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Technical Market Report

The good news is:
• The market is overdue for a bounce.

Short Term

As of Thursday's close the Russell 2000 (R2K or !RUT) had been down for 5 consecutive days for the 1st time since before the early March lows.

The charts below each cover 6 month periods showing the R2K in red and an indicator showing the percentage of the previous 5 days that the R2K has been up in green.

The last time there were 5 or more consecutive down days was in February ahead of the March low.

The next chart is similar to the one above except is shows the last half of 2008. There were 3 occurrences of 5 or more consecutive down days prior to the November low, each was followed by a brief, but significant, rally.

The next chart is similar to those above except is covers the late 2007 high and the period that followed. The 1st occurrence of 5 consecutive down days, just ahead of the Thanksgiving holiday was followed by a pretty good rally while the other two were followed by a continuing collapse.

As measured by this indicator the market is oversold and due for a bounce, however, it is likely the up trend has been broken.

Intermediate term

Last week new lows increased while new highs disappeared.

The next chart is also an update of one I have shown for the past 3 weeks covering the past year showing the OTC in blue and an indicator showing a 40% trend (4day EMA) of the ratio of NASDAQ new highs to new lows (NH / (NH + NL)) in blue. Dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50% level. The indicator dropped below the 50% level last week for the 1st time since late March. This is not a favorable development.

The next chart is similar to the one above except is shows the period before and after the 2007 high. It is offered to broaden your perspective on how this indicator has worked.

The next chart is similar to the 1st one except is shows the S&P 500 (SPX) in red and the indicator has been calculated from NYSE data. The indicator also dropped below the 50% line last week.

Seasonality

Next week includes the 5 trading days prior to the 3rd Friday of July during the 1st year of the Presidential Cycle.

The tables show the daily return on a percentage basis for the 5 trading days prior to the 3rd Friday of July during the 1st year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and SPX data from 1953 - 2008. Prior to 1953 the market traded 6 days a week so that data has been ignored. There are summaries for both the 1st year of the Presidential Cycle and all years combined.

Over all years the coming week has had, on average, negative returns. However, during the 1st year of the Presidential Cycle the average returns have been modestly positive.

Report for the week before the 3rd Friday of July.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.

OTC Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1965-1 0.47% 0.27% -0.04% 0.99% 2.06% 3.75%
 
1969-1 0.00% -0.35% -0.99% -0.56% -0.13% -2.04%
1973-1 0.91% 0.64% 1.08% 0.71% 1.09% 4.43%
1977-1 0.04% -0.10% 0.18% 0.00% 0.48% 0.59%
1981-1 -1.64% -1.00% -0.49% 0.12% 0.77% -2.24%
1985-1 0.21% 0.70% 0.85% -0.29% 0.29% 1.77%
Avg -0.12% -0.02% 0.13% -0.01% 0.50% 0.50%
 
1989-1 0.22% -0.45% 0.75% -0.44% 0.01% 0.09%
1993-1 0.26% 0.11% 0.57% -0.53% -1.26% -0.85%
1997-1 -0.76% 1.80% 0.24% 0.09% 0.03% 1.41%
2001-1 -2.67% 1.88% -2.47% 1.51% -0.84% -2.59%
2005-1 1.07% 0.36% 0.04% 0.41% 0.18% 2.06%
Avg -0.38% 0.74% -0.17% 0.21% -0.38% 0.02%
 
OTC summary for Presidential Year 1 1965 - 2005
Avg -0.19% 0.35% -0.03% 0.20% 0.24% 0.58%
Win% 70% 64% 64% 60% 73% 64%
 
OTC summary for all years 1963 - 2008
Avg -0.11% -0.19% -0.02% 0.00% -0.09% -0.41%
Win% 56% 35% 47% 58% 50% 43%
 
SPX Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1953-1 -0.98% -0.37% 0.29% 0.12% 0.70% -0.24%
1957-1 0.10% -0.51% -0.61% -0.10% 0.10% -1.02%
1961-1 -0.75% -0.59% 0.45% 0.02% 0.23% -0.64%
1965-1 -0.02% -0.12% 0.33% -0.17% -0.03% -0.02%
 
1969-1 0.00% -1.51% -0.43% -0.34% -0.91% -3.18%
1973-1 1.52% 0.05% 0.60% 0.19% 0.55% 2.90%
1977-1 -0.24% -0.10% 0.14% 0.00% 0.59% 0.39%
1981-1 -1.56% -0.30% -0.94% 0.21% 0.83% -1.75%
1985-1 -0.29% 1.04% 0.48% -0.65% 0.39% 0.96%
Avg -0.14% -0.16% -0.03% -0.15% 0.29% -0.14%
 
1989-1 0.18% -0.33% 1.32% -0.66% 0.72% 1.23%
1993-1 0.19% -0.20% 0.44% -0.19% -0.77% -0.53%
1997-1 -0.26% 2.30% 0.28% 0.40% -0.16% 2.56%
2001-1 -1.09% 1.00% -0.55% 0.61% -0.34% -0.38%
2005-1 0.63% 0.23% 0.09% 0.26% 0.12% 1.32%
Avg -0.07% 0.60% 0.32% 0.08% -0.09% 0.84%
 
SPX summary for Presidential Year 1 1953 - 2005
Avg -0.20% 0.04% 0.13% -0.02% 0.14% 0.11%
Win% 38% 36% 71% 54% 64% 43%
 
SPX summary for all years 1953 - 2008
Avg -0.12% -0.27% 0.02% -0.05% -0.06% -0.47%
Win% 46% 29% 51% 56% 50% 38%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth continued to deteriorate last week. An expanding money supply has not assured an up market, but a declining money supply has led or been coincident with a down market.

Conclusion

There were 3 significant occurrences last week, all of them bad.

The R2K completed 5 consecutive down days, both high/(high + low) indicators went negative (below the 50% level) and one of the seasonally best weeks of the year had its worst performance ever. A short term bounce is overdue and some of the indices may exceed the June highs in the next few weeks, but it is likely the trend has changed to down.

I expect the major indices to be higher on Friday July 17 than they were on Thursday July 10.

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.

Thank you,

 

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