Technical Market Report for February 18, 2012

By: Mike Burk | Sat, Feb 18, 2012
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The good news is:
• The Dow Jones Industrial Average (DJIA) and NASDAQ composite (OTC) both hit multi year highs again last week.


The negatives

The market is overbought.

The chart below shows the major indices from the December low through last Friday plotted on log scales to show their relative performance. Dashed vertical lines have been drawn on the 1st trading day of each month.

The legend shows the date range and 2 lines for each symbol. The first line beginning with the symbol shows percentage change of the index over the period shown, followed by the lowest low from the starting point and the highest high from the starting point. The second line begins with the Maximum Draw Down (MDD), the date it occurred and the annualized return over the period shown CAR.

Compared to last week the upward pace has accelerated.

New highs have been declining all month.

The chart below covers the past year showing the S&P 500 (SPX) in red and a 10% trend (19 day EMA) of NYSE new highs in green.

Friday the SPX closed at its high for this rally and only 0.2% off a multi year high. The SPX is up nearly 3% so far in February while NY NH has been falling all month.

The next chart is similar to the one above except it shows the NASDAQ composite (OTC) in blue and OTC NH has been calculated from NASDAQ data.

OTC NH has not been falling as sharply as NY NH, but it is indicating narrowing leadership as prices are increasing.

The chart below shows the OTC in blue and momentum of OTC NH in (OTC NH 10% MoM 15) green. For the past year peaks in OTC NH 10% MoM 15 have preceded (by a week or two) or coincided with highs in prices. The indicator is not perfect and I have drawn arrows to point out its failures. Considering the current extremely overbought condition of the market, OTC NH 10% MoM 15 suggests caution.


The positives

Multi month and multi year index highs and no new lows are signs of strength.

The chart below covers the past year 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 of the indicator; the line is solid at the neutral 50% level.

The value of OTC HL Ratio is 89%, up slightly from last week and very strong. There are trading systems that impose a NO SELL filter when variations of this indicator are above 80%.

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

At 98% this indicator is very strong.


Seasonality

Next week includes the 5 trading days prior to the 4th Friday of February during the 4th 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 February during the 4th 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 4th 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.

Returns for the coming week have been stronger during the 4th year of the Presidential Cycle than other years.

Report for the week before the 4th Friday of February.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through the 4th Friday.

OTC Presidential Year 4
Year Mon Tue Wed Thur Fri Totals
1964-4 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
1968-4 0.24% 0.37% 0.44% 0.00% 0.57% 1.61%
 
1972-4 0.00% -0.08% 0.25% 0.32% 0.67% 1.16%
1976-4 0.32% 0.46% 0.39% -0.69% -1.30% -0.83%
1980-4 0.00% -0.92% 0.65% -0.49% -0.76% -1.53%
1984-4 0.00% -0.55% -0.32% -0.83% 1.76% 0.06%
1988-4 0.80% 0.31% 0.57% 0.13% -0.06% 1.75%
Avg 0.56% -0.16% 0.31% -0.31% 0.06% 0.12%
 
1992-4 -0.77% -0.56% 1.77% 0.25% -0.08% 0.61%
1996-4 0.00% -0.69% 1.26% 1.84% 0.06% 2.48%
2000-4 0.00% -0.67% 3.84% 1.48% -0.59% 4.06%
2004-4 -1.49% -0.10% 0.87% 0.47% -0.14% -0.38%
2008-4 0.00% -0.67% 0.91% -1.17% 0.16% -0.78%
Avg -1.13% -0.54% 1.73% 0.57% -0.12% 1.20%
 
OTC summary for Presidential Year 4 1964 - 2008
Avg -0.18% -0.28% 0.97% 0.13% 0.03% 0.75%
Win% 60% 27% 91% 60% 45% 64%
 
OTC summary for all years 1963 - 2011
Avg -0.28% -0.32% 0.23% 0.04% 0.09% -0.08%
Win% 40% 38% 67% 62% 54% 57%
 
SPX Presidential Year 4
Year Mon Tue Wed Thur Fri Totals
1956-4 -0.16% 0.25% 0.00% 0.88% 0.82% 1.79%
1960-4 0.00% -0.53% -0.36% 0.34% 0.41% -0.14%
1964-4 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
1968-4 0.39% 0.58% 0.45% 0.00% -0.38% 1.03%
 
1972-4 0.00% 0.01% 0.09% 0.07% 0.69% 0.85%
1976-4 -0.48% 0.41% -0.33% -1.55% -0.40% -2.35%
1980-4 0.00% -0.70% 1.63% -1.02% -0.21% -0.30%
1984-4 0.00% -0.71% -0.21% -0.01% 2.09% 1.15%
1988-4 1.54% -0.23% -0.22% -1.08% 0.34% 0.34%
Avg 0.53% -0.24% 0.19% -0.72% 0.50% -0.06%
 
1992-4 0.20% -0.44% 1.19% -0.36% -0.28% 0.31%
1996-4 0.00% -1.13% 1.16% 1.66% 0.03% 1.73%
2000-4 0.00% 0.45% 0.63% -0.54% -1.48% -0.93%
2004-4 -0.27% -0.17% 0.40% 0.11% 0.00% 0.07%
2008-4 0.00% -0.09% 0.83% -1.29% 0.79% 0.25%
Avg -0.04% -0.28% 0.84% -0.08% -0.19% 0.28%
 
SPX summary for Presidential Year 4 1956 - 2008
Avg 0.20% -0.18% 0.44% -0.23% 0.19% 0.29%
Win% 50% 38% 67% 42% 62% 69%
 
SPX summary for all years 1953 - 2011
Avg -0.24% -0.19% 0.19% -0.09% 0.09% -0.11%
Win% 36% 40% 53% 45% 60% 45%


Money supply (M2)

The money supply chart was provided by Gordon Harms.

M2 growth has leveled off at its elevated trend.


Conclusion

The blistering pace of market advances over the past 2 months continued last week, but new highs have been declining since the beginning of this month. This condition can not continue for long and, because of the extremely overbought condition of the market, it is likely be resolved by a decline in prices.

I expect the major averages to be lower on Friday February 24 than they were on Friday February 17.

Last weeks negative forecast was a miss.

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Good Luck,

YTD W 3 /L 3 /T 1

 


 

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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