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Technical Market Report

The good news is:
• The market has recovered most of its losses from the mid January high.

The negatives

The market is overbought.

The Russell 2000 (R2K) has been up for 8 consecutive days rising 7.7% over that period. The last time the R2K was up for 8 consecutive days was April 5, 2004 and after that peak it fell 11.7% over the next 5 weeks and did not hit a new high until the following November.

Following the October 2002 bottom the market popped up with a strong gain over the next 2 months then consolidated for about 3 months hitting a low in early March 2003.

Between early March 2003 and late January 2004 the market rallied strongly. The S&P 500 SPX was up 44%, NASDAQ composite (OTC) 70% and the R2K 74%.

The chart below covers 222 trading days from March 10, 2003 to January 26, 2004 showing the SPX in red, the OTC in blue and the R2K in green. The indices have been plotted on a log scaled Y axis to show their relative performance.

The next chart is similar to the one above except it shows the 222 trading day period from early March last year through late January of this year. The R2K has had the same percentage gain over this recent period as it did in the same time frame in 2003 - 2004. The OTC and SPX have been much stronger in the recent period than in 2003 - 2004.

In 2004 the R2K peaked in early March, about 6 weeks after the other indices. All of the indices hit a low about 7 months later in mid August after falling between 8% and 18%. The chart below shows that period.

The 8 day rally of the R2K in March 2004 was a blow off. The similarities in magnitude and time to the current period are strong.

The Positives

Last week new lows were in single digits for both the NYSE and NASDAQ.

The chart below covers the past year showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by new highs + new lows (OTC HL Ratio) in red. Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.

At just shy of 90% and rising the indicator suggests no reason for concern.

The chart below shows OTC HL Ratio during the 2003 - 2004 period. Unfortunately it did not anticipate the coming decline.

Seasonality

Next week includes the last 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 last 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 quite positive. By all other measures returns have been flat.

Last 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
  Day5 Day4 Day3 Day2 Day1 Totals
1966-2 0.97% 1 0.03% 3 -0.35% 4 -0.40% 5 0.35% 1 0.60%
 
1970-2 0.02% 5 -0.31% 2 -0.05% 3 0.82% 4 -0.16% 5 0.32%
1974-2 0.82% 5 -0.23% 1 0.42% 2 1.02% 3 0.31% 4 2.35%
1978-2 0.14% 3 0.03% 4 0.53% 5 -0.47% 1 -0.73% 2 -0.51%
1982-2 -0.87% 1 -0.88% 2 0.61% 3 0.48% 4 -0.01% 5 -0.67%
1986-2 -0.04% 1 -0.17% 2 0.11% 3 0.94% 4 0.26% 5 1.09%
Avg 0.01% -0.31% 0.32% 0.56% -0.07% 0.52%
 
1990-2 0.29% 4 -0.76% 5 0.34% 1 0.39% 2 0.76% 3 1.02%
1994-2 0.29% 2 -0.26% 3 -1.23% 4 0.56% 5 1.11% 1 0.48%
1998-2 1.37% 1 -0.75% 2 1.60% 3 0.60% 4 -0.37% 5 2.45%
2002-2 0.48% 5 2.63% 1 -0.17% 2 -0.85% 3 -1.16% 4 0.93%
2006-2 0.89% 3 -0.17% 4 0.34% 5 0.88% 1 -1.12% 2 0.83%
Avg 0.67% 0.14% 0.18% 0.32% -0.16% 1.14%
 
OTC summary for Presidential Year 2 1966 - 2006
Averages 0.40% -0.08% 0.20% 0.36% -0.07% 0.81%
% Winners 82% 27% 64% 73% 45% 82%
MDD 2/28/2002 2.17% -- 2/23/1982 1.75% -- 2/24/1994 1.48%
 
OTC summary for all years 1963 - 2009
Averages -0.10% 0.20% 0.10% -0.17% -0.09% -0.07%
% Winners 53% 57% 53% 57% 49% 53%
MDD 2/28/2001 6.79% -- 2/27/2007 4.64% -- 2/27/2009 4.44%
 
SPX Presidential Year 2
  Day5 Day4 Day3 Day2 Day1 Totals
1930-2 -1.05% 1 0.04% 2 1.85% 3 -0.13% 4 0.87% 5 1.58%
1934-2 -2.62% 5 -1.71% 6 -2.29% 1 1.12% 2 -0.46% 3 -5.96%
1938-2 2.64% 3 -1.46% 4 0.52% 5 -0.26% 6 -1.73% 1 -0.29%
1942-2 0.24% 2 -0.70% 3 0.71% 4 0.82% 5 0.00% 6 1.06%
1946-2 2.01% 4 -4.57% 1 -0.59% 2 2.02% 3 0.76% 4 -0.37%
Avg 0.24% -1.68% 0.04% 0.72% -0.11% -0.79%
 
1950-2 0.23% 4 0.41% 5 -0.12% 6 0.12% 1 -0.35% 2 0.29%
1954-2 -0.15% 5 -0.35% 2 0.00% 3 0.31% 4 0.93% 5 0.73%
1958-2 -0.56% 1 -0.10% 2 0.76% 3 -0.59% 4 0.39% 5 -0.09%
1962-2 -0.48% 3 -0.23% 5 -0.57% 1 0.19% 2 0.10% 3 -0.99%
1966-2 -0.58% 1 -0.42% 3 -0.64% 4 0.28% 5 0.09% 1 -1.29%
Avg -0.31% -0.14% -0.11% 0.06% 0.23% -0.27%
 
1970-2 0.31% 5 -0.05% 2 1.55% 3 -0.50% 4 0.67% 5 1.98%
1974-2 0.72% 5 -0.38% 1 1.02% 2 0.42% 3 -0.19% 4 1.59%
1978-2 -0.03% 3 0.09% 4 0.97% 5 -0.87% 1 -0.78% 2 -0.62%
1982-2 -1.44% 1 -0.07% 2 1.76% 3 -0.23% 4 -0.09% 5 -0.07%
1986-2 -0.12% 1 -0.25% 2 0.11% 3 1.22% 4 0.07% 5 1.03%
Avg -0.11% -0.13% 1.08% 0.01% -0.06% 0.78%
 
1990-2 -0.60% 4 -0.48% 5 1.39% 1 0.48% 2 0.49% 3 1.29%
1994-2 0.81% 2 -0.16% 3 -1.37% 4 0.39% 5 0.23% 1 -0.10%
1998-2 0.38% 1 -0.72% 2 1.19% 3 0.56% 4 0.06% 5 1.46%
2002-2 0.82% 5 1.80% 1 0.00% 2 0.05% 3 -0.28% 4 2.38%
2006-2 0.75% 3 -0.38% 4 0.13% 5 0.36% 1 -1.04% 2 -0.18%
Avg 0.43% 0.01% 0.27% 0.37% -0.11% 0.97%
 
SPX summary for Presidential Year 2 1930 - 2006
Averages 0.06% -0.48% 0.32% 0.29% -0.01% 0.17%
% Winners 50% 20% 60% 70% 55% 50%
MDD 2/26/1934 6.47% -- 2/26/1946 5.14% -- 2/28/1938 2.91%
 
SPX summary for all years 1928 - 2009
Averages -0.19% -0.04% 0.05% -0.05% 0.05% -0.18%
% Winners 47% 43% 53% 54% 57% 48%
MDD 2/27/1933 7.21% -- 2/26/1934 6.47% -- 2/26/1946 5.14%

Money supply (M2)

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

Conclusion

During up moves, market strength is revealed on the down days and last week there were none. It is too early to tell, but, we may be looking at a blow off top.

I expect the major averages to be higher on Friday February 26 than they were on Friday February 19.

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 recent newsletter, Jerry Minton explores the question of psychological risk to investor decision-making. To read about "recency bias" go to www.alphaim.net and sign-up for the free newsletter. You can also order a free CD ROM which presents Alpha's investment philosophy

Thank you

 

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