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Technical Market Report for November 6, 2010

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


The negatives

The market is overbought.

The major indices were up 3% - 5% last week (all but the Russell 2000 exceeding their April highs) and up 14% - 23% in the past 5 weeks; while most of the breadth indicators are well below their April highs.

The NASDAQ composite (OTC) declined 0.1% last Monday breaking its string of 8 consecutive up days then finished off the week with 4 consecutive up days. Since the low in late August 5 weeks ago the OTC is up 22% while the dollar index is down 8% and the Commodity Research Bureau Index of commodity prices is also up 20.5%. Historically a rapidly declining dollar along with rapidly rising commodity prices would have been bad for the market.

All of the charts are updates of some that I showed last week.

The chart below covers the past 150 trading days 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.

New highs picked up last week, but the indicator is well below its April high while the OTC exceeded its April high.

NASDAQ and NASDAQ New Highs

The chart below is similar to the one above except is shows the S&P 500 (SPX) in red and NY NH has been calculated from NYSE new highs.

The pattern is similar.

SPX and NYSE New Highs

Advance decline lines (ADL) are a running total of declining issues subtracted from advancing issues.

The chart below covers the period from the March 2009 low showing the OTC in blue and an ADL calculated from NASDAQ issues traded (OTC ADL) in green.

The OTC is broke above its high of last April while the OTC ADL has remained well below its April high. The OTC ADL historically has had a very negative bias and was remarkably strong from the March 2009 low to the April 2010 high. It has also been strong since its August low so the best way to assess it would be to restart the period of consideration from the August low in which case it hit a new high last Friday.

NASDAQ and NASDAQ ADL

Volume is another area inconsistency with historical patterns.

We have had a 20%+ rally is a little over 2 months with virtually no pickup in volume.

The chart below covers the past 150 trading days showing the OTC in blue and a 5% trend (39 day EMA) of NASDAQ volume (OTC Tot Vol T 5%) in orange. Volume picked up slightly last week, but not as much as you would expect in a 3% - 5% one week rally.

NASDAQ and NASDAQ Total Volume

The next chart shows the SPX in red and a 5% trend of NYSE volume (NY Tot Vol T 5%) in black.

NY Tot Vol T 5% hit an 8 year low Monday before rising the rest of the week.

SPX and NYSE Total Volume


The positives

The chart below is an update of one I have been showing every week, it covers the past 150 trading days showing the 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.

The indicator rose to 87% on Friday, very strong.

NASDAQ and NASDAQ HL Ratio

The next chart is similar to the one above except is shows the SPX in red and NY HL Ratio has been calculated from NYSE data.

At 97%, this indicator cannot get much stronger.

SPX and NYSE HL Ratio


Seasonality

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

Average returns by all measures have been modestly positive.

Report for the week before the 2nd Friday of November.
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 0.77% 0.00% 0.54% 0.65% 0.70% 2.66%
 
1970-2 0.26% 0.96% 0.86% -0.34% -1.33% 0.41%
1974-2 -0.68% 2.12% 0.18% 0.80% -0.20% 2.23%
1978-2 -0.36% -1.96% 0.14% 0.79% 0.84% -0.54%
1982-2 -0.13% 1.52% 0.10% 0.48% 0.47% 2.44%
1986-2 -0.28% 0.37% -0.03% -0.88% 0.16% -0.66%
Avg -0.24% 0.60% 0.25% 0.17% -0.01% 0.78%
 
1990-2 1.28% -0.07% -1.10% -0.13% 1.66% 1.65%
1994-2 -0.49% 0.69% -0.04% -0.37% -0.30% -0.51%
1998-2 0.24% 0.24% -0.19% -0.59% -0.17% -0.46%
2002-2 2.63% 0.33% 1.27% -2.98% -1.27% -0.01%
2006-2 1.51% 0.42% 0.38% -0.37% 0.58% 2.51%
Avg 1.03% 0.32% 0.07% -0.89% 0.10% 0.64%
 
OTC summary for Presidential Year 2 1966 - 2006
Avg 0.43% 0.46% 0.19% -0.27% 0.11% 0.88%
Win% 55% 80% 64% 36% 55% 55%
 
OTC summary for all years 1963 - 2009
Avg -0.02% 0.13% -0.11% 0.28% -0.13% 0.14%
Win% 45% 60% 55% 60% 59% 53%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 0.95% 0.39% 0.09% 0.87% 0.21% 2.52%
1958-2 0.59% 0.78% 0.13% -0.41% 0.49% 1.58%
1962-2 1.04% 0.00% 0.62% -0.66% 0.79% 1.78%
1966-2 -0.10% 0.00% 0.81% 0.63% 0.06% 1.39%
 
1970-2 0.53% 0.14% 0.28% -1.03% -0.93% -1.00%
1974-2 -1.08% 2.78% -0.48% 0.62% -0.40% 1.43%
1978-2 -1.03% -1.41% 0.64% -0.03% 0.37% -1.46%
1982-2 -1.21% 1.84% -1.30% 0.43% -1.57% -1.82%
1986-2 0.15% 0.39% -0.18% -1.47% 0.61% -0.50%
Avg -0.53% 0.75% -0.21% -0.30% -0.38% -0.67%
 
1990-2 0.88% -0.94% -1.80% 0.52% 1.99% 0.65%
1994-2 0.17% 0.56% -0.05% -0.23% -0.43% 0.02%
1998-2 -0.95% -0.17% -0.65% -0.25% 0.67% -1.34%
2002-2 0.82% 0.78% 0.91% -2.29% -0.88% -0.65%
2006-2 1.13% 0.22% 0.21% -0.53% 0.19% 1.22%
Avg 0.41% 0.09% -0.28% -0.55% 0.31% -0.02%
 
SPX summary for Presidential Year 2 1954 - 2006
Avg 0.14% 0.45% -0.05% -0.27% 0.08% 0.27%
Win% 64% 75% 57% 36% 64% 57%
 
SPX summary for all years 1953 - 2009
Avg -0.03% 0.09% -0.02% 0.27% -0.07% 0.24%
Win% 51% 50% 59% 60% 57% 56%


Money supply (M2)

The chart below was provided by Gordon Harms. Money supply growth has been slowly accelerating.

M2 Money Supply


Conclusion

Seasonality trumped breadth last week and now the market is overbought in both the short and intermediate term.

I expect the major averages to be lower on Friday November 12 than they were on Friday November 5.

Last weeks forecast, disregarding seasonality, was a mistake.

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 musings, Jerry Minton looks at some of the most popular mutual funds and the efficiency of their decision making priorities. To read about it and to subscribe to his free newsletter go to www.alphaim.net.

Thank you,

 

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