Technical Market Report for October 1, 2011

By: Mike Burk | Sat, Oct 1, 2011
Print Email

The good news is:
• A bottom appears to be developing. Most of the major indices closed within 1.5% of their previous lows on Friday with fewer new lows than there were on the September 22 low. The September 22 low had fewer new lows than the August 8 low so the pattern is improving. However, on Friday there were 275 new lows on the NYSE and 247 on the NASDAQ which are enough to suggest another retest. The seasonal pattern, which the market has been slavishly following, calls for a rally next week followed by a 2 week decline into the low for the year.


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 is near its low for the year.

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

NYSE data has a more positive bias than NASDAQ data, but, this chart shows no signs of recovery.

The problem is new highs.

The chart below covers the past 6 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green. The rally from mid August to mid September did not generate many new highs.

The next chart is similar to the one above except is shows the SPX in red and NY NH has been calculated from NYSE new highs. The pattern is similar.


The positives

Since the August 8 low, each successive retest has been accompanied by successively fewer new lows. The problem is the numbers are still too high.

The chart below covers the past 6 months showing the SPX in red and a 10% trend of NYSE new lows (NY NL) in blue. NY NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).

The SPX closed 1.1% above its August low on Friday while NY NL has been progressively higher on each retest.

The next chart is similar to the one above except is shows the OTC in blue and OTC NL, in orange, has been calculated from NASDAQ data.

The pattern is similar, but not quite as positive.


Seasonality

Next week includes the first 5 trading days of October 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 October 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 mostly positive.

First 5 days of October.
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 -0.32% 2 -0.14% 3 -0.12% 4 0.29% 5 -0.26% 1 -0.55%
1967-3 0.26% 1 -0.08% 2 0.21% 3 0.46% 4 0.32% 5 1.17%
 
1971-3 0.50% 5 0.35% 1 0.03% 2 0.63% 3 0.27% 4 1.78%
1975-3 -0.71% 3 0.49% 4 1.81% 5 0.70% 1 -0.20% 2 2.09%
1979-3 -0.26% 1 0.28% 2 0.33% 3 0.60% 4 0.57% 5 1.53%
1983-3 -0.68% 1 0.06% 2 -0.08% 3 0.41% 4 0.53% 5 0.24%
1987-3 0.94% 4 0.70% 5 0.45% 1 -1.35% 2 -0.64% 3 0.10%
Avg -0.04% 0.38% 0.51% 0.20% 0.11% 1.15%
 
1991-3 0.31% 2 -0.41% 3 -1.11% 4 -0.02% 5 -0.81% 1 -2.04%
1995-3 -1.52% 1 -0.69% 2 -1.78% 3 1.19% 4 -0.22% 5 -3.03%
1999-3 -0.34% 5 2.16% 1 0.13% 2 2.05% 3 0.12% 4 4.13%
2003-3 2.54% 3 0.22% 4 2.42% 5 0.69% 1 0.76% 2 6.61%
2007-3 1.46% 1 0.22% 2 -0.64% 3 0.15% 4 1.71% 5 2.90%
Avg 0.49% 0.30% -0.20% 0.81% 0.31% 1.72%
 
OTC summary for Presidential Year 3 1963 - 2007
Averages 0.18% 0.26% 0.14% 0.48% 0.18% 1.25%
% Winners 50% 67% 58% 83% 58% 75%
MDD 10/4/1995 3.95% -- 10/7/1991 2.33% -- 10/7/1987 1.98%
 
OTC summary for all years 1963 - 2010
Averages -0.04% -0.14% 0.12% 0.05% -0.07% -0.08%
% Winners 53% 54% 58% 63% 63% 63%
MDD 10/7/2008 15.73% -- 10/7/1998 13.65% -- 10/6/2000 8.49%
 
SPX Presidential Year 3
  Day1 Day2 Day3 Day4 Day5 Totals
1931-3 -1.85% 4 1.78% 5 -3.40% 6 -5.87% 1 12.36% 2 3.02%
1935-3 -0.95% 2 -3.31% 3 1.44% 4 0.89% 5 0.70% 6 -1.23%
1939-3 -1.08% 1 -0.85% 2 0.16% 3 0.23% 4 -0.16% 5 -1.69%
1943-3 0.08% 5 -0.08% 6 -0.50% 1 -0.42% 2 -1.17% 3 -2.08%
1947-3 0.33% 3 0.07% 4 0.46% 5 0.13% 6 0.13% 1 1.12%
Avg -0.69% -0.48% -0.37% -1.01% 2.37% -0.17%
 
1951-3 0.90% 1 0.72% 2 0.63% 3 -0.29% 4 0.25% 5 2.22%
1955-3 -2.70% 1 0.78% 2 0.40% 3 -0.67% 4 -0.75% 5 -2.95%
1959-3 0.11% 4 0.46% 5 -0.10% 1 -0.09% 2 -0.26% 3 0.11%
1963-3 0.73% 2 0.11% 3 0.73% 4 0.03% 5 -0.21% 1 1.39%
1967-3 -0.40% 1 0.34% 2 -0.23% 3 0.25% 4 0.61% 5 0.57%
Avg -0.27% 0.48% 0.29% -0.16% -0.07% 0.27%
 
1971-3 0.60% 5 0.28% 1 -0.10% 2 0.72% 3 0.20% 4 1.70%
1975-3 -1.12% 3 1.07% 4 2.54% 5 1.08% 1 -0.13% 2 3.45%
1979-3 -0.70% 1 0.95% 2 0.00% 3 0.53% 4 1.00% 5 1.78%
1983-3 -0.16% 1 0.28% 2 0.88% 3 1.51% 4 0.31% 5 2.82%
1987-3 1.71% 4 0.23% 5 0.00% 1 -2.70% 2 -0.21% 3 -0.98%
Avg 0.07% 0.56% 0.67% 0.23% 0.23% 1.76%
 
1991-3 0.35% 2 -0.24% 3 -0.98% 4 -0.84% 5 -0.46% 1 -2.17%
1995-3 -0.46% 1 0.11% 2 -0.15% 3 0.20% 4 -0.02% 5 -0.33%
1999-3 0.01% 5 1.70% 1 -0.25% 2 1.84% 3 -0.58% 4 2.73%
2003-3 2.23% 3 0.20% 4 0.94% 5 0.44% 1 0.47% 2 4.29%
2007-3 1.33% 1 -0.03% 2 -0.46% 3 0.21% 4 0.96% 5 2.01%
Avg 0.69% 0.35% -0.18% 0.37% 0.07% 1.31%
 
SPX summary for Presidential Year 3 1931 - 2007
Averages -0.05% 0.23% 0.10% -0.14% 0.65% 0.79%
% Winners 55% 75% 50% 65% 50% 65%
MDD 10/5/1931 9.17% -- 10/2/1935 4.23% -- 10/7/1955 2.95%
 
SPX summary for all years 1928 - 2010
Averages 0.09% 0.13% 0.16% -0.18% 0.26% 0.46%
% Winners 49% 65% 52% 54% 54% 64%
MDD 10/7/2008 14.47% -- 10/5/1932 9.33% -- 10/5/1931 9.17%


Money supply (M2)

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

M2


October

Since 1963, over all years, the OTC in October has been up 57% of the time with an average gain of 0.7%. During the 3rd year of the Presidential Cycle October has been up 58% time with an average loss of -1.9%, helped considerably by a 27.9% loss in October 1987. The best October for the OTC was 1974 (+17.6%)

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 October over all years since 1963 while the black line shows the average during the 3rd year of the Presidential Cycle over the same period.

Since 1928 the SPX has been up 60% of the time in October with an average gain of 0.2%. During the 3rd year of the Presidential Cycle the SPX has been up 50% of the time with no average gain or loss. The best ever October for the SPX was 1974 (+16.6%) the worst 1987 (-23.1%).

The chart below is similar to the one above except it shows the daily average performance over all years for the SPX in October in red and the performance during the 3rd year of the Presidential Cycle in black.

Since 1979 the Russell 2000 (R2K) has been up 53% of the time in October with an average loss of -0.9%. During the 3rd year of the Presidential Cycle the R2K has been up 50% of the time with an average loss of -5.2%. The best ever October for the R2K, 1982 (+13.4%), the worst 1987 (-30.9%)

The chart below is similar to those above except it shows the daily performance over all years of the R2K in October in green and the performance during the 3rd year of the Presidential Cycle in black.

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 56% of the time in October with an average gain of 0.1%. During the 3rd year of the Presidential Cycle the DJIA has been up 38% of the time with an average loss of -0.9%. The best October ever for the DJIA 1998 up 12.6%, the worst 1987 (-24.5%).

The chart below is similar to those above except it shows the daily performance over all years of the DJIA in October in Magenta and the performance during the 3rd year of the Presidential Cycle in black.


Conclusion

The market has been closely following the average seasonal pattern for the 3rd year of the Presidential Cycle with a negative bias. The October charts above suggest a pattern that calls for a rally next week followed by a decline to a low a few days before the end of the month.

I expect the major averages to be higher on Friday October 7 than they were on Friday September 30.

Last week the DJIA was up and all the other major indices were down so I am calling last weeks negative forecast a tie.

This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html. If it is not for you, reply with REMOVE in the subject line.

In his latest newsletter, Jerry Minton looks at a common argument against market timing. To read it, go to www.alphaim.net. You can sign up for a free subscription at the homepage.

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.

Copyright © 2003-2017 Mike Burk

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com