Technical Market Report for October 29, 2011

By: Mike Burk | Sat, Oct 29, 2011
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The good news is:
• The market generated some new highs last week.


The negatives

The major indices are up 15% - 25% for the month making the market as overbought as it has ever been.

Except for Thursday, volume has been declining.

Thursday's huge rally was accompanied by an equally spectacular 1.8% decline in the dollar index. Since the 1st of October the dollar index is down 5.7% and the Chinese are following the US in its race to the bottom.


The positives

On Thursday there were more than 100 new highs on both the NYSE and NASDAQ for the first time since early July.

The first chart covers the past 6 months 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.

In the past 2 weeks, every day the index has been down, OTC NH has continued to rise.

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

NY NH is also moving sharply upward.

The chart below covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by new highs + new lows (OTC HL Ratio) in red. Dashed horizontal lines have been drawn at 10% levels for OTC HL Ratio, the line is solid at the neutral 50% level.

The indicator has held above the neutral level for over a week now.

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

NY HL ratio has a more positive bias than OTC HL ratio and it has been above the neutral level most of the month.


Seasonality

Next week includes the last trading day of October and the 1st 4 trading days of November during the 3rd year of the Presidential Cycle.

The tables below show the return on a percentage basis for the last trading day of October and the 1st 4 trading days of November 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 positive by all measures, but weaker during the 3rd year of the Presidential Cycle than other years.

Last day of October and first 4 days of November.
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 Day1 Day2 Day3 Day4 Totals
1963-3 -0.81% 4 0.14% 5 0.06% 1 -0.93% 3 -0.20% 4 -1.75%
1967-3 0.02% 2 -0.63% 3 -1.05% 4 -0.50% 5 -0.42% 1 -2.58%
 
1971-3 0.57% 5 -1.34% 1 -0.14% 2 1.42% 3 0.52% 4 1.03%
1975-3 -0.59% 5 -0.48% 1 0.31% 2 0.57% 3 0.12% 4 -0.07%
1979-3 0.04% 3 0.66% 4 0.34% 5 -0.56% 1 -0.33% 2 0.14%
1983-3 -0.58% 1 -0.55% 2 0.78% 3 -0.12% 4 -0.61% 5 -1.07%
1987-3 5.29% 5 1.56% 1 -2.34% 2 -0.17% 3 1.89% 4 6.24%
Avg 0.95% -0.03% -0.21% 0.23% 0.32% 1.25%
 
1991-3 0.31% 4 -0.38% 5 -0.63% 1 0.25% 2 0.12% 3 -0.34%
1995-3 -0.35% 2 0.42% 3 1.61% 4 0.79% 5 -0.34% 1 2.15%
1999-3 3.17% 5 0.04% 1 0.47% 2 1.58% 3 0.90% 4 6.17%
2003-3 -0.02% 5 1.84% 1 -0.49% 2 0.07% 3 0.00% 4 1.39%
2007-3 1.51% 3 -2.25% 4 0.56% 5 -0.54% 1 1.07% 2 0.35%
Avg 0.92% -0.06% 0.30% 0.43% 0.35% 1.94%
 
OTC summary for Presidential Year 3 1963 - 2007
Averages 0.71% -0.08% -0.04% 0.16% 0.23% 0.97%
% Winners 58% 50% 58% 50% 50% 58%
MDD 11/6/1967 2.58% -- 11/4/1987 2.50% -- 11/1/2007 2.25%
 
OTC summary for all years 1963 - 2010
Averages 0.51% 0.29% 0.25% 0.23% 0.19% 1.46%
% Winners 71% 65% 54% 67% 61% 71%
MDD 11/6/2008 9.63% -- 11/6/1973 3.92% -- 11/4/1993 3.61%
 
SPX Presidential Year 3
  Day1 Day1 Day2 Day3 Day4 Totals
1931-3 0.96% 6 -0.28% 1 3.05% 3 -0.37% 4 3.06% 5 6.41%
1935-3 0.81% 4 1.20% 5 -0.24% 6 0.32% 1 1.90% 3 3.99%
1939-3 -1.00% 2 -0.08% 3 0.16% 4 0.86% 5 -0.31% 6 -0.38%
1943-3 0.08% 6 0.00% 1 -1.17% 3 -0.85% 4 -0.77% 5 -2.71%
1947-3 0.65% 5 0.32% 6 -0.13% 1 -0.78% 3 0.00% 4 0.07%
Avg 0.30% 0.23% 0.33% -0.16% 0.78% 1.48%
 
1951-3 1.24% 3 0.70% 4 -0.74% 5 -0.83% 6 0.35% 1 0.72%
1955-3 -0.07% 1 -0.14% 2 0.17% 3 2.10% 4 1.67% 5 3.72%
1959-3 0.19% 5 -0.19% 1 -0.26% 3 0.10% 4 0.49% 5 0.33%
1963-3 0.28% 4 -0.24% 5 -0.51% 1 -0.87% 3 0.34% 4 -1.00%
1967-3 -0.94% 2 -1.27% 3 -0.40% 4 -0.61% 5 -0.33% 1 -3.54%
Avg 0.14% -0.23% -0.35% -0.02% 0.50% 0.05%
 
1971-3 0.29% 5 -1.52% 1 0.41% 2 1.86% 3 -0.13% 4 0.91%
1975-3 -0.30% 5 -1.07% 1 0.48% 2 0.72% 3 0.45% 4 0.28%
1979-3 -0.83% 3 0.74% 4 -0.06% 5 -0.67% 1 -0.61% 2 -1.43%
1983-3 0.11% 1 0.06% 2 0.73% 3 -0.84% 4 -0.62% 5 -0.56%
1987-3 2.87% 5 1.57% 1 -1.93% 2 -0.74% 3 2.22% 4 3.99%
Avg 0.43% -0.04% -0.07% 0.06% 0.26% 0.64%
 
1991-3 -0.13% 4 -0.29% 5 -0.27% 1 -0.40% 2 0.32% 3 -0.76%
1995-3 -0.30% 2 0.47% 3 0.94% 4 0.14% 5 -0.36% 1 0.90%
1999-3 1.53% 5 -0.65% 1 -0.47% 2 0.53% 3 0.57% 4 1.51%
2003-3 0.36% 5 0.79% 1 -0.54% 2 -0.14% 3 0.59% 4 1.06%
2007-3 1.20% 3 -2.64% 4 0.08% 5 -0.50% 1 1.20% 2 -0.65%
Avg 0.53% -0.47% -0.05% -0.07% 0.47% 0.41%
 
SPX summary for Presidential Year 3 1931 - 2007
Averages 0.35% -0.13% -0.04% -0.05% 0.50% 0.64%
% Winners 65% 40% 40% 40% 60% 60%
MDD 11/6/1967 3.49% -- 11/5/2007 3.05% -- 11/5/1943 2.77%
 
SPX summary for all years 1928 - 2010
Averages 0.25% 0.25% -0.02% 0.26% 0.04% 0.77%
% Winners 58% 63% 57% 66% 53% 70%
MDD 11/6/1929 14.66% -- 11/6/2008 10.03% -- 11/5/1948 7.60%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2 growth continues to level off, but remains well above trend.


November

Since 1963, over all years, the OTC in November has been up 65% of the time with an average gain of 1.3%. During the 3rd year of the Presidential Cycle November has been up 58% time with an average gain of 1.0%. The best November for the OTC was 1999 (+12.4%), the worst 2000 (-22.1%).

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 November 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 54% of the time in November with an average gain of 0.4%. During the 3rd year of the Presidential Cycle the SPX has been up 50% of the time with an average loss (-0.7%). The best November for the SPX was 1928 (+10.4%) the worst 1948 (-11.7%).

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

Since 1979 the Russell 2000 (R2K) has been up 66% of the time in November with an average gain of 1.6%. During the 3rd year of the Presidential Cycle the R2K has been up 63% of the time with an average gain of 1.0%. The best November for the R2K both 1982 and 2004 (+8.0%), the worst 2008 (-12.1%)

The chart below is similar to those above except it shows the daily performance over all years of the R2K in November 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 57% of the time in November with an average gain of 0.6%. During the 3rd year of the Presidential Cycle the DJIA has been up 55% of the time in November with an average loss of -0.2%. The best November for the DJIA, 1928 (+14.9%), the worst 1973 (-13.3%).

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


Conclusion

The market is extremely overbought, but a sharp increase in new highs last week confirmed the uptrend and seasonally next week has been strong.

I expect the major averages to be higher on Friday November 4 than they were on Friday October 28.

Last week negative forecast was a miss.

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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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