The good news is:
• The NASDAQ 100 (NDX) hit a multi year high last Tuesday.
Short Term
Seasonally the worst part of October is over with very little damage. Most of the major indices are within 1% of their levels at the beginning of the month. Notable exceptions are the Dow Jones Industrial Average (DJIA) down 1.99% and the NASDAQ composite (OTC) up 2.31%.
If the FOMC lowers rates as expected on Tuesday the market should respond positively.
Intermediate Term
The current year has been in some ways reminiscent of 1999.
Both were relatively weak for a 3rd Presidential year up to this point, both had a dip from mid July to early August and both had the same style of leadership, i.e. the OTC was the strongest while the Russell 2000 (R2K) the weakest.
The first chart covers 1999 up to October 26 showing the DJIA in green, the S&P500 (SPX) in red the OTC in blue and the R2K in magenta. The Y axis is scaled logarithmically so you can see the relative performance of the various indices and there have been dashed vertical lines drawn on the 1st trading day of each month.
The next chart shows the same indices for the current year. The SPX and R2K have been a little stronger than they were in 1999 while the DJIA has been a little weaker and the OTC has been much weaker.
Most of the breadth indicators have been stronger this year than they were in 1999 including both the OTC and NYSE advance decline lines and both new high indicators. NYSE new lows went to an extreme last August that had no comparison in 1999.
There is also little similarity in the total volume patterns of 1999 and 2007.
The next two charts show the SPX in red and a 5% trend (39 day EMA) of NYSE total volume in black.
In 1999 volume peaked in early May and declined during the July - August decline in prices then began rising again in September.
Last summer total volume and volume of advancing issues rose to all time highs while prices were falling. Volume fell to the lows for the year as some of the indices hit new highs in early October.
The breadth patterns are not identical, but many of them are close.
The next chart shows what happened between October 26, 1999 and the end of that year.
The OTC led the way, up nearly 47% in 2 months while the DJIA was the worst performing index, up a measly 10% over the same period.
Seasonality
Next week includes the last 3 trading days of October and the first 2 trading days of November during the 3rd year of the Presidential Cycle.
The tables show the daily change of the indices during the last 3 trading days of October and the last 2 trading days of November during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2003 and SPX data from 1928 - 2003. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.
Over all years both indices have been up 66% of the time with solid average gains. During the 3rd year of the Presidential Cycle the indices have been up only a little better than half of the time, but the average gains have been higher.
Report for the last 3 days of October and first 2 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 | ||||||
| Day3 | Day2 | Day1 | Day1 | Day2 | Totals | |
| 1963-3 | 0.14% 2 | -0.64% 3 | -0.81% 4 | 0.14% 5 | 0.06% 1 | -1.12% |
| 1967-3 | 0.62% 5 | -0.24% 1 | 0.02% 2 | -0.63% 3 | -1.05% 4 | -1.27% |
| 1971-3 | -1.33% 3 | 0.21% 4 | 0.57% 5 | -1.34% 1 | -0.14% 2 | -2.04% |
| 1975-3 | -1.46% 3 | -0.17% 4 | -0.59% 5 | -0.48% 1 | 0.31% 2 | -2.39% |
| 1979-3 | 0.12% 1 | 1.17% 2 | 0.04% 3 | 0.66% 4 | 0.34% 5 | 2.32% |
| 1983-3 | -0.13% 4 | -0.49% 5 | -0.58% 1 | -0.55% 2 | 0.78% 3 | -0.96% |
| Avg | -0.44% | 0.10% | -0.11% | -0.47% | 0.05% | -0.87% |
| 1987-3 | -1.51% 3 | 5.20% 4 | 5.29% 5 | 1.56% 1 | -2.34% 2 | 8.20% |
| 1991-3 | 0.96% 2 | 1.27% 3 | 0.31% 4 | -0.38% 5 | -0.63% 1 | 1.53% |
| 1995-3 | 0.79% 5 | 1.37% 1 | -0.35% 2 | 0.42% 3 | 1.61% 4 | 3.85% |
| 1999-3 | -0.32% 3 | 2.59% 4 | 3.17% 5 | 0.04% 1 | 0.47% 2 | 5.96% |
| 2003-3 | 0.22% 3 | -0.20% 4 | -0.02% 5 | 1.84% 1 | -0.49% 2 | 1.34% |
| Avg | 0.03% | 2.05% | 1.68% | 0.70% | -0.28% | 4.18% |
| OTC summary for Presidential Year 3 1963 - 2003 | ||||||
| Averages | -0.17% | 0.92% | 0.64% | 0.12% | -0.10% | 1.40% |
| % Winners | 55% | 55% | 55% | 55% | 55% | 55% |
| MDD 11/3/1975 2.68% -- 11/3/1987 2.34% -- 11/2/1971 2.03% | ||||||
| OTC summary for all years 1963 - 2006 | ||||||
| Averages | -0.14% | 0.21% | 0.55% | 0.36% | 0.16% | 1.13% |
| % Winners | 59% | 55% | 70% | 66% | 50% | 66% |
| MDD 10/31/1978 5.83% -- 10/30/2001 5.74% -- 11/2/1973 3.42% | ||||||
| SPX Presidential Year 3 | ||||||
| Day3 | Day2 | Day1 | Day1 | Day2 | Totals | |
| 1931-3 | 0.40% 4 | 3.17% 5 | 0.96% 6 | -0.28% 1 | 3.05% 3 | 7.28% |
| 1935-3 | -0.08% 2 | -0.72% 3 | 0.81% 4 | 1.20% 5 | -0.24% 6 | 0.97% |
| 1939-3 | -0.31% 6 | -0.15% 1 | -1.00% 2 | -0.08% 3 | 0.16% 4 | -1.39% |
| 1943-3 | -0.25% 4 | -0.42% 5 | 0.08% 6 | 0.00% 1 | -1.17% 3 | -1.76% |
| 1947-3 | -0.32% 3 | -1.03% 4 | 0.65% 5 | 0.32% 6 | -0.13% 1 | -0.51% |
| 1951-3 | 1.07% 1 | -0.13% 2 | 1.24% 3 | 0.70% 4 | -0.74% 5 | 2.13% |
| 1955-3 | -0.35% 4 | 0.55% 5 | -0.07% 1 | -0.14% 2 | 0.17% 3 | 0.14% |
| 1959-3 | 0.07% 3 | -0.09% 4 | 0.19% 5 | -0.19% 1 | -0.26% 3 | -0.28% |
| 1963-3 | -0.03% 2 | -0.89% 3 | 0.28% 4 | -0.24% 5 | -0.51% 1 | -1.39% |
| Avg | 0.09% | -0.32% | 0.46% | 0.09% | -0.30% | 0.02% |
| 1967-3 | 0.02% 5 | -0.18% 1 | -0.94% 2 | -1.27% 3 | -0.40% 4 | -2.76% |
| 1971-3 | -1.00% 3 | 0.18% 4 | 0.29% 5 | -1.52% 1 | 0.41% 2 | -1.64% |
| 1975-3 | -1.24% 3 | -0.09% 4 | -0.30% 5 | -1.07% 1 | 0.48% 2 | -2.22% |
| 1979-3 | 0.14% 1 | 1.95% 2 | -0.83% 3 | 0.74% 4 | -0.06% 5 | 1.94% |
| 1983-3 | -0.33% 4 | -0.89% 5 | 0.11% 1 | 0.06% 2 | 0.73% 3 | -0.32% |
| Avg | -0.48% | 0.19% | -0.33% | -0.61% | 0.23% | -1.00% |
| 1987-3 | 0.04% 3 | 4.93% 4 | 2.87% 5 | 1.57% 1 | -1.93% 2 | 7.48% |
| 1991-3 | 0.50% 2 | 0.38% 3 | -0.13% 4 | -0.29% 5 | -0.27% 1 | 0.20% |
| 1995-3 | 0.52% 5 | 0.61% 1 | -0.30% 2 | 0.47% 3 | 0.94% 4 | 2.24% |
| 1999-3 | 1.15% 3 | 3.53% 4 | 1.53% 5 | -0.65% 1 | -0.47% 2 | 5.10% |
| 2003-3 | 0.13% 3 | -0.11% 4 | 0.36% 5 | 0.79% 1 | -0.54% 2 | 0.62% |
| Avg | 0.47% | 1.87% | 0.87% | 0.38% | -0.45% | 3.13% |
| SPX summary for Presidential Year 3 1931 - 2003 | ||||||
| Averages | 0.01% | 0.56% | 0.31% | 0.01% | -0.04% | 0.83% |
| % Winners | 53% | 42% | 63% | 42% | 37% | 53% |
| MDD 11/2/1967 2.76% -- 11/3/1975 2.67% -- 11/1/1971 2.05% | ||||||
| SPX summary for all years 1928 - 2006 | ||||||
| Averages | -0.06% | 0.38% | 0.26% | 0.29% | -0.09% | 0.76% |
| % Winners | 53% | 57% | 58% | 64% | 55% | 66% |
| MDD 11/6/1929 14.66% -- 11/2/1932 8.04% -- 11/3/1937 6.80% | ||||||
Mutual Fund
Compliance issues demand that I not mention the mutual fund that I manage by name or symbol in this letter.
To see a current chart of the fund go to: http://finance.yahoo.com/q/bc?s=APHAX&t=6m&l=on&z=m&q=l&c=.
For information about the fund go to: http://www.thealphafunds.com/index.htm.
The fund now has service class shares available.
November
The OTC has been up 68% of the time in November, and including a 22% loss in 2000 and a 14% loss in 1973 it has had an average gain of 1.7% for the month.
Performance during the 3rd year of the Presidential Cycle has been only slightly less, up 64% of the time with an average gain of 1.6%.
The charts below show an average November for all years and for the 3rd year of the Presidential Cycle. They have been calculated by averaging the percentage gain of each of the first 11 days of the month and each of the last 10. When there are fewer than 21 trading days in the month some of the days in the middle of the month are counted twice and when there are more than 21 trading days in the month some of the days in the middle are not counted.
A dashed vertical line has been drawn after the 1st trading day of the month and at 5 trading day intervals after that. A solid line has been drawn on the 11th trading day, the break point.
Over all years the SPX has been up 55% of the time in November with an average gain of 0.4%. During the 3rd year of the Presidential Cycle it has been up 53% of the time with an average loss of 0.6%. The losses were distorted by an average loss of 4.48% for the 5 cycles before 1950.
The next chart is similar to the one above except it begins with 1950.
All periods are stronger and the 3rd year is slightly positive.
Conclusion
Seasonal patterns are improving and the Fed is likely to lower rates.
I expect the major indices to be higher on Friday November 2 than they were on Friday October 26.
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Last weeks negative forecast was a miss. In spite of continued deterioration in the breadth indicators, prices rose.
