Technical Market Report for January 22, 2011

By: Mike Burk | Sat, Jan 22, 2011
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The good news is:
• The Dow Jones Industrial Average (DJIA) closed at a multi year high on Friday.


The negatives

Last week I pointed out that neither the NASDAQ composite (OTC) nor the S&P 500 (SPX) had been up in the week prior to options expiration during the 3rd year of the Presidential Cycle since 1991, so the decline in those averages last week was not surprising. What was surprising was how much harder the decline was on the small caps than it was on the blue chips. The SPX was down 0.76% while the Russell 2000 (R2K) was down 4.26%.

The R2K deterioration relative to the SPX began last December and accelerated sharply last week. You can see it in the chart below from FastTrack (FastTrack.Net). The chart covers a little over a year showing the R2K in red, the SPX in green and Accutrack, a relative strength indicator is displayed as a histogram in yellow. Accutrack dropped below the neutral line last week for the 1st time since last August.

If the deterioration of the secondaries relative to the blue chips continues, the market could be setting up for an intermediate term top.


The positives

Unsurprisingly, new highs declined last week. New lows, on the other hand, declined sharply on the NYSE and rose only slightly on the NASDAQ.

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and 40% trend (4 day EMA) of the ratio of NASDAQ new highs to new highs + new lows (OTC HL Ratio) in red. Dashed vertical lines have been drawn on the 1st trading day of each month. Dashed horizontal lines drawn at 10% levels for the indicator. The line is solid at the neutral 50% level.

OTC HL Ratio declined sharply from it lofty (mid 90%) levels of the week before, but, even the worst data point from last week would have held the indicator above the 50% level.

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

NY HL Ratio turned up on Friday.

Quite a few breadth indicators hit their lowest points in quite a while on Friday suggesting the likelihood of an oversold bounce. The next 2 charts show a couple of them.

The next chart shows the OTC in blue and momentum of NASDAQ down side volume (OTC DV 5% MoM 10) in brown.

OTC DV 5% MoM 10 has been falling all month and is at a level which, for the past 6 months, has been near rally starting points.

The next chart shows the OTC in blue and an indicator of the percentage of the last 4 days the NASDAQ AD line (OTC ADL) has been up. The indicator touches the top of the chart when the OTC ADL has been up for 4 consecutive days and it touches the bottom of the chart when the OTC ADL has been down for 4 consecutive days.

The indicator touched the bottom of the chart for the 1st time since last August.


Seasonality

Next week includes the 5 trading days prior to the 4th Friday of January during the 3rd year of the Presidential Cycle.

The tables below show the return on a percentage basis for the 5 trading days prior to the 4th Friday of January during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and SPX data from 1953 - 2010. There are summaries for both the 3rd 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.

Average returns for the coming week have been positive by every measure and stronger during the 3rd year of the Presidential Cycle than other years.

Report for the week before the 4th Friday of January.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through the 4th Friday.

OTC Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1963-3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
1967-3 0.62% -0.34% -0.11% -0.10% 0.02% 0.08%
 
1971-3 0.50% 0.09% -0.29% -0.47% 0.91% 0.75%
1975-3 0.53% -0.40% -0.09% 0.58% 1.38% 1.99%
1979-3 0.01% 0.64% -0.10% 0.86% 0.49% 1.91%
1983-3 -2.97% 1.04% 0.94% 1.66% 0.61% 1.28%
1987-3 0.70% -0.14% -0.64% 0.93% -0.25% 0.60%
Avg -0.25% 0.25% -0.04% 0.71% 0.63% 1.31%
 
1991-3 0.72% -0.18% 1.29% 1.93% 0.75% 4.52%
1995-3 -0.33% 0.49% -0.29% -0.45% 0.18% -0.41%
1999-3 1.30% 2.71% -1.10% 2.93% 1.15% 7.00%
2003-3 0.00% -0.87% -0.35% 2.12% -3.32% -2.42%
2007-3 -0.83% 0.01% 1.43% -1.30% 0.05% -0.63%
Avg 0.21% 0.43% 0.20% 1.05% -0.24% 1.61%
 
OTC summary for Presidential Year 3 1963 - 2007
Avg 0.03% 0.28% 0.06% 0.79% 0.18% 1.33%
Win% 70% 55% 27% 64% 82% 73%
 
OTC summary for all years 1963 - 2010
Avg -0.19% -0.11% 0.25% 0.08% 0.04% 0.09%
Win% 54% 45% 54% 48% 68% 57%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 0.23% -0.03% 1.24% 0.11% 0.56% 2.10%
1959-3 -0.23% 0.07% 0.57% -0.12% 0.05% 0.34%
1963-3 0.15% 0.25% 0.28% 0.20% 0.26% 1.13%
1967-3 0.37% 0.14% -0.76% -0.05% 0.41% 0.11%
 
1971-3 0.42% 0.33% -0.73% 0.34% 0.70% 1.06%
1975-3 0.17% -0.53% 1.47% 0.46% 1.26% 2.83%
1979-3 0.15% 0.70% -0.44% 1.03% 0.66% 2.10%
1983-3 -2.70% 1.27% -0.15% 1.93% 0.17% 0.52%
1987-3 1.15% -0.11% -0.45% 2.27% -1.39% 1.47%
Avg -0.16% 0.33% -0.06% 1.20% 0.28% 1.60%
 
1991-3 -0.35% -0.83% 0.58% 1.38% 0.39% 1.17%
1995-3 0.22% 0.01% 0.34% 0.19% 0.44% 1.20%
1999-3 0.72% 1.48% -0.73% 1.79% 1.12% 4.38%
2003-3 0.00% -1.57% -1.04% 1.02% -2.92% -4.51%
2007-3 -0.53% 0.35% 0.85% -1.13% -0.12% -0.57%
Avg 0.02% -0.11% 0.00% 0.65% -0.22% 0.33%
 
SPX summary for Presidential Year 3 1955 - 2007
Avg -0.02% 0.11% 0.07% 0.67% 0.11% 0.95%
Win% 69% 64% 50% 79% 79% 86%
 
SPX summary for all years 1953 - 2010
Avg -0.12% 0.00% 0.20% 0.14% 0.03% 0.26%
Win% 50% 59% 55% 58% 56% 66%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2 growth leveled off last week after falling for a couple of weeks.


Conclusion

The market has been following the average pattern for the 3rd year of the Presidential Cycle quite closely and that pattern suggests we are near a short term low. Technical indicators confirm that assessment.

I expect the major averages to be higher on Friday January 28 than they were on Friday January 21.

Last week the DJIA was up while everything else was down 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. If it is not for you, reply with REMOVE in the subject line.

In his latest newsletter, Jerry Minton takes a look at the underlying cause for the long-term "skewing" of market returns into the November-May period. Titled "Experts and Human Nature" Jerry takes a jab at "expert opinion". To read about it and sign up for the free newsletter, go to www.alphaim.net. All of Alpha's programs had a good year last year.

Client composite returns net of fees and expenses:
E-System 17.04%
Seasonal 10.18%
Bonds Plus 10.02%
Mid cap 20.20%
The Formula 18.51%

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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