Technical Market Report for August 20, 2011

By: Mike Burk | Sun, Aug 21, 2011
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The good news is:
• So far, it looks like we have had a successful retest of last week's low.


The negatives

I like to compare the current period with 2007. Both are 3rd years in the Presidential Cycle, both had highs in July and so far, lows in August. A big difference, however, is the Fed was aggressively easing in August of 2007 while, this year, QE2 expired at the end of June and they have yet to announce QE3.

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 10% trend of NASDAQ new highs (OTC NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

OTC NH is at a multi year low while the OTC is only 6 weeks from its multi year high.

Any rally that is not accompanied by a rapid build up of new highs is likely to be just a counter trend rally in a bear market.


The positives

The OTC closed at a low for the year on Friday concluding 4 consecutive down days. The OTC low was not confirmed by any of the other major indices nor was it confirmed by many of the breadth indicators. For example, on August 8 the OTC closed at 2,357 with 725 new lows. Friday the OTC closed at 2341 with "only" 317 new lows. 317 is a big number for new lows, but less than half of 725 recorded at the previous, higher, low.

The chart below covers the past 6 months 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).

OTC NL turned downward last week, but, remains considerably higher than it was at the previous low for the index.

The next chart is similar to the one above except it covers the August 2007 low and the period that followed. OTC NL hit its low about a week before the OTC bottomed in mid August.

Interestingly, highest value for OTC NL in August of 2007 was 254 while the highest value recorded so far this August has been 215. Pretty close.


Seasonality

Next week includes the 5 trading days prior to the 4th 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 4th 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 most periods and a little stronger during the 3rd year of the Presidential Cycle.

Report for the week before the 4th Friday of August.
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 0.26% -0.14% -0.06% 0.06% 0.58% 0.69%
1967-3 -0.02% 0.10% -0.11% -0.34% -0.23% -0.61%
 
1971-3 0.34% 0.31% 0.23% 0.11% 0.30% 1.30%
1975-3 -0.70% -1.77% -1.47% 0.50% 0.72% -2.71%
1979-3 0.07% 0.03% 0.51% 0.26% 0.18% 1.05%
1983-3 -0.11% -1.71% -0.95% -0.46% 0.27% -2.96%
1987-3 -0.31% 0.29% 0.04% -0.10% -0.33% -0.42%
Avg -0.14% -0.57% -0.33% 0.06% 0.23% -0.75%
 
1991-3 -2.89% 0.89% 3.17% 0.06% 0.53% 1.76%
1995-3 -1.12% 0.55% 0.28% -0.71% -0.09% -1.09%
1999-3 2.69% 1.21% 1.93% -1.10% -0.57% 4.16%
2003-3 2.20% 1.24% -0.03% 0.97% -0.69% 3.69%
2007-3 0.14% 0.51% 1.25% -0.43% 1.38% 2.84%
Avg 0.20% 0.88% 1.32% -0.24% 0.11% 2.27%
 
OTC summary for Presidential Year 3 1963 - 2007
Avg 0.05% 0.12% 0.40% -0.10% 0.17% 0.64%
Win% 50% 75% 58% 50% 58% 58%
 
OTC summary for all years 1963 - 2010
Avg -0.12% -0.08% 0.35% -0.14% 0.15% 0.16%
Win% 40% 54% 67% 52% 60% 58%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 -0.10% 1.36% 0.14% 0.45% 0.44% 2.29%
1959-3 -0.36% 0.20% 0.14% 0.96% -0.25% 0.70%
1963-3 -0.07% -0.08% -0.13% 0.35% 0.31% 0.38%
1967-3 -0.56% -0.54% -0.14% -0.56% -0.42% -2.21%
 
1971-3 1.03% 1.07% 0.01% -0.17% 0.24% 2.17%
1975-3 -0.19% -1.45% -2.04% -0.18% 1.46% -2.40%
1979-3 0.49% 0.07% 0.07% -0.33% -0.03% 0.28%
1983-3 0.22% -0.96% -0.93% -0.25% 0.81% -1.12%
1987-3 -0.77% 1.03% -0.65% -0.95% -1.31% -2.65%
Avg 0.16% -0.05% -0.71% -0.38% 0.23% -0.74%
 
1991-3 -2.36% 0.79% 2.94% 0.19% 0.73% 2.28%
1995-3 -0.20% 0.25% -0.43% 0.06% 0.47% 0.16%
1999-3 1.77% 0.24% 1.34% -1.43% -1.01% 0.91%
2003-3 0.92% 0.26% -0.20% 0.30% -1.02% 0.25%
2007-3 -0.03% 0.11% 1.17% -0.11% 1.15% 2.30%
Avg 0.02% 0.33% 0.96% -0.20% 0.07% 1.18%
 
SPX summary for Presidential Year 3 1955 - 2007
Avg -0.01% 0.17% 0.09% -0.12% 0.11% 0.24%
Win% 36% 71% 50% 43% 57% 71%
 
SPX summary for all years 1953 - 2010
Avg -0.15% -0.01% 0.20% -0.17% 0.00% -0.14%
Win% 41% 55% 59% 47% 48% 59%


Money supply (M2)

The money supply chart was provided by Gordon Harms. Everyone bailing out of the equity market was offered as an explanation for the rapid growth in M2 by Kelly Evans in the WSJ last week.

M2


Conclusion

The market is oversold and Friday's lows are unconfirmed by nearly all of the breadth indicators. It could go lower, but the downside should be limited.

I expect the major averages to be higher on Friday August 26 than they were on Friday August 19.

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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