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Technical Market Report

The good news is:
• There has been no build up of new lows during this sell off.

The negatives

Volume has been declining during most of the rally since March. Since October, volume has been increasing during sell offs and decreasing during advances.

The chart below covers the past year showing the S&P 500 (SPX) in red and momentum of the volume of the component issues of the SPX (Composite Vol MoM) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

Composite Vol MoM is near its high for this rally.

The Positives

Most of the major indices have fallen 6% - 8% from their highs a couple weeks ago. Over that time new highs have declined significantly, however, new lows have remained dormant.

The chart below covers the past year showing the NASDAQ composite (OTC) in blue and the ratio of NASDAQ new highs to new highs + new lows (OTC HL Ratio) in red. Dashed horizontal lines have been drawn at 10% levels of the indicator and the line is solid at the neutral 50% level.

New lows peaked at 22 on Wednesday and Friday while new highs hit a low of 31 on Thursday. The rally should continue as long as the ratio remains above the neutral 50% level.

The next chart is similar to the one above except it covers the year from early 2007 to early 2008 showing how the indicator looked during the October 2007 top.

The market is over sold.

The chart below covers the past year showing the SPX in red and the percentage of the component issues of the SPX above their 21 day EMA in olive drab. Dashed horizontal lines have been drawn at the 25%, 50% and 75% levels for indicator. The indicator is at 14% its lowest level since the low last March.

Seasonality

Next week includes the first 5 trading days of February during the 2nd year of the Presidential Cycle.

The tables below show the return on a percentage basis for the first 5 trading days of February during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2009 and SPX data from 1928 - 2009. There are summaries for both the 2nd year of the Presidential Cycle and all years combined.

Since 1970 average returns during the 2nd year of the Presidential Cycle have been negative while prior to 1970 returns had been consistently positive. Over all years average returns have been modestly positive.

First 5 days of February.
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 2
  Day1 Day2 Day3 Day4 Day5 Totals
1966-2 -0.64% 2 -0.81% 3 0.36% 4 0.54% 5 0.37% 1 -0.18%
 
1970-2 -1.85% 1 -0.29% 2 0.67% 3 -0.15% 4 0.46% 5 -1.17%
1974-2 -0.82% 5 -1.34% 1 -0.46% 2 0.30% 3 0.08% 4 -2.24%
1978-2 0.69% 3 0.39% 4 0.27% 5 0.05% 1 0.47% 2 1.88%
1982-2 -0.83% 1 0.34% 2 -0.02% 3 -0.15% 4 0.57% 5 -0.09%
1986-2 0.50% 1 0.12% 2 0.29% 3 0.56% 4 0.42% 5 1.90%
Avg -0.46% -0.15% 0.15% 0.12% 0.40% 0.06%
 
1990-2 0.47% 4 1.07% 5 0.60% 1 -0.17% 2 0.66% 3 2.62%
1994-2 -0.40% 2 0.29% 3 -0.22% 4 -2.57% 5 0.25% 1 -2.66%
1998-2 2.07% 1 0.81% 2 0.85% 3 -0.21% 4 1.04% 5 4.56%
2002-2 -1.18% 5 -2.91% 1 -0.92% 2 -1.40% 3 -1.69% 4 -8.10%
2006-2 0.21% 3 -1.25% 4 -0.83% 5 -0.17% 1 -0.61% 2 -2.66%
Avg 0.23% -0.40% -0.11% -0.90% -0.07% -1.25%
 
OTC summary for Presidential Year 2 1966 - 2006
Averages -0.16% -0.32% 0.05% -0.31% 0.18% -0.56%
% Winners 45% 55% 55% 36% 82% 36%
MDD 2/7/2002 7.86% -- 2/4/1994 2.90% -- 2/7/2006 2.84%
 
OTC summary for all years 1963 - 2009
Averages 0.22% -0.07% 0.09% 0.07% 0.12% 0.43%
% Winners 68% 68% 57% 60% 64% 64%
MDD 2/7/2002 7.86% -- 2/7/2001 6.29% -- 2/6/2008 5.58%
 
SPX Presidential Year 2
  Day1 Day2 Day3 Day4 Day5 Totals
1930-2 0.61% 6 -0.83% 1 1.19% 2 1.30% 3 -1.07% 4 1.20%
1934-2 2.60% 4 -0.09% 5 1.14% 6 1.99% 1 0.08% 2 5.72%
1938-2 1.87% 2 -1.38% 3 -3.72% 4 1.93% 5 2.09% 6 0.79%
1942-2 0.34% 1 0.68% 2 0.79% 3 -0.22% 4 -1.12% 5 0.47%
1946-2 0.38% 5 0.38% 6 -0.48% 1 0.43% 2 -0.70% 3 0.01%
Avg 1.16% -0.25% -0.22% 1.09% -0.14% 1.64%
 
1950-2 0.00% 3 1.06% 4 0.35% 5 0.35% 6 -0.17% 1 1.58%
1954-2 -0.35% 1 -0.27% 2 0.35% 3 0.73% 4 0.38% 5 0.84%
1958-2 0.82% 1 1.00% 2 -0.64% 3 -0.21% 4 -0.88% 5 0.09%
1962-2 0.61% 4 0.79% 5 0.10% 1 0.11% 2 0.66% 3 2.28%
1966-2 -0.78% 2 0.40% 3 0.13% 4 0.66% 5 0.35% 1 0.77%
Avg 0.06% 0.60% 0.06% 0.33% 0.07% 1.11%
 
1970-2 0.86% 1 1.19% 2 -0.61% 3 -0.39% 4 0.50% 5 1.54%
1974-2 -1.29% 5 -2.13% 1 -0.31% 2 0.28% 3 0.04% 4 -3.41%
1978-2 0.76% 3 0.22% 4 -0.57% 5 -0.13% 1 0.93% 2 1.21%
1982-2 -2.18% 1 0.20% 2 -1.30% 3 -0.05% 4 0.72% 5 -2.61%
1986-2 1.03% 1 -0.55% 2 0.08% 3 0.24% 4 0.51% 5 1.31%
Avg -0.16% -0.21% -0.54% -0.01% 0.54% -0.39%
 
1990-2 -0.09% 4 0.65% 5 0.28% 1 -0.66% 2 1.24% 3 1.42%
1994-2 -0.41% 2 0.50% 3 -0.27% 4 -2.27% 5 0.42% 1 -2.04%
1998-2 2.14% 1 0.47% 2 0.09% 3 -0.34% 4 0.90% 5 3.26%
2002-2 -0.71% 5 -2.47% 1 -0.40% 2 -0.60% 3 -0.31% 4 -4.49%
2006-2 0.19% 3 -0.91% 4 -0.54% 5 0.08% 1 -0.81% 2 -1.99%
Avg 0.22% -0.35% -0.17% -0.76% 0.29% -0.77%
 
SPX summary for Presidential Year 2 1930 - 2006
Averages 0.32% -0.05% -0.22% 0.16% 0.19% 0.40%
% Winners 60% 60% 50% 55% 65% 75%
MDD 2/3/1938 5.05% -- 2/7/2002 4.43% -- 2/5/1974 3.70%
 
SPX summary for all years 1928 - 2009
Averages 0.16% 0.07% -0.15% 0.04% -0.02% 0.08%
% Winners 63% 59% 46% 51% 51% 63%
MDD 2/4/1933 7.06% -- 2/5/1932 5.47% -- 2/3/1938 5.05%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth has leveled off after a month of falling sharply.

Conclusion

The sell off of the last 2 weeks has the market, by many measures, the most oversold it has been since the rally began last March. At this time there is no evidence of a developing top so the market is likely to recover, at least, to its previous highs.

I expect the major averages to be higher on Friday February 5 than they were on Friday January 29.

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.

In his latest newsletter, Jerry Minton documents the superiority of the S&P Midcap400 index and a simple investment strategy using the index which has suffered only one down year since the index was created in 1981. Read about it at: http://www.alphaim.net

Thank you,

 

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