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Technical Market Report

The good news is:
• The OEX (S&P 100), OTC (NASADAQ composite) and NDX (NASDAQ 100) all closed at multi month highs on Friday.

Short Term

Last week we witnessed a blow off.

The OTC was up 8 consecutive days for the 1st time since May 24, 2005, up 8% over the 8 days. The OEX (the largest 100 issues in the S&P 500) was up 7% last week.

A high for all of the major indices followed by a dip and then a new high for only the blue chip indices is a relatively common topping pattern.

The chart below covers the period from the early June high through last Friday showing the OTC in blue, the S&P 500 (SPX) in red, the Russell 2000 (R2K) in green and the S&P 400 (Mid) in black. The indices are displayed on semi log scales to reflect their relative performance. The OTC is the only one of the indices that has been up since the June high.

It is possible last week marked the resumption of the up trend, but it is overbought by any measure and, for the short term it is likely to decline.

Intermediate term

The next chart is also an update of one I have shown for the past month covering the 100 trading days 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 recovered last week. This indicator usually gives a few days warning of a top and although it is at a lower high than in early June the current level is high enough to suggest another index high before a final top in this cycle.

Seasonality

Next week includes the 5 trading days prior to the 4th 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 4th 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.

It was pointed out to me there has been a problem with the seasonal data for July. The program that generates the tables looks for Fridays the market traded. When the 4th of July holiday falls on a Friday or Saturday as it did this year there is no trading on the 1st Friday so the program counts the 2nd week as the 1st etc. This week the tables show 0's for the week when the 4th of July fell on a Friday or Saturday.

Over all years the OTC in the coming week has had, on average, modestly negative returns. By all other measures the returns have been modestly positive.

Report for the week before the 4th Friday of July.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through the 4th Friday.

OTC Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1965-1 -1.67% 0.12% -1.20% -0.46% -0.42% -3.63%
 
1969-1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
1973-1 0.07% 0.50% 0.83% -0.02% 0.17% 1.55%
1977-1 0.59% 0.36% 0.05% 0.26% 0.40% 1.67%
1981-1 0.68% -0.24% 0.02% 0.52% 0.76% 1.74%
1985-1 -0.30% -0.20% -0.82% 0.24% 0.06% -1.02%
Avg 0.26% 0.11% 0.02% 0.25% 0.35% 0.98%
 
1989-1 -0.74% 0.11% 0.59% 0.75% 0.08% 0.79%
1993-1 -0.56% 0.87% -0.26% -0.65% 0.68% 0.08%
1997-1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2001-1 -2.01% -1.47% 1.28% 1.95% 0.30% 0.04%
2005-1 -0.55% 1.32% 0.71% -0.46% 0.05% 1.07%
Avg -0.96% 0.21% 0.58% 0.40% 0.28% 0.50%
 
OTC summary for Presidential Year 1 1965 - 2005
Avg -0.50% 0.15% 0.13% 0.24% 0.23% 0.25%
Win% 33% 67% 67% 56% 89% 78%
 
OTC summary for all years 1963 - 2008
Avg -0.35% -0.20% 0.20% -0.05% -0.12% -0.53%
Win% 39% 55% 58% 61% 61% 47%
 
SPX Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1953-1 -0.53% -0.25% 0.12% 0.17% 0.00% -0.49%
1957-1 -0.23% 0.19% 0.10% 0.00% -0.33% -0.27%
1961-1 0.02% 0.55% 0.94% 1.17% 0.15% 2.83%
1965-1 -0.07% -1.26% -0.57% -0.26% 0.26% -1.90%
 
1969-1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
1973-1 0.35% 0.58% 1.39% 0.19% -0.24% 2.27%
1977-1 0.77% 0.83% -0.06% -0.14% 0.08% 1.48%
1981-1 1.12% -0.59% 0.02% 0.66% 0.70% 1.91%
1985-1 -0.40% -0.93% -0.50% 0.25% 0.18% -1.40%
Avg 0.46% -0.03% 0.21% 0.24% 0.18% 1.07%
 
1989-1 -0.66% 0.06% 1.25% 1.17% 0.05% 1.86%
1993-1 0.06% 0.29% -0.03% -0.60% 0.58% 0.31%
1997-1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2001-1 -1.64% -1.63% 1.61% 1.04% 0.24% -0.37%
2005-1 -0.55% 0.67% 0.48% -0.66% 0.54% 0.48%
Avg -0.70% -0.15% 0.83% 0.24% 0.35% 0.57%
 
SPX summary for Presidential Year 1 1953 - 2005
Avg -0.15% -0.12% 0.39% 0.27% 0.20% 0.56%
Win% 42% 58% 67% 64% 82% 58%
 
SPX summary for all years 1953 - 2008
Avg -0.19% -0.18% 0.38% 0.07% -0.07% 0.02%
Win% 30% 53% 66% 61% 58% 53%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth continued to deteriorate last week.

Conclusion

A lack of new lows is the only condition missing for a major top.

I expect the major indices to be lower on Friday July 24 than they were on Friday July 17.

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