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Technical Market Report

The good news is:
 • New lows have dried up on both exchanges.
 • The secondaries are outperforming the blue chips.

As of last weekend the NASDAQ new low indicator was at a new low, i.e. near a high in the number of new lows and had not turned upward. NASDAQ new lows peaked at 182 on Monday May 10 and remained uncomfortably high until this past week. The chart below shows the NASDAQ composite in red and the new low indicator (A 19 day EMA on an inverted Y axis) in blue. Since last Monday, the indicator has been moving up sharply implying risk is limited at this time.

Overbought is a nebulous concept suggesting the market has gone up too far too fast. Calling the market overbought is like calling the price of gas it too high.

By most overbought/oversold measures such as the % an index is above its moving average (50 and 200 day moving averages are popular), price oscillators and momentum indicators, the current market is about neutral. Some shorter term measures suggest there is not much room to the upside in the near term. The first chart below shows the S&P mid cap index in red and an indicator that plots the percentage of the past 7 trading days the index has been up. The chart covers the past 1.5 years. The indicator reaches the top of the screen when the index has been up for 7 consecutive trading days; that has only happened twice since this rally began. The first time was leading up to the Labor Day holiday last September after which the market fell modestly before resuming its upward move. The other time was April 5 this year when the index made a new high before falling nearly 9% over the next 6 weeks to the recent low. I think there are stronger parallels between the current period and last September because the weakness we saw last July and early August was, at that point, the most severe to that date. The weakness we saw going into the low of a week ago is now the most severe to date.

The chart below shows the Russell 2000 (R2K) in red and an indicator that attempts to force the price action into cyclical pattern in blue. With a major exception that occurred around the first of this year, the index has started to decline shortly after the indicator reached the top of the screen where it is now.

Seasonally the first three days of June have been pretty strong.

First 4 days of June.
The number following the year is its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.

R2K Day1 Day2 Day3 Day4 Totals
1989-1 0.51% 4 0.58% 5 -0.59% 1 -0.12% 2 0.38%
1990-2 0.47% 5 0.54% 1 -0.23% 2 -0.19% 3 0.59%
1991-3 0.10% 1 0.01% 2 -0.02% 3 -0.07% 4 0.03%
1992-4 0.43% 1 0.28% 2 0.02% 3 -0.08% 4 0.65%
1993-1 0.39% 2 0.34% 3 0.19% 4 -0.40% 5 0.52%
1994-2 0.32% 3 0.76% 4 0.04% 5 0.25% 1 1.38%
1995-3 0.46% 4 0.29% 5 0.72% 1 0.17% 2 1.63%
1996-4 -0.11% 1 0.34% 2 0.26% 3 -0.66% 4 -0.18%
1997-1 0.72% 1 -0.06% 2 -0.16% 3 0.61% 4 1.11%
1998-2 -1.19% 1 -0.33% 2 -0.12% 3 0.57% 4 -1.07%
1999-3 -0.28% 2 -0.16% 3 -0.17% 4 1.46% 5 0.84%
2000-4 3.42% 4 4.17% 5 0.05% 1 -0.32% 2 7.33%
2001-1 1.05% 5 1.12% 1 1.81% 2 -0.76% 3 3.22%
2002-2 -2.68% 1 -0.13% 2 0.27% 3 -2.05% 4 -4.60%
2003-3 0.37% 1 0.28% 2 1.66% 3 1.21% 4 3.52%
Averages 0.26% 0.54% 0.25% -0.02% 1.02%
% Winners 73% 73% 60% 40%  
 
SPX Day1 Day2 Day3 Day4 Totals
1989-1 0.45% 4 1.10% 5 -1.07% 1 0.69% 2 1.17%
1990-2 0.53% 5 1.17% 1 -0.21% 2 -0.46% 3 1.04%
1991-3 -0.45% 1 -0.08% 2 -0.68% 3 -0.38% 4 -1.60%
1992-4 0.47% 1 -0.91% 2 0.26% 3 -0.32% 4 -0.50%
1993-1 0.81% 2 0.00% 3 -0.30% 4 -0.54% 5 -0.02%
1994-2 0.25% 3 0.00% 4 0.54% 5 -0.27% 1 0.52%
1995-3 0.02% 4 -0.18% 5 0.58% 1 -0.01% 2 0.40%
1996-4 -0.22% 1 0.73% 2 0.87% 3 -0.80% 4 0.59%
1997-1 -0.23% 1 -0.10% 2 -0.64% 3 0.40% 4 -0.57%
1998-2 0.01% 1 0.21% 2 -0.96% 3 1.12% 4 0.38%
1999-3 -0.58% 2 0.04% 3 0.37% 4 2.17% 5 2.00%
2000-4 1.99% 4 1.96% 5 -0.65% 1 -0.67% 2 2.63%
2001-1 0.39% 5 0.51% 1 1.30% 2 -1.05% 3 1.14%
2002-2 -2.48% 1 0.00% 2 0.88% 3 -1.98% 4 -3.57%
2003-3 0.35% 1 0.47% 2 1.51% 3 0.40% 4 2.73%
Averages 0.09% 0.33% 0.12% -0.11% 0.42%
% Winners 67% 73% 53% 33%  

The market is overbought for the short term, but should get some help from a seasonally strong bias during the first part of the week.

I expect the major indices will be higher on Friday June 4 than they were on Friday May 28.

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