"No warning can save people determined to grow suddently rich" - Lord Overstone

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Technical Market Report

The good news is:
• The build up of new lows has been minimal during this sell off.

The negatives

The secondaries lead both up and down. A relative strength comparison of the Russell 2000 (R2K) to the S&P 500 (SPX) offers a perspective on how the secondaries are performing relative to the blue chips.

The chart below from http://fasttrack.net/ covers the past year showing the SPX in green, the R2K in red and a relative strength indicator called Accutrack (AT) expressed as a histogram in yellow at the bottom.

AT has been falling since the 1st of the year and is about neutral.

The next chart is similar to the one above except it covers most of 2007 showing the top in October. The R2K was underperforming the SPX through most of 2007 unlike the past year.

The Positives

Most of the major indices have fallen 7% - 9% from their highs in mid January. New highs peaked on January 11 at 523 on the NYSE and 211 on the NASDAQ. Last Friday they were down to 19 on the NYSE and 14 on the NASDAQ. New lows picked up to a multi month high of 26 on the NYSE and 46 on the NASDAQ. On Friday new lows exceeded new highs, on both the NYSE and NASDAQ, for the 1st time since late October. There has been a rule of thumb for many years (30 years that I can remember) saying there should be little concern until there are more than 40 new lows on the NYSE and 70 on the NASDAQ for several consecutive days.

The chart below covers the past year showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in black. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).

OTC NL is still above its levels of last November and December.

For a longer term perspective on OTC NL, the next chart is similar to the one above except it covers the past 5 years. Dashed vertical lines have been drawn on the 1st trading day of each year. The perspective from this indicator suggests the recent pull back is routine.

The next 2 charts are similar to those above except they show the SPX in red and NY NL calculated from NYSE new lows.

The next chart covers the past 5 years with NYSE data.

There is usually a build up of new lows prior to a significant top and we have not seen that.

Seasonality

Next week includes the 5 trading days prior to the 2nd Friday in February during the 2nd year of the Presidential Cycle.

The tables below show the return on a percentage basis for the 5 trading days of prior to the 2nd Friday of February during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2009 and SPX data from 1953 - 2009. There are summaries for both the 2nd year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.

Average returns for the OTC have been modestly positive over all periods while average returns for the SPX have been modestly negative over all periods.

Report for the week before the 2nd Friday of February.
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.

OTC Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1966-2 0.37% 0.18% -0.28% 0.84% -0.10% 1.01%
 
1970-2 1.46% 0.53% -0.19% 0.61% 0.60% 3.01%
1974-2 -1.34% -0.46% 0.30% 0.08% -0.66% -2.08%
1978-2 0.05% 0.47% 0.42% 0.02% 0.37% 1.32%
1982-2 -1.90% -1.15% 0.25% -0.39% 0.15% -3.04%
1986-2 0.64% 0.15% 0.39% 0.55% 0.58% 2.32%
Avg -0.22% -0.09% 0.24% 0.17% 0.21% 0.31%
 
1990-2 0.60% -0.17% 0.66% 0.12% 0.36% 1.56%
1994-2 0.25% 0.45% 0.49% -0.40% -0.26% 0.53%
1998-2 -0.24% 1.10% -0.02% 0.33% -0.23% 0.95%
2002-2 -2.91% -0.92% -1.40% -1.69% 2.06% -4.86%
2006-2 -0.17% -0.61% 0.98% -0.49% 0.27% -0.02%
Avg -0.49% -0.03% 0.14% -0.42% 0.44% -0.37%
 
OTC summary for Presidential Year 2 1966 - 2006
Avg -0.29% -0.04% 0.15% -0.04% 0.29% 0.06%
Win% 55% 55% 64% 64% 64% 64%
 
OTC summary for all years 1963 - 2009
Avg -0.08% -0.13% 0.08% 0.24% -0.07% 0.04%
Win% 39% 51% 57% 68% 54% 55%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 -0.27% -0.23% -0.11% -0.31% 0.23% -0.69%
1958-2 -0.60% -0.89% -0.44% 0.02% 0.95% -0.95%
1962-2 0.10% 0.11% 0.66% 0.23% -0.14% 0.96%
1966-2 0.35% -0.04% 0.55% -0.24% -0.02% 0.59%
 
1970-2 0.79% -1.05% 0.98% -0.24% -0.22% 0.26%
1974-2 -2.13% -0.31% 0.28% 0.04% -1.04% -3.16%
1978-2 -0.13% 0.93% 0.55% -0.58% -0.24% 0.52%
1982-2 -2.24% -0.83% 0.86% -0.20% -0.04% -2.45%
1986-2 0.78% -0.15% 0.02% 0.66% 1.09% 2.41%
Avg -0.59% -0.28% 0.54% -0.06% -0.09% -0.49%
 
1990-2 0.28% -0.66% 1.24% -0.24% 0.20% 0.82%
1994-2 0.42% -0.15% 0.36% -0.81% 0.27% 0.08%
1998-2 -0.18% 0.82% 0.10% 0.40% -0.39% 0.75%
2002-2 -2.47% -0.40% -0.60% -0.31% 1.49% -2.30%
2006-2 0.08% -0.81% 0.87% -0.15% 0.25% 0.24%
Avg -0.38% -0.24% 0.39% -0.22% 0.36% -0.08%
 
SPX summary for Presidential Year 2 1954 - 2006
Avg -0.37% -0.26% 0.38% -0.12% 0.17% -0.21%
Win% 50% 21% 79% 36% 50% 64%
 
SPX summary for all years 1953 - 2009
Avg -0.23% -0.18% 0.14% -0.01% 0.01% -0.26%
Win% 38% 46% 61% 41% 50% 54%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth has remained comatose.

Conclusion

The market is extremely oversold, but the January highs were confirmed by most indicators and there has been nothing to suggest the recent decline has been anything but a routine pull back in a bull market.

I expect the major averages to be higher on Friday February 12 than they were on Friday February 5.

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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