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Technical Market Report

The good news is:
• Several of the major indices closed at new recovery highs Friday.

The negatives

The market is over bought.

Most of the major indices have had spectacular runs over the past week and a half including:
The NASDAQ 100 (NDX) up 5.3% in 8 consecutive up days.
The Russell 2000 (R2K) up 6.6% in 5 consecutive up days.
The S&P 500 (SPX) up 4% in 6 consecutive up days.
The S&P mid cap (MID) up 5.5% 8 consecutive up days.

There were 245 new highs on the NASDAQ Friday, the most we have seen since November 15, 2006. 245 new highs is enough to suggest the market will see higher highs in the near future, but, the rapid, and somewhat disorderly move upward is also a characteristic of a blow off.

The chart below covers the past year showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

The OTC closed at a new recovery high Friday while OTC NH remained well off its January high.

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.

You can see on this chart that OTC NH usually has a series of non confirmations prior to a cycle top.

OTC NH may recover and move on to new highs, but, for now, it is a little disconcerting to see it lagging.

The Positives

The secondaries lead both up and down and, for now, they are leading the way upward.

The OTC, R2K and MID all closed at new recovery highs Friday. These are the indices that lead.

Seasonality

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

The tables below show the return on a percentage basis for the 5 trading days prior to the 2nd Friday of March 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.

Seasonally next week has been strong by all measures.

Report for the week before the 2nd Friday of March.
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 -0.72% -1.43% -1.03% 0.57% -0.39% -3.00%
 
1970-2 -0.22% -0.50% -0.02% -0.35% -0.93% -2.02%
1974-2 -0.27% 0.97% 0.43% -0.62% 0.68% 1.19%
1978-2 -0.21% 0.28% 0.38% 0.40% 0.58% 1.44%
1982-2 -1.69% -0.77% 0.42% -0.19% -1.09% -3.33%
1986-2 0.47% 0.94% 0.63% 0.18% 0.40% 2.62%
Avg -0.38% 0.18% 0.37% -0.12% -0.07% -0.02%
 
1990-2 -0.20% 0.51% 0.03% 0.93% 0.06% 1.33%
1994-2 0.57% -0.37% 0.12% -0.50% 0.01% -0.17%
1998-2 -1.61% 1.35% 0.47% 0.42% 0.43% 1.06%
2002-2 3.14% 0.37% 1.29% -0.46% 2.55% 6.89%
2006-2 -0.72% -0.77% -0.04% -0.78% 0.55% -1.77%
Avg 0.23% 0.22% 0.38% -0.08% 0.72% 1.47%
 
OTC summary for Presidential Year 2 1966 - 2006
Avg -0.13% 0.05% 0.25% -0.04% 0.26% 0.39%
Win% 27% 55% 73% 45% 73% 55%
 
OTC summary for all years 1963 - 2009
Avg -0.03% 0.42% 0.00% 0.37% -0.11% 0.65%
Win% 47% 59% 62% 66% 51% 70
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 -0.26% 0.23% 0.23% 0.45% 0.00% 0.64%
1958-2 0.33% 0.71% -0.24% 0.12% -0.31% 0.62%
1962-2 -0.21% -0.33% -0.13% 0.72% 0.33% 0.37%
1966-2 -1.34% 0.16% 0.88% 0.00% -0.12% -0.42%
 
1970-2 -1.04% 0.27% -0.07% -0.41% -0.53% -1.77%
1974-2 0.00% 1.87% 0.68% -1.06% 0.87% 2.36%
1978-2 -0.63% 0.53% 0.55% 0.06% 1.13% 1.63%
1982-2 -1.83% 1.39% 0.53% -0.05% -0.69% -0.64%
1986-2 0.45% 2.26% 0.37% 0.28% 1.44% 4.79%
Avg -0.76% 1.26% 0.41% -0.24% 0.44% 1.27%
 
1990-2 -0.54% 1.26% -0.29% 0.99% -0.69% 0.73%
1994-2 0.47% -0.22% 0.25% -0.68% 0.55% 0.37%
1998-2 -0.32% 1.13% 0.40% 0.13% -0.12% 1.22%
2002-2 1.95% -0.67% 1.45% -0.45% 0.58% 2.87%
2006-2 -0.70% -0.19% 0.20% -0.49% 0.73% -0.43%
Avg 0.17% 0.26% 0.40% -0.10% 0.21% 0.95%
 
SPX summary for Presidential Year 2 1954 - 2006
Avg -0.28% 0.60% 0.34% -0.03% 0.24% 0.88%
Win% 31% 71% 71% 54% 54% 71%
 
SPX summary for all years 1953 - 2009
Avg -0.04% 0.26% 0.04% 0.20% -0.07% 0.40%
Win% 54% 56% 54% 61% 45% 60%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth is showing some signs of life.

Conclusion

Last weeks run up was a little too much of a good thing and the market is overbought. However, if you are going to have a strong rally the action last week shows how it should be done with the secondaries leading, new highs expanding and no new lows.

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

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, "Let's Get Real", Jerry Minton examines the real stock market and how adjusting returns for inflation affects our perception of the market as a long-term investment medium. You can sign up for a free subscription at: http://www.alphaim.net

Thank you,

 

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