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Technical Market Report for May 8, 2010

The good news is:
• The market is no longer overbought.

The negatives

On the NASDAQ new lows exceeded new highs for the last 3 days of last week and the last 2 days of last week on the NYSE. If that does not reverse soon the rally of the past 14 months is in trouble.

The chart below covers the past year showing the NASDAQ composite (OTC) in blue and a 40% trend (4 day EMA) of the ratio of NASDAQ new highs to new highs + new lows in red. Dashed vertical lines have been drawn on the 1st trading day of each month and dashed horizontal lines have been drawn at 10% levels of the indicator. The horizontal line is solid at the neutral 50% level of the indicator.

The indicator made its 4th excursion below the 50% level since this rally began 14 months ago. It must recover quickly if the rally is to continue.

NASDAQ Hi/Low Ratio

New next chart is similar to the one above except is shows the S&P 500 (SPX) in red and the indicator, shown in black has been calculated with NYSE data.

S&P500 Hi/Low Ratio

The Positives

The highs of mid to late April were confirmed by everything that matters so it is likely the blue chips will recover to new highs. The key will be the secondaries. If the secondaries make a new high the rally is likely to continue. If the blue chips make a new high and the secondaries do not, we will be looking at a cycle top.

The chart below covers the past 3 months showing the SPX in red, the OTC in blue, the Russell 2000 (R2K) in green and the S&P mid cap (MID) in black. The indices have been plotted on log scales to show their relative performance. The R2K led the way up while the SPX was the laggard. That is what you want to see in a bull market. What happens next will be key.

SPX, NASDAQ, Russell 2000, and S&P Mid-Cap Feb - May 7, 2010

The next chart is similar to the one above except it covers period just prior to the high in late July 2007 through the final highs in October. The period was a little odd because the OTC led the way up, but, the R2K and MID were clearly the laggards.

SPX, NASDAQ, Russell 2000, and S&P Mid-Cap July - October 2007

The April highs were confirmed so we are likely to see another high in the blue chips. If that high is confirmed by the secondaries the rally should continue, if it is not confirmed we are likely to be looking at a bleak summer.

Seasonality

Next week includes the 5 trading days prior to the 2nd Friday of May 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 May during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2009 and S&P 500 data from 1953 - 2009. Prior to 1953 the market traded 6 days a week so that data has been ignored. There are summaries for both the 2nd year of the Presidential Cycle and all years combined.

By all measures next week has been lousy. There has not been an up week during the 2nd year of the Presidential Cycle since 1990.

Report for the week before the 2nd Friday of May.
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 -0.56% -1.30% 0.12% 0.07% -0.86% -2.53%
 
1970-2 0.05% -2.37% 0.26% 0.01% 1.27% -0.78%
1974-2 -0.18% -0.74% -1.06% 0.08% -1.76% -3.67%
1978-2 -0.11% -0.08% 0.43% 0.60% 0.97% 1.81%
1982-2 -0.30% -0.74% 1.00% -0.21% 0.30% 0.06%
1986-2 0.74% 0.07% -0.25% 0.54% 0.44% 1.54%
Avg 0.04% -0.77% 0.08% 0.20% 0.24% -0.21%
 
1990-2 0.61% 0.14% -0.12% 0.43% 1.13% 2.20%
1994-2 -1.35% 0.28% -1.10% 0.36% -0.37% -2.18%
1998-2 0.20% -0.66% -0.44% -1.16% 1.60% -0.46%
2002-2 -2.14% -0.30% 7.78% -2.70% -3.01% -0.36%
2006-2 0.10% -0.29% -0.75% -2.07% -1.27% -4.28%
Avg -0.52% -0.16% 1.07% -1.03% -0.39% -1.02%
 
OTC summary for Presidential Year 2 1966 - 2006
Avg -0.27% -0.54% 0.53% -0.37% -0.14% -0.79%
Win% 45% 27% 45% 64% 55% 36%
 
OTC summary for all years 1963 - 2009
Avg -0.06% -0.11% -0.04% -0.08% 0.11% -0.18%
Win% 51% 49% 53% 60% 60% 53%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 -0.10% -0.45% 0.81% -0.56% 0.84% 0.53%
1958-2 0.23% 0.50% -0.18% 0.14% 0.02% 0.71%
1962-2 -0.33% -1.29% -1.40% -1.07% -1.45% -5.54%
1966-2 -1.73% 0.88% 0.17% -1.15% -0.88% -2.71%
 
1970-2 -2.54% -0.97% 1.11% 0.45% -0.49% -2.44%
1974-2 -0.19% 0.37% 0.20% 1.44% -1.60% 0.22%
1978-2 -0.35% -0.30% 0.02% 1.33% 0.90% 1.60%
1982-2 -0.91% 0.88% -0.21% -0.80% -0.18% -1.22%
1986-2 1.25% -0.21% -0.49% 0.44% 0.30% 1.31%
Avg -0.55% -0.05% 0.13% 0.58% -0.21% -0.11%
 
1990-2 0.63% 0.43% 0.25% 0.28% 2.38% 3.97%
1994-2 -1.23% 0.83% -1.01% 0.51% 0.09% -0.81%
1998-2 0.10% -0.58% -0.96% -0.89% 1.19% -1.14%
2002-2 -1.93% -0.30% 3.75% -1.45% -1.68% -1.62%
2006-2 -0.08% 0.04% -0.17% -1.28% -1.12% -2.62%
Avg -0.50% 0.08% 0.37% -0.57% 0.17% -0.44%
 
SPX summary for Presidential Year 2 1954 - 2006
Avg -0.51% -0.01% 0.13% -0.19% -0.12% -0.70%
Win% 29% 50% 50% 50% 50% 43%
 
SPX summary for all years 1953 - 2009
Avg -0.08% 0.00% -0.01% -0.14% 0.08% -0.16%
Win% 39% 47% 53% 47% 55% 42%

Money Supply (M2)

The money supply chart below was provided by Gordon Harms. Money supply has been under trend all year and the deterioration has been accelerating.

M2 Money Supply

Conclusion

The market is over sold so there is likely to be, at least, a short term bounce. However, there has been no sign of a bottom which would be indicated by a reduction of downside volume and new lows.

I expect the major averages to be higher on Friday May 14 than they were on Friday May 7.

This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html

Gordon Harms produces a Power Point for our local timing group meetings. You can get a copy of that at: http://www.stockmarket-ta.com

In his latest newsletter entitled "Sell In May", Jerry Minton investigates the causes of the extreme volatility (positive and negative) of the market in the second year of the four-year election cycle. You can read about it and sign up for a free subscription at Alpha's website: www.alphaim.net.

Thank you,

 

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