Technical Market Report for September 10, 2011

By: Mike Burk | Sun, Sep 11, 2011
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The good news is:
• Sorry, I cannot find any good news.

Neither the Dow Jones Industrial Average (DJIA) nor the S&P 500 (SPX) have been down in the 3rd year of the Presidential Cycle since 1939. However, every month, so far this year, the SPX has underperformed its monthly year 3 averages. The DJIA has done better, outperforming its monthly year 3 averages in January, March and April.


The negatives

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 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 and dashed horizontal lines have been drawn at 10% levels for OTC HL Ratio and the line is solid at the neutral 50% level.

OTC HL Ratio deteriorated last week and is well below the neutral level.

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

NY HL Ratio has a positive bias relative to OTC HL Ratio yet it dropped below the neutral level and remained there.

The problem is there have been no new highs.

The chart below shows the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.

Since the rally off the August lows, OTC NH has remained lifeless.

The next chart is similar to the one above except it covers the past 5 years to give you a longer term perspective on this indicator. Dashed vertical lines have been drawn on the 1st trading day of each year.


The positives

New lows have been all over the place. Last week, on the NASDAQ, there were:

Tuesday 241
Wednesday 34
Thursday 53
Friday 194

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 orange. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).

OTC NL has been ratcheting upward.

The volatility in new lows on the NYSE was similar to the NASDAQ.

The next chart is similar to the one above except it shows the SPX in red and NY NL has been calculated from NYSE data.

NY NL is also ratcheting upward with a more positive bias.


Seasonality

Next week includes the 5 trading days prior to the 3rd Friday of September 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 3rd Friday of September 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.

Report for the week before the 3rd Friday of September.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.

OTC Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1963-3 0.03% -0.34% -0.36% -0.39% 0.37% -0.70%
1967-3 0.23% 0.07% -0.17% 0.50% -0.06% 0.57%
 
1971-3 -0.18% -0.41% 0.02% -0.01% 0.29% -0.29%
1975-3 -0.33% -0.93% 0.12% 1.23% 2.15% 2.25%
1979-3 -0.07% -0.84% 0.17% 0.51% 0.30% 0.07%
1983-3 -0.49% -0.94% 0.14% -0.39% 0.36% -1.31%
1987-3 -0.15% -0.80% -0.25% -0.02% 0.02% -1.19%
Avg -0.24% -0.78% 0.04% 0.26% 0.63% -0.10%
 
1991-3 -0.20% -0.10% 0.66% 0.79% 0.86% 2.02%
1995-3 0.62% -0.15% 0.23% -0.04% -1.49% -0.83%
1999-3 -1.46% 0.83% -1.89% -0.27% 2.24% -0.55%
2003-3 -0.50% 2.25% -0.22% 1.40% -0.20% 2.73%
2007-3 -0.79% 2.71% 0.56% -0.46% 0.64% 2.66%
Avg -0.47% 1.11% -0.13% 0.29% 0.41% 1.21%
 
OTC summary for Presidential Year 3 1963 - 2007
Avg -0.27% 0.11% -0.08% 0.24% 0.46% 0.45%
Win% 25% 33% 58% 42% 75% 50%
 
OTC summary for all years 1963 - 2010
Avg 0.03% 0.15% -0.03% 0.17% 0.38% 0.70%
Win% 46% 54% 57% 63% 73% 63%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 0.68% 1.38% 0.42% -0.53% 0.76% 2.71%
1959-3 -0.73% -0.54% 0.07% -0.55% -0.57% -2.32%
1963-3 -0.14% 0.07% -0.44% 0.58% 0.11% 0.18%
1967-3 0.19% 0.48% 1.05% 0.22% 0.07% 2.01%
 
1971-3 -0.35% -0.73% 0.43% -0.11% 0.30% -0.45%
1975-3 -0.50% -0.95% 0.34% 2.05% 2.17% 3.10%
1979-3 0.07% -0.77% 0.26% 2.06% -0.04% 1.58%
1983-3 -0.86% -0.41% 0.34% -0.59% 1.13% -0.39%
1987-3 0.34% -1.65% -0.91% 0.02% -0.02% -2.22%
Avg -0.26% -0.90% 0.09% 0.69% 0.71% 0.32%
 
1991-3 0.57% -0.07% 0.37% 0.16% 0.09% 1.13%
1995-3 0.21% 0.45% 0.39% 0.84% -0.04% 1.85%
1999-3 -0.55% -0.59% -1.37% 0.04% 1.28% -1.19%
2003-3 -0.38% 1.43% -0.33% 1.33% -0.32% 1.74%
2007-3 -0.51% 2.92% 0.61% -0.67% 0.46% 2.81%
Avg -0.13% 0.83% -0.06% 0.34% 0.30% 1.27%
 
SPX summary for Presidential Year 3 1955 - 2007
Avg -0.14% 0.07% 0.09% 0.35% 0.38% 0.75%
Win% 43% 43% 71% 64% 64% 64%
 
SPX summary for all years 1953 - 2010
Avg 0.07% 0.10% 0.04% 0.14% 0.19% 0.54%
Win% 52% 53% 61% 57% 60% 62%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2's spectacular assent of the past 10 weeks appears to be resuming.


Conclusion

The huge day to day variation in the number of new lows is disconcerting. The typical pattern is for new lows to dry up immediately after a bottom and not return. The high numbers of new lows on Tuesday and Friday last week along with no significant increase in new highs on the rallies leads me to think the decline may not be over. Finally, the seasonal pattern, which remains strong through next week turns negative after that. The market has been following the seasonal pattern pretty well with a negative bias, that is, the historically strong periods have been weak and the weak periods have been weaker.

I expect the major averages to be lower on Friday September 16 than they were on Friday September 9.

Last weeks positive forecast was a miss.

Gordon Harms produces a Power Point for our local timing group meetings. You can get a copy of it at: http://www.stockmarket-ta.com.

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In his latest newsletter, Jerry Minton looks at the behavior of the small cap index in the fourth quarter of the year and reveals a remarkable investment opportunity. To read about it and subscribe to his free newsletter, go to www.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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