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Technical Market Report for July 10, 2010

The good news is:
• New lows declined all week long, reaching relatively benign levels on Friday.


The negatives

After setting some negative records the previous week most of the major indices were up every day last week leaving the market over bought for the short term.

New lows disappeared last week, but, although new highs increased, there were not enough of them to suggest that last weeks move was anything but a counter trend rally.

The chart below covers the past 6 months 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 (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. Dashed vertical lines have been drawn on the 1st trading day of each month.

OTC HL Ratio moved up last week, but, is still in very negative territory.

NASDAQ HL Ratio

The next chart covers the past 6 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.

A 4 day 5% rally was not enough to turn OTC NH upward.

NASDAQ New Highs

NYSE breadth data has a strong positive bias. The charts below are similar to those above except they show the S&P 500 (SPX) in red and the indicators have been calculated from NYSE data.

NY HL Ratio rose above the neutral line last week.

NYSE HL Ratio

NY NH turned slightly upward.

NYSE New Highs

Advance decline lines (ADL) are a running total of declining issues subtracted from advancing issues. The ADL calculated from NASDAQ data (OTC ADL) has had a pretty strong negative bias over its 30+ year history. Since the March 2009 low through the late April high, the OTC ADL had its longest show of strength ever. That show of strength appears to have ended, last Monday the OTC ADL hit its lowest point in over a year.

NASDAQ ADV/DEC


The positives

New lows declined sharply last week falling into single digits on the NYSE for the first time since June 21. NYSE downside volume has been in an downward trending pattern for nearly 2 months.

The chart below, an update of one shown last week, it covers the past 6months showing the SPX in red and a 5% trend (39 day EMA) of NYSE downside volume (NY DV) in brown. NY DV has been plotted on an inverted Y axis so increasing NY DV moves the indicator downward (up is good).

NY DV has hit a two month high last week.

SPX and NY DV


Seasonality

Next week includes the 5 trading days prior to the 3rd Friday of July 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 3rd Friday of July 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.

By all measures, returns have been modestly negative.

Report for the week before the 3rd Friday of July.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.

OTC Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1966-2 0.67% -0.49% -0.12% -0.09% 0.87% 0.84%
 
1970-2 0.33% -0.68% -0.80% 0.24% 0.83% -0.08%
1974-2 0.49% -0.49% 1.51% 0.14% 0.81% 2.46%
1978-2 0.64% -0.22% 0.58% 0.77% -0.12% 1.65%
1982-2 0.46% 0.30% -0.08% 0.24% 0.34% 1.25%
1986-2 -0.42% 0.11% -0.01% -0.29% 0.29% -0.32%
Avg 0.30% -0.20% 0.24% 0.22% 0.43% 0.99%
 
1990-2 0.25% -1.09% -0.79% -0.58% -0.63% -2.84%
1994-2 -0.09% 0.39% 1.38% 0.31% -0.03% 1.96%
1998-2 0.27% -1.75% -0.47% -1.76% -0.22% -3.92%
2002-2 0.66% -0.53% 1.60% -2.88% -2.79% -3.94%
2006-2 0.02% 0.27% 1.83% -1.98% -0.93% -0.79%
Avg 0.22% -0.54% 0.71% -1.38% -0.92% -1.91%
 
OTC summary for Presidential Year 2 1966 - 2006
Avg 0.30% -0.38% 0.42% -0.54% -0.14% -0.34%
Win% 82% 36% 45% 45% 45% 45%
 
OTC summary for all years 1963 - 2009
Avg -0.08% -0.18% -0.01% 0.05% -0.10% -0.31%
Win% 57% 36% 48% 59% 49% 45%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 -0.07% -0.33% 0.23% 0.33% -0.43% -0.26%
1958-2 1.22% 0.17% -0.02% 0.54% 0.69% 2.60%
1962-2 0.00% -1.82% -1.02% 0.39% 0.69% -1.75%
1966-2 -0.18% -0.65% -0.67% 0.60% 0.30% -0.60%
 
1970-2 0.04% -0.95% 0.06% 1.26% -0.23% 0.18%
1974-2 0.76% -1.16% 1.07% 0.10% -0.29% 0.48%
1978-2 0.20% -0.93% 1.29% -0.09% -0.29% 0.19%
1982-2 0.68% -0.11% 0.90% 0.03% 0.54% 2.05%
1986-2 -0.05% 0.82% 0.21% -0.30% 0.95% 1.63%
Avg 0.33% -0.47% 0.71% 0.20% 0.14% 0.90%
 
1990-2 0.45% -0.39% -0.90% 0.30% -1.02% -1.55%
1994-2 -0.33% -0.02% 0.17% 1.04% 0.17% 1.03%
1998-2 -0.22% -1.60% -0.09% -2.10% 0.10% -3.91%
2002-2 -0.38% -1.84% 0.55% -2.70% -3.83% -8.20%
2006-2 -0.14% 0.19% 1.86% -0.85% -0.71% 0.35%
Avg -0.12% -0.73% 0.32% -0.86% -1.06% -2.46%
 
SPX summary for Presidential Year 2 1954 - 2006
Avg 0.15% -0.62% 0.26% -0.10% -0.24% -0.56%
Win% 46% 21% 64% 64% 50% 57%
 
SPX summary for all years 1953 - 2009
Avg -0.09% -0.25% 0.01% -0.01% -0.06% -0.39%
Win% 47% 30% 50% 57% 51% 39%


Money Supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth has been leveling off.

S&P500 and M2 Money Supply


Conclusion

The market has been swinging from one extreme to another, but has been following the average seasonal pattern quite closely all year and that pattern suggests the next week and a half will be down.

I expect the major averages to be lower on Friday July 16 than they were on Friday July 9.

This report is free to anyone who wants it, so please tell your friends.

They can sign up at: http://alphaim.net/signup.html

In his latest newsletter, Jerry Minton announces a new investment service for 401(k) participants. To read about it and the retirement crisis facing American workers, go to www.alphaim.net. There's a free sign-up on the home page.

Thank you,

 

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