Technical Market Report for July 30, 2011

By: Mike Burk | Sat, Jul 30, 2011
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The good news is:
• In a few days the seasonal pattern turns positive and after 5 consecutive days the market is due for a bounce.

A few weeks ago I complained that with every day of the past week was up and it was the down days that would reveal the real strength of the market. Last week most of the major indices were down every day presenting the opposite problem.


The negatives

Some of the breadth indicators have been deteriorating since the beginning of the year suggesting a narrowing of leadership. New lows were at threatening levels most of the week.

The chart below covers the past year 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.

OTC NH has had a pattern of declining highs since mid January.

The next chart is similar to the one above except is shows the S&P 500 SPX in red and NY NH has been calculated from NYSE data.

The pattern is similar to the NASDAQ chart.


The positives

The positives are short term. The market is oversold and due for a bounce. Most of the major indices were down every day last week. The mid and small cap indices have not had 5 consecutive down days in over a year. The blue chip indices were down for 5 consecutive days in mid June just before they rallied about 7% into early July.

The market is due for a bounce and, if there is any life left in bull it could be a good one.


Seasonality

Next week includes the first 5 trading days of August during the 3rd 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 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and SPX data covers the period from 1928 - 2010. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.

Average returns have been negative for the 3rd year of the Presidential Cycle and mixed over all years.

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 3
  Day1 Day2 Day3 Day4 Day5 Totals
1963-3 -0.27% 4 -0.12% 5 0.24% 1 0.33% 2 0.41% 3 0.59%
1967-3 0.44% 2 0.50% 3 0.69% 4 0.04% 5 0.05% 1 1.71%
 
1971-3 0.30% 1 -1.12% 2 -1.10% 3 -0.15% 4 0.65% 5 -1.41%
1975-3 -1.65% 5 -1.03% 1 -1.00% 2 0.09% 3 -0.81% 4 -4.40%
1979-3 0.40% 3 0.45% 4 0.06% 5 -0.15% 1 0.62% 2 1.39%
1983-3 -0.53% 1 0.36% 2 0.22% 3 -1.37% 4 0.17% 5 -1.14%
1987-3 -0.41% 1 -0.08% 2 0.81% 3 1.04% 4 0.63% 5 1.98%
Avg -0.38% -0.28% -0.20% -0.11% 0.25% -0.72%
 
1991-3 0.42% 4 0.30% 5 -0.61% 1 0.52% 2 0.45% 3 1.08%
1995-3 -1.01% 2 -0.74% 3 -0.11% 4 0.85% 5 0.42% 1 -0.59%
1999-3 -0.56% 1 -1.36% 2 -1.85% 3 1.02% 4 -0.69% 5 -3.45%
2003-3 -1.12% 5 -0.09% 1 -2.37% 2 -1.24% 3 -0.03% 4 -4.85%
2007-3 0.30% 3 0.87% 4 -2.51% 5 1.44% 1 0.56% 2 0.65%
Avg -0.39% -0.20% -1.49% 0.52% 0.14% -1.43%
 
OTC summary for Presidential Year 3 1963 - 2007
Averages -0.31% -0.17% -0.63% 0.20% 0.20% -0.70%
% Winners 42% 42% 42% 67% 75% 50%
MDD 8/7/2003 4.77% -- 8/7/1975 4.33% -- 8/4/1999 3.73%
 
OTC summary for all years 1963 - 2010
Averages -0.02% -0.14% -0.13% 0.12% 0.16% -0.02%
% Winners 55% 40% 48% 65% 60% 52%
MDD 8/5/2002 9.20% -- 8/6/1990 8.72% -- 8/6/2004 6.09%
 
SPX Presidential Year 3
  Day1 Day2 Day3 Day4 Day5 Totals
1931-3 0.80% 6 0.65% 1 -0.65% 2 -1.45% 3 -0.66% 4 -1.30%
1935-3 -0.36% 4 -0.82% 5 1.55% 6 0.72% 1 -0.09% 2 1.01%
1939-3 0.00% 2 1.00% 3 -0.33% 4 -1.82% 5 0.59% 6 -0.56%
1943-3 -1.80% 1 2.18% 2 0.60% 3 -0.34% 4 -1.02% 5 -0.38%
1947-3 0.25% 5 -1.14% 1 0.32% 2 -0.32% 3 0.13% 4 -0.76%
Avg -0.22% 0.37% 0.30% -0.64% -0.21% -0.40%
 
1951-3 0.49% 3 1.38% 4 0.13% 5 0.70% 1 0.09% 2 2.79%
1955-3 -1.36% 1 0.23% 2 0.14% 3 -1.69% 4 0.47% 5 -2.21%
1959-3 0.33% 1 -0.16% 2 -0.51% 3 -0.10% 4 -0.61% 5 -1.06%
1963-3 -0.09% 4 0.33% 5 0.59% 1 0.66% 2 -0.30% 3 1.20%
1967-3 0.65% 2 0.43% 3 -0.13% 4 0.18% 5 -0.26% 1 0.88%
Avg 0.01% 0.44% 0.05% -0.05% -0.12% 0.32%
 
1971-3 0.40% 1 -1.51% 2 -0.66% 3 0.21% 4 0.17% 5 -1.39%
1975-3 -0.86% 5 -0.95% 1 -1.06% 2 0.02% 3 0.06% 4 -2.79%
1979-3 0.35% 3 -0.07% 4 -0.06% 5 0.25% 1 1.29% 2 1.77%
1983-3 -0.32% 1 -0.02% 2 0.88% 3 -1.29% 4 0.25% 5 -0.49%
1987-3 -0.34% 1 -0.42% 2 0.70% 3 1.14% 4 0.28% 5 1.36%
Avg -0.15% -0.59% -0.04% 0.07% 0.41% -0.31%
 
1991-3 -0.18% 4 0.02% 5 -0.55% 1 1.44% 2 -0.02% 3 0.72%
1995-3 -0.43% 2 -0.15% 3 -0.01% 4 0.03% 5 0.20% 1 -0.36%
1999-3 -0.05% 1 -0.44% 2 -1.27% 3 0.64% 4 -1.02% 5 -2.14%
2003-3 -1.03% 5 0.27% 1 -1.77% 2 0.17% 3 0.73% 4 -1.62%
2007-3 0.72% 3 0.44% 4 -2.66% 5 2.42% 1 0.62% 2 1.53%
Avg -0.19% 0.03% -1.25% 0.94% 0.10% -0.38%
 
SPX summary for Presidential Year 3 1931 - 2007
Averages -0.14% 0.06% -0.24% 0.08% 0.04% -0.19%
% Winners 40% 50% 40% 65% 60% 40%
MDD 8/5/1975 2.84% -- 8/6/1931 2.73% -- 8/4/1955 2.67%
 
SPX summary for all years 1928 - 2010
Averages 0.37% 0.11% 0.04% -0.29% 0.02% 0.25%
% Winners 71% 48% 52% 33% 43% 52%
MDD 8/7/1933 4.19% -- 8/6/1957 2.59% -- 8/7/1985 2.31%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2 has continued to explode.

M2 Money Supply


August

Since 1963, over all years, the OTC in August has been up 63% of the time with an average gain of 0.4%. During the 3rd year of the Presidential Cycle August has been up 83% time with an average gain of 2.6%. The worst August ever, 1998 (-19.0%), the best 2000 (+14.1%).

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.

In the chart below the blue line shows the average of the OTC in August over all years since 1963 while the green line shows the average during the 3rd year of the Presidential Cycle.

Since 1928 the SPX has been up 61% of the time in August with an average gain of 0.7%. During the 3rd year of the Presidential Cycle the SPX has been up 70% of the time with an average gain of 0.9%. The best ever August for the SPX was 1932 (+37.3%) the worst 1998 (-13.9%).

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 3rd year of the Presidential Cycle in green.

Since 1979 the Russell 2000 (R2K) has been up 63% of the time in August with an average gain of 0.5%. During the 3rd year of the Presidential Cycle the R2K has been up 75% of the time with an average gain of 2.3%. The best ever August for the R2K, 1984 (+9.9%), the worst 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 black and the performance during the 3rd year of the Presidential Cycle in green.

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 66% of the time in August with an average gain of 1.2%. During the 3rd year of the Presidential Cycle the DJIA has been up 68% of the time with an average gain of 1.2%. The best August ever for the DJIA 1932 (+33.2%), the worst 1998 (-14.2%)

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 3rd year of the Presidential Cycle in green.


Conclusion

The market has been following the seasonal pattern, with a slightly negative bias, quite closely. The market is very over sold and the seasonal pattern turns positive in the next few days.

I expect the major averages to be higher on Friday August 5 than they were on Friday July 29.

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In his latest newsletter, Jerry Minton looks at "The Dead Zone", calendar periods that claim 80% of the markets declines. You can sign up for his free newsletter 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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