Technical Market Report for December 31, 2011

By: Mike Burk | Mon, Jan 2, 2012
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The good news is:
• The Dow Jones Industrial Average (DJIA) finished the year up, continuing a winning streak for the 3rd year of the Presidential Cycle that has run since 1943.


The negatives

Last year was ok for the blue chips, but, segmented by capitalization, everything else was down. Compared to an average 3rd year in the Presidential Cycle returns were awful. The S&P 500 had its worst performance for the 3rd year of the Presidential Cycle since 1939.

The chart covers the past year showing the DJIA, S&P 500 (SPX) in red, NASDAQ composite (OTC) in blue and the Russell 2000 (R2K) in green. The indices are shown on log scales. Dashed vertical lines have been drawn on the 1st trading day of each month.

 

Index Return for 2011 3rd yr avg.
DJIA 5.53% 11.4%
SPX -0.09% 14.9%
OTC -1.80% 34.3%
R2K -5.45% 22.8%

 

Chart 1

The last time some of the indices were down in the 3rd year of the Presidential Cycle was 1987 and the patterns similar, that is, there was a high in the late middle of the year followed by a sharp decline and a modest recovery. In 1987 the blue chips finished slightly positive while the secondaries were negative similar to the 2011 pattern.

Chart 2

The next chart shows how 1988 played out. After a rough start in January the secondaries had a good 1st half and finished ahead of the blue chips.

It was a good year for all.

Chart 3

Volume has been a problem.

The chart below covers the past 2 years showing the OTC in blue and a 5% trend (39 day EMA) of NASDAQ total volume (OTC TotVol T) in orange.

OTC TotVol T is at its lowest point in about 7 years.

Chart 4

There are 2 reported volume figures for NYSE issues, the volume of issues traded on the NYSE itself and volume of NYSE issues traded on all exchanges. The volume of NYSE issues traded on all exchanges is about 4 times that traded on the NYSE itself.

The chart below is similar to the one above except is shows the SPX in red and a 5% trend of NYSE exchange volume in grey.

NYSE exchange volume is at its lowest point in over 10 years.

Chart 5


The Positives

There is nothing overwhelmingly positive, but, a lot of stuff that could be worse.

The chart below covers the past year showing the 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 horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.

At a current value of 82% NY HL Ratio is strong.

Chart 6

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

At 35% and falling OTC HL Ratio is weak.

Chart 7


Seasonality

Next week includes the first 4 trading days of the year during the 4th year of the Presidential Cycle.

The tables below show the return on a percentage basis for the first 4 trading days of the year during the 4th year of the Presidential Cycle.

NASDAQ composite (OTC) data covers the period from 1963 - 2010 and SPX data covers the period from 1928 - 2010. There are summaries for both the 4th year of the Presidential Cycle and all years combined.

Average returns for the coming week have been positive by all measures but weaker during the 4th year of the Presidential Cycle than other years.

Report includes the first 4 days of January.
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 4
  Day1 Day2 Day3 Day4 Totals
1964-4 0.65% 4 1.06% 5 0.14% 1 0.41% 2 2.26%
1968-4 -0.18% 2 -0.36% 3 -0.42% 4 -0.49% 5 -1.45%
 
1972-4 -0.41% 1 0.25% 2 0.79% 3 0.78% 4 1.40%
1976-4 0.57% 5 0.90% 1 1.92% 2 0.90% 3 4.28%
1980-4 -1.97% 3 -1.48% 4 1.40% 5 0.41% 1 -1.64%
1984-4 -0.35% 2 1.20% 3 1.24% 4 1.21% 5 3.31%
1988-4 2.42% 1 1.65% 2 0.77% 3 0.85% 4 5.69%
Avg 0.05% 0.50% 1.22% 0.83% 2.61%
 
1992-4 0.02% 4 1.06% 5 0.89% 1 0.73% 2 2.70%
1996-4 0.63% 2 -1.17% 3 -1.58% 4 0.36% 5 -1.76%
2000-4 1.52% 1 -5.56% 2 -0.62% 4 -3.88% 4 -8.53%
2004-4 0.17% 5 2.03% 1 0.49% 2 0.99% 3 3.67%
2008-4 -1.61% 3 -0.27% 4 -3.77% 5 -0.21% 1 -5.85%
Avg 0.14% -0.78% -0.92% -0.40% -1.96%
 
OTC summary for Presidential Year 4 1964 - 2008
Averages 0.12% -0.06% 0.10% 0.17% 0.34%
% Winners 58% 58% 67% 75% 58%
MDD 1/6/2000 9.78% -- 1/7/2008 5.76% -- 1/3/1980 3.42%
 
OTC summary for all years 1963 - 2011
Averages 0.19% 0.60% 0.27% -0.11% 0.96%
% Winners 60% 69% 63% 63% 67%
MDD 1/6/2000 9.78% -- 1/7/2008 5.76% -- 1/3/1980 3.42%
 
Year 4
  Day1 Day2 Day3 Day4 Totals
1932-4 -3.69% 6 -3.32% 1 -0.13% 2 7.02% 3 -0.13%
1936-4 -0.22% 4 1.12% 5 -0.59% 6 -0.45% 1 -0.14%
1940-4 1.12% 2 1.11% 3 -0.31% 4 -0.55% 5 1.37%
1944-4 -0.09% 1 1.29% 2 1.10% 3 -0.42% 4 1.88%
1948-4 0.26% 5 -0.91% 1 -0.33% 2 0.53% 3 -0.45%
Avg -0.52% -0.14% -0.05% 1.23% 0.51%
 
1952-4 0.13% 3 0.34% 4 0.17% 5 0.08% 6 0.71%
1956-4 -0.70% 2 -0.35% 3 -0.11% 4 0.42% 5 -0.75%
1960-4 0.03% 1 0.80% 2 -0.43% 3 -0.73% 4 -0.33%
1964-4 0.55% 4 0.09% 5 0.23% 1 0.03% 2 0.89%
1968-4 -0.37% 2 -0.46% 3 -0.32% 4 0.61% 5 -0.55%
Avg -0.07% 0.08% -0.09% 0.08% 0.00%
 
1972-4 -0.41% 1 0.41% 2 0.96% 3 0.43% 4 1.39%
1976-4 0.79% 5 1.85% 1 1.03% 2 0.45% 3 4.11%
1980-4 -2.02% 3 -0.51% 4 1.24% 5 0.27% 1 -1.02%
1984-4 -0.54% 2 1.67% 3 1.22% 4 0.28% 5 2.63%
1988-4 3.59% 1 1.05% 2 0.10% 3 0.84% 4 5.58%
Avg 0.28% 0.89% 0.91% 0.45% 2.54%
 
1992-4 0.04% 4 0.50% 5 -0.33% 1 -0.13% 2 0.08%
1996-4 0.78% 2 0.10% 3 -0.58% 4 -0.16% 5 0.13%
2000-4 -0.96% 1 -3.83% 2 0.19% 3 0.10% 4 -4.50%
2004-4 -0.31% 5 1.24% 1 0.13% 2 0.24% 3 1.30%
2008-4 -1.44% 3 0.00% 4 -2.46% 5 0.32% 1 -3.58%
Avg -0.38% -0.40% -0.61% 0.07% -1.31%
 
SPX summary for Presidential Year 4 1932 - 2008
Averages -0.17% 0.11% 0.04% 0.46% 0.43%
% Winners 45% 65% 50% 70% 55%
MDD 1/5/1932 7.02% -- 1/4/2000 4.76% -- 1/4/2008 3.86%
 
SPX summary for all years 1929 - 2011
Averages 0.07% 0.52% 0.01% 0.09% 0.67%
% Winners 47% 74% 50% 55% 63%
MDD 1/5/1932 7.02% -- 1/4/2000 4.76% -- 1/6/1955 4.65%


Money supply (M2)

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

Chart 1


January

Since 1963, over all years, the OTC in January has been up 65% of the time in January with an average gain of 2.8%. During the 4th year of the Presidential Cycle January has been up 67% time with an average gain of 1.7%. The best January for the OTC was 1975 (+16.6%), the worst 2008 (-9.9%).

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 January over all years since 1963 while the black line shows the average during the 4th year of the Presidential Cycle over the same period.

Chart 1

Since 1928 the SPX has been up 64% of the time in January with an average gain of 1.2%. During the 4th year of the Presidential Cycle the SPX has been up 52% of the time with an average gain of 0.1%. The best January for the SPX was 1987 (+13.2%) the worst 1975 (-12.3%).

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

Chart 1

Since 1979 the Russell 2000 (R2K) has been up 55% of the time in January with an average gain of 1.6%. During the 4th year of the Presidential Cycle the R2K has been up 50% of the time in January with an average gain of 1.8%. The best January for the R2K 1987 (+13.1%) the worst 2009 (-11.2%)

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

Chart 1

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 63% of the time in January with an average gain of 0.9%. During the 4th year of the Presidential Cycle the DJIA has been up 52% of the time in January with an average loss of -0.1%. The best January for the DJIA 1976 (+14.4%), the worst 1916 (-8.6%).

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


Conclusion

The indicators do not mean much right now because of seasonal anomalies and seasonal strength has been less than average.

I expect the major averages to be lower on Friday January 6 than they were on Friday December 30.

Last weeks positive forecast was a miss.

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 (The Big Skew) Jerry Minton looks at the uneven history of equity markets over time. To read it and subscribe to his free newsletter go tohttp://www.alphaim.net/.

The line at the bottom (YTD W 20 /L 21 /T 11) is the score of my weekly forecasts for the past year.

The scoring is done by looking at the performance of the DJIA, SPX, OTC and R2K. All of them must be up or down for the week or the forecast is scored as a tie. If I made a positive forecast and all of the indices were up the forecast is considered a win, if all of the indices were down a positive forecast is considered a loss. The opposite is true for negative forecasts.

This year is the 1st time in the 8 years I have been writing this letter that I had more losses than wins, I hope it is not a trend.

Good Luck,

YTD W 20 /L 21 /T 11

 


 

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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