Technical Market Report for May 21, 2011

By: Mike Burk | Sat, May 21, 2011
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The good news is:
• For what has, so far, been the worst month of the year the major averages are only down 2% - 4%.


The negatives

Advance decline lines (ADL) are a running total of declining issues subtracted from advancing issues. Their characteristics vary and change. Changing characteristics sometimes lead and usually confirm price activity.
The chart below covers the past year showing the NASDAQ composite (OTC) in blue and an ADL calculated from NASDAQ issues (OTC ADL) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

The rise of the OTC ADL led or was, at least, parallel to the rise of the OTC until last February, confirming the OTC multi year high in February. The confirmation in February implied a high likelihood of a succeeding high in the near future. The OTC made a higher high in late April that was unconfirmed by OTC ADL. The non confirmation means the likelihood of another higher high in the near future has been reduced.


The positives

New lows remained at benign levels on the NYSE last week, but, approached levels for concern on the NASDAQ.

The chart below is an update of one I usually show covering the past 6 months 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) in red. Dashed horizontal lines have been drawn at 10% increments for the indicator. The horizontal line is solid at the neutral 50% level.

OTC HL Ratio dipped below the neutral level early last week before recovering to a slightly positive reading.

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

NY HL Ratio has held up pretty well.


Seasonality

The National Holiday Act of 1971 defined Memorial Day as the last Monday in May. Next week includes the 5 trading days prior to Memorial Day 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 Memorial Day during the 3rd year of the Presidential Cycle. All data covers the period from 1971 - 2010. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.

Average returns by all measures have been flat for the coming week.

5 days before Memorial Day.
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 3
  Day5 Day4 Day3 Day2 Day1 Totals
1971-3 -0.40% 1 -0.85% 2 0.03% 3 0.07% 4 0.60% 5 -0.55%
 
1975-3 -0.55% 1 -0.17% 2 -1.10% 3 0.75% 4 1.30% 5 0.24%
1979-3 0.11% 1 0.56% 2 0.17% 3 -0.02% 4 0.44% 5 1.27%
1983-3 0.10% 1 1.15% 2 0.59% 3 0.72% 4 0.21% 5 2.77%
1987-3 -1.27% 1 -1.30% 2 -0.39% 3 0.47% 4 -0.26% 5 -2.76%
Avg -0.40% -0.12% -0.14% 0.40% 0.46% 0.19%
 
1991-3 -0.27% 1 0.73% 2 0.76% 3 0.47% 4 0.63% 5 2.33%
1995-3 0.76% 1 0.97% 2 -0.19% 3 -0.08% 4 -0.62% 5 0.85%
1999-3 -2.63% 1 -2.97% 2 1.81% 3 -0.20% 4 2.12% 5 -1.87%
2003-3 -2.97% 1 -0.11% 2 -0.08% 3 1.19% 4 0.17% 5 -1.81%
2007-3 0.80% 1 0.36% 2 -0.42% 3 -1.52% 4 0.76% 5 -0.03%
Avg -0.86% -0.20% 0.38% -0.03% 0.61% -0.11%
 
OTC summary for Presidential Year 3 1971 - 2007
Averages -0.63% -0.16% 0.12% 0.19% 0.53% 0.04%
% Winners 40% 50% 50% 60% 80% 50%
MDD 5/25/1999 5.52% -- 5/21/2003 3.16% -- 5/20/1987 2.94%
 
OTC summary for all years 1971 - 2010
Averages -0.18% -0.18% 0.02% 0.25% 0.11% 0.03%
% Winners 44% 48% 55% 60% 60% 63%
 
SPX Presidential Year 3
  Day5 Day4 Day3 Day2 Day1 Totals
1971-3 -0.85% 1 -0.66% 2 0.12% 3 -0.19% 4 0.23% 5 -1.35%
1975-3 0.11% 1 -0.51% 2 -1.12% 3 0.37% 4 1.33% 5 0.18%
1979-3 0.21% 1 0.37% 2 -0.63% 3 0.05% 4 0.29% 5 0.29%
1983-3 0.80% 1 1.29% 2 0.40% 3 -0.44% 4 -0.62% 5 1.44%
1987-3 -0.27% 1 -2.45% 2 -0.50% 3 0.70% 4 0.71% 5 -1.81%
Avg 0.00% -0.39% -0.35% 0.10% 0.39% -0.25%
 
1991-3 -0.03% 1 0.82% 2 0.22% 3 -0.32% 4 0.67% 5 1.37%
1995-3 0.86% 1 0.94% 2 0.00% 3 0.00% 4 -0.93% 5 0.87%
1999-3 -1.77% 1 -1.71% 2 1.59% 3 -1.79% 4 1.59% 5 -2.09%
2003-3 -2.49% 1 -0.11% 2 0.40% 3 0.92% 4 0.14% 5 -1.14%
2007-3 0.15% 1 -0.06% 2 -0.12% 3 -0.97% 4 0.55% 5 -0.46%
Avg -0.66% -0.02% 0.42% -0.44% 0.40% -0.29%
 
SPX summary for Presidential Year 3 1971 - 2007
Averages -0.33% -0.21% 0.04% -0.17% 0.40% -0.27%
%Winners 50% 40% 60% 40% 80% 50%
MDD 5/27/1999 3.68% -- 5/20/1987 3.21% -- 5/20/2003 2.60%
 
SPX summary for all years 1971 - 2010
Averages -0.03% -0.08% -0.07% 0.12% 0.09% 0.03%
% Winners 55% 48% 50% 53% 58% 60%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2 has continued to increase above trend.


Conclusion

The breadth indicators continued to deteriorate last week and Seasonality for the coming week has been flat. There is no evidence the recent consolidation has ended.

I expect the major averages to be lower on Friday May 27 than they were on Friday May 20.

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In his latest newsletter, Jerry Minton examines the usefulness of valuations in predicting market returns. Read about it at: http://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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