Technical Market Report for October 2, 2010

By: Mike Burk | Sun, Oct 3, 2010
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The good news is:
• The NASDAQ composite (OTC) had its best September ever, up 8.8%.


The negatives

Advance Decline Lines (ADL) are running totals of declining issues subtracted from advancing issues.

The chart below is an update of one I have been showing. It covers the past 6 months showing the (OTC) in blue and the NASDAQ ADL in red, green and black. The colors of the ADL are controlled by a trend identifier that looks for patterns of higher highs and higher lows (green) or lower highs and lower lows (red) and it colors the line black if neither of the directional patterns can be identified. Dashed vertical lines have been drawn on the 1st trading day of each month.

Relatively, the OTC ADL is not keeping up with the index, however, the trend did go positive last week.

NASDAQ ADL 6-Month Chart

The next chart is similar to the one above except it covers the past year.

NASDAQ ADL 12-Month Chart

The chart below covers the past 6 months showing the S&P 500 (SPX) in red and an ADL calculated from NYSE data. The NYSE ADL has had an extremely positive bias for the last 8 - 10 years and it hit an all time high on Friday.

S&P500 and NYSE ADL


The positives

New highs picked up again last week and new lows remained at non threatening levels.

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 (OTC HL Ratio) in red. Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.

There are some trading systems that impose a "No Sell Filter" when a variation of this indicator is above 80% as it is now.

NASDAQ HL

The chart below is similar to the one above except it shows the SPX in red and NY HL Ratio has been calculated from NYSE data.

After dipping a little last week this indicator is now above 95%.

S&P500 and NYSE HL Ratio


Seasonality

Next week includes the 5 trading days prior to the 2nd Friday of October during the 2nd year of the Presidential Cycle.

The tables below show the return on a percentage basis for the 5 trading days prior to the 2nd Friday of October during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2009 and SPX data from 1953 - 2009. There are summaries for both the 2nd 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.

Next week during the 2nd year of the Presidential Cycle the market has been very strong. Over all years there has been a positive bias, but a 19.52% loss in 2008 makes the average return for the SPX negative.

Report for the week before the 2nd Friday of October.
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.

OTC Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1966-2 -1.42% 1.32% 0.22% 2.35% 0.32% 2.79%
 
1970-2 1.56% 0.69% 0.30% 0.21% -0.13% 2.63%
1974-2 2.56% -0.78% 2.57% 2.71% 2.18% 9.24%
1978-2 0.48% 0.22% 0.25% 0.22% 0.01% 1.17%
1982-2 -0.36% 0.40% 1.70% 1.88% 1.69% 5.31%
1986-2 0.13% -0.23% 0.15% 0.05% 0.13% 0.22%
Avg 0.87% 0.06% 0.99% 1.01% 0.78% 3.71%
 
1990-2 0.22% -2.59% -1.73% -2.29% 0.60% -5.79%
1994-2 0.91% 1.16% 0.19% 0.12% -0.11% 2.27%
1998-2 -4.85% -1.68% -3.20% -2.97% 5.17% -7.53%
2002-2 -1.80% 0.88% -1.34% 4.42% 4.05% 6.21%
2006-2 0.51% 0.16% -0.31% 1.64% 0.47% 2.48%
Avg -1.00% -0.42% -1.28% 0.18% 2.04% -0.47%
 
OTC summary for Presidential Year 2 1966 - 2006
Avg -0.19% -0.04% -0.11% 0.76% 1.31% 1.73%
Win% 64% 64% 64% 82% 82% 82%
 
OTC summary for all years 1963 - 2009
Avg -0.07% -0.34% -0.10% 0.21% 0.53% 0.22%
Win% 62% 47% 50% 70% 70% 57%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 0.56% 0.49% 0.40% -0.21% -0.06% 1.17%
1958-2 0.62% 0.57% 0.18% -0.02% 0.67% 2.01%
1962-2 0.00% 0.23% 0.07% -0.33% -0.18% -0.21%
1966-2 1.82% 0.51% 2.84% -0.19% -0.38% 4.60%
 
1970-2 1.54% 0.44% 0.05% -1.08% -1.01% -0.07%
1974-2 4.19% -0.17% 4.60% 2.90% 1.93% 13.45%
1978-2 1.03% -0.12% 0.89% -0.48% -0.21% 1.11%
1982-2 -0.38% 0.39% 3.27% 2.25% 1.75% 7.27%
1986-2 0.46% -0.16% 0.97% -0.35% -0.16% 0.76%
Avg 1.37% 0.08% 1.95% 0.65% 0.46% 4.50%
 
1990-2 0.64% -2.67% -1.54% -1.64% 1.55% -3.68%
1994-2 0.87% 1.47% -0.07% 0.50% 0.28% 3.05%
1998-2 -1.40% -0.40% -1.41% -1.16% 2.59% -1.78%
2002-2 -1.91% 1.69% -2.73% 3.50% 3.91% 4.45%
2006-2 0.08% 0.20% -0.26% 0.95% 0.20% 1.19%
Avg -0.35% 0.06% -1.20% 0.43% 1.71% 0.65%
 
SPX summary for Presidential Year 2 1954 - 2006
Avg 0.62% 0.18% 0.52% 0.33% 0.78% 2.38%
Win% 77% 64% 64% 36% 57% 71%
 
SPX summary for all years 1954 - 2009
Avg 0.07% -0.26% 0.10% -0.09% 0.15% -0.03%
Win% 57% 36% 46% 44% 54% 56%


October

October makes investors uneasy because both crashes (1929 and 1987) occurred during that month. However, on average, October has been up and during the 2nd year of the Presidential Cycle it has been 2nd to November as the strongest month of the year. Since 1963, over all years the OTC in October has been up 57% of the time with an average gain of 0.5%. During the 2nd year of the Presidential Cycle October has been up 73% time with an average gain of 3.3%. The worst October, 1987 (-27.9%) the best 1974 (+17.6%)

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

NASDAQ Octobers

Since 1928 the SPX has been up 60% of the time in October with an average gain of 0.1%. During the 2nd year of the Presidential Cycle the SPX has also been up 60% of the time with an average gain of 2.2% making it the strongest month during the 2nd year of the Presidential Cycle. The best ever October for the SPX was 1974 (+16.6%) the worst 1987 (-23.1%).

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

S&P500 Octobers

Since 1979 the Russell 2000 (R2K) has been up 52% of the time in October, but a 30.9% loss in 1987 and a 20% loss in 2008 gives it an average loss of -1.1%. During the 2nd year of the Presidential Cycle the R2K has been up 86% of the time (1990 the only down year with a -7.5% loss) with an average gain of 3.6%. The best ever October for the R2K 1982 (+13.4%), the worst 1987 (-30.9%)

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

Russell 2000 Octobers

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 56% of the time in October with an average loss of -1.0%. During the 2nd year of the Presidential Cycle the DJIA has only been up 43% of the time with an average gain of 0.1%. The best October ever for the DJIA1998 up 12.6%, the worst 1987 (-24.5%)

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

Dow Jones Industrial Average Octobers


Conclusion

For the last 3 months seasonality has been turned upside down. The major indices did not reflect the gains in the breadth indicators last week.

I expect the major averages to be higher on Friday October 8 than they were on Friday October 1.

Last week the blue chips were down and the secondaries were up so I am calling last weeks negative forecast a tie.

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In his latest newsletter, Jerry Minton looks at the S&P 400 MidCap Index and its robust performance during the annual "power zone". To read about this investment strategy and to subscribe to Jerry's free newsletter, go to 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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