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Technical Market Report for August 7, 2010

The good news is:
• The market appears to have broken with the negative seasonal pattern.


The negatives

Surging markets are revealed by expanding new highs and masked by the secondaries outperforming the well publicized blue chips. Currently those characteristics are missing.

The chart below, an update of one shown last week, covers the past 6 months showing the NASDAQ composite (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.

It could be worse, but, this is not a picture of a surging market.

NASDAQ New Highs

The chart below from FastTrack (Fasttrack.net) covers the past 6 months showing the Russell 2000 (R2K) in red, the S&P 500 (SPX) in green and a relative strength indicator called Accutrack is displayed as a histogram in yellow.

Accutrack deteriorated last week indicating the secondaries are underperforming the blue chips.

Total Return


The positives

Last week the NYSE advance decline line (ADL) hit a new all time high.

Without interest rate changes, fixed income issues accumulate value daily until they go ex dividend. Nearly half of the issues traded on the NYSE are fixed income related. About 10 years ago when interest rates were taken to record lows the NYSE ADL transformed from having a slightly negative bias to a wildly positive one. A new all time high for this indicator is significant, but not what it once was.

The chart below covers the past 6 months showing the SPX in red and the NYSE ADL in blue. Advance - Decline lines are a running total of declining issues subtracted from advancing issues. The NYSE ADL hit a new high on Wednesday.

NYSE Advance-Decline

New highs have been outnumbering new lows on the NYSE by a wide margin. The chart below shows the SPX in red and NY HL Ratio a 40% trend (4 day EMA) of NYSE new highs divided by new highs + new lows in blue. Dashed horizontal lines have been drawn at 10% levels for the indicator. The line is solid at the neutral 50% level.

NY HL Ratio above 90% is extraordinarily positive.

NYSE HL Ratio

The NASDAQ has few, if any, fixed income issues. The chart below is similar to the one above except it shows the OTC in blue and OTC HL Ratio has been calculated from NASDAQ data.

Although not as positive as the NYSE chart OTC HL Ratio has held above the neutral line.

NASDAQ HL Ratio


Seasonality

Next week includes the 5 trading days prior to the 2nd Friday of August 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 August 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.

Average returns over the coming week have been modestly positive. Average returns during the 2nd year of the Presidential Cycle have been a little less than all years combined.

Report for the week before the 2nd Friday of August.
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 0.70% -0.14% 0.44% 0.09% -0.14% 0.95%
 
1970-2 -0.87% -1.71% -0.44% -0.98% -1.28% -5.29%
1974-2 0.39% 1.23% 1.63% -1.42% 0.04% 1.87%
1978-2 0.39% 0.22% 0.88% -0.05% 0.32% 1.76%
1982-2 -1.35% -0.04% -0.34% -0.58% -0.44% -2.75%
1986-2 -1.08% 0.02% -0.55% 0.09% 0.22% -1.29%
Avg -0.51% -0.06% 0.24% -0.59% -0.23% -1.14%
 
1990-2 -4.17% 0.51% 1.41% 1.29% -1.20% -2.17%
1994-2 0.25% 0.30% 0.77% 0.00% 0.47% 1.79%
1998-2 -0.41% -2.53% 1.83% -1.26% -0.68% -3.05%
2002-2 -3.36% 4.44% 1.70% 2.78% -0.79% 4.77%
2006-2 -0.60% -0.56% -0.03% 0.56% -0.68% -1.31%
Avg -1.66% 0.43% 1.14% 0.84% -0.58% 0.00%
 
OTC summary for Presidential Year 2 1966 - 2006
Avg -0.92% 0.16% 0.66% 0.05% -0.38% -0.43%
Win% 36% 55% 64% 50% 36% 45%
 
OTC summary for all years 1963 - 2009
Avg -0.26% 0.11% 0.30% -0.01% 0.03% 0.16%
Win% 40% 55% 65% 63% 47% 60%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 -0.86% 0.83% 1.15% -0.42% 0.42% 1.13%
1958-2 0.95% -0.40% -0.61% 0.65% 0.59% 1.18%
1962-2 -0.64% -0.68% 0.26% -0.07% 0.14% -0.98%
1966-2 -0.30% -0.31% -0.46% -0.11% 0.18% -0.99%
 
1970-2 -1.40% -0.50% -0.53% -0.88% 0.56% -2.74%
1974-2 0.89% 1.55% 2.65% -1.31% -0.87% 2.91%
1978-2 -0.36% 0.44% 0.47% -0.80% 0.29% 0.04%
1982-2 -0.61% -0.23% -0.23% -0.18% 1.40% 0.15%
1986-2 0.46% 0.44% -0.08% 0.08% -0.07% 0.84%
Avg -0.20% 0.34% 0.46% -0.62% 0.26% 0.24%
 
1990-2 -3.02% 0.12% 1.05% 0.47% -1.30% -2.68%
1994-2 0.18% 0.01% 0.52% -0.31% 0.67% 1.06%
1998-2 -0.58% -1.30% 1.42% -0.86% -1.13% -2.45%
2002-2 -3.43% 2.99% 2.00% 3.27% 0.35% 5.19%
2006-2 -0.28% -0.34% -0.44% 0.46% -0.40% -0.99%
Avg -1.43% 0.30% 0.91% 0.61% -0.36% 0.03%
 
SPX summary for Presidential Year 2 1954 - 2006
Avg -0.64% 0.19% 0.51% 0.00% 0.06% 0.12%
Win% 29% 50% 57% 36% 64% 57%
 
SPX summary for all years 1953 - 2009
Avg -0.25% 0.16% 0.21% 0.01% 0.05% 0.18%
Win% 39% 61% 55% 49% 53% 58%


Money Supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth has been following the reduced trend of the past year.

M2 money Supply


Conclusion

The market held up pretty well last week considering the historical weakness of the period. Most of the breadth indicators deteriorated last week, perhaps it was just the seasonal bias.

I expect the major averages to be lower on Friday August 13 than they were on Friday August 6.

Last week the blue chips were up while the secondaries were down so I am calling last weeks negative forecast a tie.

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 looks at the "94%" which occurs in the fourth quarter of the year. You can read about it and subscribe to the free newsletter at www.alphaim.net.

Thank you,

 

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