Technical Market Report for August 6, 2011

By: Mike Burk | Sat, Aug 6, 2011
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The good news is:
• A bottom, when it comes, should be easy to identify.

Late August last year the Fed announced their intention to commence with QE2 in November. The market promptly took off. Expect the announcement of QE3 soon.


The negatives

I am having difficulty deciding what is a negative and what is a positive. Most of the indicators are near record lows so there is nowhere to go but up.

The chart below covers the past year and a half showing the S&P 500 (SPX) in red and a 40% trend (4 day EMA) of NYSE new highs divided by new highs + new lows (NY HL Ratio) in dark blue. Dashed vertical lines have been drawn on the 1st trading day of each month. Dashed horizontal lines have been drawn at 10% levels for the indicator. The line is solid at the neutral 50% level for the indicator.

You have to go back to March 2009 to find a lower value for this indicator.

The next chart is similar to the one above except is shows the NASDAQ composite (OTC) in blue and OTC HL Ratio, in red, has been calculated from NASDAQ data.

March 2009 was also the last time this indicator was lower.


The positives

New lows increased every day last week. There were 436 new lows on the NASDAQ Friday the most since March 9, 2009 when there were 451.

The all time record for NASDAQ new lows was set October 10, 2008 at 1514 so there is room to go.

The chart below covers the past year and a half showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in black. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).

It is not visible, but, OTC NL is at the bottom right corner of the chart.

The value of the indicator is 137 so it will take fewer than 137 new lows to turn OTC NL upward.

There were 828 new lows on the NYSE Friday the most since October 24, 2008 when there were 1125.

The all time record for NYSE new lows was set October 10, 2008 at 2901.

The chart below is similar to the one above except it shows the SPX in red and NY NL in blue has been calculated from NYSE data. The value of NY NL is 200 so it will take fewer than 200 new lows on the NYSE to move the indicator upward.

It is prudent to see the new low indicators move upward for at least 5 consecutive days before making any decisions.

2007 was our most recent Presidential Cycle 3rd year and there are some similarities between then and now in price and new lows.

The first chart shows the SPX and NY NL for the current year.

Prices peaked in late April and had a slightly lower high in early July with new lows increasing modestly until late July when they began increasing quickly.

The next chart shows 2007 from the 1st of the year through the 1st week in August. Both had a dip in March and a collapse in late July.

The next chart shows all of 2007.

There was a short rally after the 1st week of August then the SPX dropped 6% from its rally high to its low for that cycle.

In 2007 the SPX had a low to high range of about 12%, so far, about the same as this year.


Seasonality

Next week includes the 5 trading days prior to the 2nd Friday of August 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 2nd Friday 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 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 have been modestly positive over all periods and a little stronger during the 3rd year of the Presidential Cycle.

Report for the week before the 2nd Friday of August.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday to 2nd Friday.

OTC Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1963-3 0.24% 0.33% 0.41% 0.03% 0.50% 1.51%
1967-3 0.05% 0.23% 0.50% 0.72% -0.13% 1.36%
 
1971-3 -0.58% -0.14% 1.01% 1.09% 0.22% 1.60%
1975-3 -1.03% -1.00% 0.09% -0.81% -0.05% -2.80%
1979-3 -0.15% 0.62% 0.53% 0.15% 0.55% 1.70%
1983-3 -1.76% -0.23% 0.81% 0.31% 0.68% -0.18%
1987-3 0.61% 0.69% -0.03% 0.52% 0.01% 1.80%
Avg -0.58% -0.01% 0.48% 0.25% 0.28% 0.42%
 
1991-3 -0.61% 0.52% 0.45% 0.38% -0.21% 0.53%
1995-3 0.42% 0.19% 0.80% -0.45% 0.35% 1.31%
1999-3 -1.14% -1.15% 2.00% -0.60% 2.00% 1.11%
2003-3 -0.09% -2.00% -1.24% -0.03% -0.49% -3.86%
2007-3 1.44% 0.56% 2.00% -2.00% -0.45% 1.54%
Avg 0.00% -0.38% 0.80% -0.54% 0.24% 0.13%
 
OTC summary for Presidential Year 3 1963 - 2007
Avg -0.22% -0.11% 0.61% -0.06% 0.25% 0.47%
Win% 42% 58% 83% 58% 58% 75%
 
OTC summary for all years 1963 - 2010
Avg -0.17% 0.03% 0.25% -0.03% -0.03% 0.05%
Win% 42% 54% 64% 62% 46% 60%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 -0.59% -1.32% -0.02% 0.93% 0.19% -0.81%
1959-3 -2.00% 1.31% -0.24% -0.17% 0.24% -0.85%
1963-3 0.59% 0.66% -0.30% 0.09% 0.66% 1.69%
1967-3 -0.26% 0.12% 0.09% -0.26% -0.40% -0.71%
 
1971-3 -0.76% 0.01% 1.20% 1.42% -0.32% 1.54%
1975-3 -0.95% -1.06% 0.02% 0.06% -0.32% -2.25%
1979-3 0.25% 1.29% 0.31% -0.46% 0.86% 2.26%
1983-3 -1.58% 0.60% 0.88% 0.01% 0.38% 0.28%
1987-3 1.55% 1.62% -0.28% 0.68% -0.20% 3.37%
Avg -0.30% 0.49% 0.43% 0.34% 0.08% 1.04%
 
1991-3 -0.55% 1.44% -0.02% -0.32% -0.57% 0.00%
1995-3 0.20% 0.06% -0.12% -0.40% -0.42% -0.69%
1999-3 -0.19% -1.26% 1.61% -0.29% 2.00% 1.86%
2003-3 0.27% -1.77% 0.17% 0.73% 0.36% -0.24%
2007-3 2.00% 0.62% 1.41% -2.00% 0.04% 2.06%
Avg 0.35% -0.18% 0.61% -0.46% 0.28% 0.60%
 
SPX summary for Presidential Year 3 1955 - 2007
Avg -0.15% 0.17% 0.34% 0.00% 0.18% 0.54%
Win% 43% 71% 57% 50% 57% 50%
 
SPX summary for all years 1953 - 2010
Avg -0.20% 0.11% 0.16% -0.01% 0.03% 0.09%
Win% 40% 60% 54% 48% 52% 57%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2 growth leveled off last week.


Conclusion

There is no evidence of a bottom.

But, after a 10% - 15% decline in the major indices over 2 weeks there should be a bounce.

I expect the major averages to be higher on Friday August 12 than they were on Friday August 5.

Last weeks positive forecast, on the expectation of a bounce, was a miss.

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In his latest newsletter, Jerry Minton looks at the 3-5 year returns of the MidCap Power Index over the past thirty years. You can read "Still Going..." at www.alphaim.net and sign up for Alpha's free bi-weekly newsletter.

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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