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Technical Market Report

The good news is the same as last week, by nearly every intermediate term technical measure, the market is in good shape.

  • Both the NYSE and NASDAQ AD lines made new cycle highs last week.
  • There have been virtually no new lows on either the NYSE or NASDAQ.
  • The 10% trend (19 day EMA) of NYSE new highs is at an all time high.
  • The NASDAQ new high indicator continued to rise.
  • The secondaries are again stronger than the blue chips.

All of this implies new highs in the blue chip indices in the next 2 to 6 weeks.

Not much has changed since last week when I pointed out that the S&P 500 (SPX) had been rising at an annualized rate of 87% since the November low. For last week the annualized rate of change accelerated to 122% for the SPX and 272% for the Russell 2000 (R2K).

Witching entered the speculators vocabulary in the mid 1980's when program trading in the form of index arbitrage became popular. Programs automatically took a position in an index future simultaneously with an offsetting position in the stocks that belonged to the index when the spread between the two was enough to make the trade profitable. At expiration of the futures both positions have the same value so the program pockets the spread. In the mid 1980's these programs would unwind at the close on the third Friday of March, June, September or December when the futures expired. All of this activity during a short period was disruptive and rules were made requiring the positions to be unwound well before the close to minimize their impact. Other strategies have been implemented using options which expire the third Friday of every month creating a monthly witching. The March, June, September and December expirations are known as triple witching or now quadruple witching because options and futures on both stocks and indices expire on those dates. The pattern varies somewhat from month to month, but there appears to be a slight upward bias during the week before witching Friday and a slight downward bias the week after, with Monday after having the strongest downward bias. Next week does not quite fit the mold because the market will be closed for the Martin Luther King holiday.

The tables below summarize the impact of witching over the past 15 years.

Monthly report for January
The witching Friday is marked *Fri*.
The number following the year is the position in the presidential cycle.
The report is calculated as trading days either side of the 3rd Friday.
If a holiday falls in that period, the day of the week will not be properly identified. Since 1998 the market has been closed for the Martin Luther King Holiday.

Daily returns from the Monday before to the Friday after:

R2K
Year Mon Tue Wed Thur *Fri* Mon Tue Wed Thur Fri
1989-1 0.02% -0.17% 0.75% 0.30% 0.07% -0.30% 0.32% 0.22% 0.49% 0.27%
1990-2 -0.88% 0.23% 0.13% -0.46% 0.50% -1.49% -0.45% -1.40% -0.11% -0.87%
1991-3 -1.75% -0.11% 1.24% 2.72% -0.31% 0.38% 0.57% 1.18% 1.82% 1.07%
1992-4 0.28% 1.25% 1.01% 0.00% 0.33% -0.37% -1.64% 1.38% 0.47% 0.37%
1993-1 0.00% 0.12% 0.20% 0.26% 0.43% 0.80% 0.52% -1.11% -0.35% 0.40%
1994-2 0.26% 0.17% 0.08% 0.29% 0.16% -0.34% -0.32% 0.30% 0.31% 0.52%
1995-3 0.71% 0.48% -0.24% -0.52% -0.55% -0.63% 0.35% -0.06% -0.29% 0.16%
1996-4 -0.99% -0.13% 0.29% 0.46% 0.42% 0.62% 0.37% 0.69% 0.04% 0.21%
1997-1 -0.07% 0.46% -0.09% -0.07% 0.26% 0.40% 0.26% 0.09% -0.05% -0.63%
1998-2 -0.50% 1.84% 0.83% -0.04% 1.07% 1.19% -0.33% -0.86% -0.33% -0.89%
1999-3 1.65% 0.90% -0.06% -1.53% -0.38% -0.08% 0.76% -0.99% 0.68% 0.77%
2000-4 1.27% 1.16% 1.28% 1.40% 1.26% -2.06% -0.26% -0.11% -0.77% -2.40%
2001-1 0.39% 1.55% 0.04% 0.24% -1.32% 0.42% 2.43% 0.04% -0.65% -0.06%
2002-2 -1.41% 0.41% -1.77% 1.25% -1.66% -1.04% 1.71% 0.48% -0.08% 0.40%
2003-3 -0.07% 0.57% -0.73% -0.16% -1.72% -1.27% -0.69% 0.83% -2.25% -1.73%
Avg -0.08% 0.58% 0.20% 0.30% -0.10% -0.25% 0.24% 0.05% -0.07% -0.16%
Win% 50% 80% 67% 57% 60% 40% 60% 60% 40% 60%
 
SPX
Year Mon Tue Wed Thur *Fri* Mon Tue Wed Thur Fri
1989-1 0.10% -0.21% 1.05% 0.13% -0.09% -0.74% 1.40% 0.23% 0.88% 0.73%
1990-2 -0.86% 1.11% -0.98% 0.23% 0.28% -2.59% 0.37% -0.41% -1.27% -0.09%
1991-3 -0.87% 0.40% 0.78% 3.73% 1.30% -0.35% -0.83% 0.58% 1.38% 0.39%
1992-4 -0.18% 1.47% 0.08% -0.61% 0.16% -0.60% -0.89% 1.33% -0.76% 0.13%
1993-1 -0.07% -0.39% -0.40% 0.49% 0.14% 0.89% -0.01% -0.42% 0.13% 0.03%
1994-2 -0.34% 0.20% 0.01% 0.14% -0.05% -0.58% -0.22% 0.48% 0.81% 0.35%
1995-3 0.73% 0.14% -0.07% -0.59% -0.46% 0.22% 0.01% 0.34% 0.19% 0.44%
1996-4 -0.33% 1.44% -0.34% 0.31% 0.59% 0.26% -0.10% 1.17% -0.47% 0.74%
1997-1 0.00% 1.23% -0.22% 0.33% 0.83% 0.07% 0.78% 0.45% -1.10% -0.91%
1998-2 1.24% 1.37% 0.61% -0.75% 1.13% 1.78% -0.80% -0.80% -0.57% -0.07%
1999-3 2.56% 0.70% 0.37% -1.71% -0.81% 0.72% 1.49% -0.73% 1.79% 1.13%
2000-4 1.07% -0.68% 0.05% -0.71% -0.29% -2.76% 0.61% -0.42% -0.39% -2.75%
2001-1 -0.64% 0.63% 0.21% 1.39% -0.40% 0.03% 1.30% 0.29% -0.50% -0.19%
2002-2 -0.63% 0.68% -1.62% 1.00% -0.99% -0.73% 0.79% 0.35% 0.10% -0.02%
2003-3 -0.14% 0.58% -1.44% -0.39% -1.40% -1.57% -1.04% 1.02% -2.92% -1.62%
Avg 0.11% 0.58% -0.13% 0.20% 0.00% -0.40% 0.19% 0.23% -0.18% -0.11%
Win% 40% 80% 53% 60% 47% 47% 53% 67% 47% 53%

The blue chip indices have been up for 8 consecutive weeks and that is a little too much of a good thing. Because of the extremely over bought condition of the market, I expect the major indices will be lower at the close Friday January 23 than they were at the close Friday January 16.

My value as a contrary indicator continues to grow, my record for the year is perfect at two losses.

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