% 0.13% 0.16% -0.05%
% Winners 54% 40% 47% 66% 62% 51%
MDD 8/5/2002 9.20% -- 8/6/1990 8.72% -- 8/6/2004 6.09%
 
SPX Presidential Year 2
  Day1 Day2 Day3 Day4 Day5 Totals
1930-2 -0.47% 5 0.57% 6 1.37% 1 0.00% 2 -1.58% 3 -0.12%
1934-2 3.11% 3 0.67% 4 -1.22% 5 -2.02% 6 -0.11% 1 0.42%
1938-2 -1.21% 1 1.31% 2 -0.89% 3 0.65% 4 2.26% 5 2.12%
1942-2 0.00% 6 0.12% 1 -0.23% 2 -0.94% 3 -0.12% 4 -1.17%
1946-2 0.28% 4 0.06% 5 -0.61% 1 -0.28% 2 0.95% 3 0.40%
Avg 0.34% 0.54% -0.32% -0.52% 0.28% 0.33%
 
1950-2 1.01% 2 -0.39% 3 0.22% 4 0.83% 5 1.49% 1 3.17%
1954-2 0.36% 1 -0.19% 2 -0.10% 3 -0.42% 4 -1.27% 5 -1.62%
1958-2 0.64% 5 0.95% 1 -0.40% 2 -0.61% 3 0.65% 4 1.23%
1962-2 -0.82% 3 0.40% 4 0.24% 5 -0.64% 1 -0.68% 2 -1.50%
1966-2 -1.54% 1 0.02% 2 1.00% 3 0.94% 4 0.08% 5 0.50%
Avg -0.07% 0.16% 0.19% 0.02% 0.06% 0.36%
 
1970-2 -1.32% 1 0.22% 2 -0.01% 3 -0.13% 4 0.26% 5 -0.98%
1974-2 -0.71% 4 -0.20% 5 0.89% 1 1.55% 2 2.65% 3 4.18%
1978-2 -0.02% 2 2.25% 3 0.57% 4 0.40% 5 -0.36% 1 2.84%
1982-2 1.76% 1 -1.06% 2 -1.57% 3 -0.92% 4 -1.38% 5 -3.16%
1986-2 -0.51% 5 0.46% 1 0.44% 2 -0.08% 3 0.08% 4 0.39%
Avg -0.16% 0.33% 0.06% 0.16% 0.25% 0.65%
 
1990-2 -0.18% 3 -1.14% 4 -1.88% 5 -3.02% 1 0.12% 2 -6.10%
1994-2 0.60% 1 -0.10% 2 0.20% 3 -0.66% 4 -0.29% 5 -0.25%
1998-2 -0.74% 1 -3.63% 2 0.87% 3 0.76% 4 -0.02% 5 -2.76%
2002-2 -2.96% 4 -2.31% 5 -3.43% 1 2.99% 2 2.00% 3 -3.70%
2006-2 -0.45% 2 0.60% 3 0.13% 4 -0.07% 5 -0.28% 1 -0.07%
Avg -0.74% -1.31% -0.82% 0.00% 0.31% -2.58%
 
SPX summary for Presidential Year 2 1930 - 2006
Averages -0.16% -0.07% -0.22% -0.08% 0.22% -0.31%
% Winners 35% 60% 50% 35% 50% 45%
MDD 8/5/2002 8.45% -- 8/6/1990 6.10% -- 8/6/1982 4.84%
 
SPX summary for all years 1928 - 2009
Averages 0.09% 0.01% 0.10% -0.10% 0.15% 0.24%
% Winners 54% 50% 51% 47% 56% 48%
MDD 8/5/2002 8.45% -- 8/6/1990 6.10% -- 8/6/1982 4.84%


Money Supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth has been following the reduced trend of the past year.

M2 Money Supply


August

Since 1963, over all years the OTC in August has been up 64% of the time with an average return of 0.6%. During the 2nd year of the Presidential Cycle August has also been up 64% time but with an average loss of -1.9%. All of the down years for August during the 2nd year of the Presidential Cycle have been huge, -9.9% in 1966, -10.4% in 1974, -12.5% in 1990 and -19% in 1998.

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 average of the OTC over all years since 1963 while the green line shows the average during the 2nd year of the Presidential Cycle.

NASDAQ August Year 2 - 1963-2010

Since 1928 the SPX has been up 62% of the time in August with an average gain of 0.8%. During the 2nd year of the Presidential Cycle the SPX has been up 65% of the time with an average loss of -0.3%. Like the OTC, the losses, when they come have been huge.

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

SPX August Year 2 - 1928-2010

Since 1979 the Russell 2000 (R2K) has been up 65% of the time in August with an average gain of 0.8%. During the 2nd year of the Presidential Cycle the R2K has only been up 71% of the time with an average loss of -1.6%. There have been 2 down years during the 2nd year of the Presidential Cycle for the R2K, 1990, -13.2% and 1998 -18.2%.

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

R2K August Year 2 - 1979-2010

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 67% of the time in August with an average gain of 1.2%. During the 2nd year of the Presidential Cycle the DJIA has only been up 70% of the time with an average gain of 0.7%.

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

Dow Jones Industrial Average - August Year 2 - 1885-2010


Conclusion

Most of the indicators are strong, but, seasonally the first few days of August during the 2nd year of the Presidential Cycle have been weak.

I expect the major averages to be lower on Friday August 6 than they were on Friday July 30.

Last week the DJIA and R2K were up a little while the SPX and OTC were down a little so I am calling last weeks negative forecast a tie.

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 looks at the "94% bet" which occurs in the fourth quarter of the year. You can read about it and subscribe to the free newsletter at www.alphaim.net

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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