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Technical Market Report for May 7, 2011

The good news is:
• The market internals held up pretty well during last week's sharp sell off.


The negatives

The market appears to be developing a top.

All of the major indices hit multi year highs on Friday April 29, but many of the breadth indicators did not confirm those highs.

The chart below 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.

Since OTC NH peaked in January it has had progressively lower highs while the OTC has been making progressively higher highs.

Leadership is deteriorating.

The next chart is similar to the one above except is shows the S&P 500 in red and NY NH has been calculated from NYSE data.

This chart looks a little better, but not encouraging.

Advance - decline lines (ADL) are a running total of declining issues subtracted from advancing issues. Their characteristics vary widely and they change. The ADL calculated from NASDAQ data (OTC ADL) has had a strong negative bias over most of its history. That bias turned surprisingly positive in March 2009 and remained that way until recently.

The chart below shows the OTC in blue and the OTC ADL in green. For the past 2 months OTC ADL has been making progressively lower highs supporting the idea of deteriorating leadership.


The positives

The pull back from the multi year highs of a week ago was pretty severe, but the build up of new lows was not enough to suggest the bull is dead.

The chart below covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by new highs + new lows (OTC HL Ratio) in red. Dashed vertical lines have been drawn on the 1st trading day of each month. Dashed horizontal lines have been drawn at 10% increments for the indicator. The horizontal line is solid at the neutral 50% level.

OTC HL Ratio took a hit last week, but held above the neutral 50% level.

The next chart is similar to the one above except it shows the S&P 500 (SPX) in red and NY HL Ratio, in dark blue, has been calculated from NYSE data.

NY HL Ratio held up pretty well, never dropping below 80%.


Seasonality

Next week includes the 5 trading days prior to the 2nd Friday of May during the 3rd 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 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and SPX data from 1953 - 2010. There are summaries for both the 3rd 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 by all measures have been a little weak.

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 3
Year Mon Tue Wed Thur Fri Totals
1963-3 -0.45% -0.51% 0.09% 0.09% -0.06% -0.84%
1967-3 1.17% -0.65% -1.31% -0.64% 0.53% -0.89%
 
1971-3 -0.46% 0.16% 0.04% 0.16% 0.17% 0.07%
1975-3 1.11% -0.41% 1.24% 0.38% 0.85% 3.17%
1979-3 -2.33% -0.77% 0.57% -0.48% -0.02% -3.03%
1983-3 0.33% 0.56% -0.48% -0.24% 0.59% 0.76%
1987-3 0.00% 0.95% -0.01% 0.06% 0.13% 1.13%
Avg -0.27% 0.10% 0.27% -0.03% 0.35% 0.42%
 
1991-3 -0.13% 0.01% 0.20% 1.08% -0.88% 0.28%
1995-3 0.68% -0.13% -0.06% 0.73% 0.60% 1.82%
1999-3 0.91% 1.60% 1.55% -0.94% -2.10% 1.02%
2003-3 0.08% 1.31% -1.11% -1.13% 2.04% 1.18%
2007-3 -0.05% 0.03% 0.18% -1.65% 1.12% -0.37%
Avg 0.30% 0.56% 0.15% -0.38% 0.16% 0.79%
 
OTC summary for Presidential Year 3 1963 - 2007
Avg 0.07% 0.18% 0.07% -0.22% 0.25% 0.36%
Win% 58% 58% 58% 50% 67% 67%
 
OTC summary for all years 1963 - 2010
Avg 0.04% -0.11% 0.00% -0.10% 0.07% -0.10%
Win% 52% 50% 54% 58% 58% 54%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 0.11% -0.21% -1.14% -0.59% 0.65% -1.18%
1959-3 0.00% 0.17% -0.24% -1.27% 0.77% -0.56%
1963-3 -0.71% -0.13% 0.82% 0.49% 0.24% 0.70%
1967-3 0.15% -1.04% -0.27% 0.43% -0.29% -1.01%
 
1971-3 -0.50% 0.25% 0.27% -0.20% -0.47% -0.64%
1975-3 0.96% -1.60% 0.50% 0.54% 1.08% 1.48%
1979-3 -1.66% 0.15% 0.29% -0.95% 0.00% -2.16%
1983-3 -0.17% 0.06% -0.57% -0.43% 0.40% -0.72%
1987-3 0.46% 2.07% 0.04% -0.26% -0.45% 1.86%
Avg -0.18% 0.19% 0.11% -0.26% 0.14% -0.04%
 
1991-3 -0.19% -0.73% 0.32% 1.25% -1.96% -1.31%
1995-3 0.74% -0.08% 0.15% 0.00% 0.23% 1.04%
1999-3 -0.35% 1.14% 0.62% 0.26% -2.18% -0.50%
2003-3 -0.38% 0.85% -0.51% -1.01% 1.43% 0.38%
2007-3 0.26% -0.12% 0.32% -1.40% 0.96% 0.03%
Avg 0.02% 0.21% 0.18% -0.18% -0.30% -0.07%
 
SPX summary for Presidential Year 3 1955 - 2007
Avg -0.10% 0.06% 0.04% -0.22% 0.03% -0.19%
Win% 46% 50% 64% 43% 62% 43%
 
SPX summary for all years 1953 - 2010
Avg 0.00% -0.01% 0.01% -0.16% 0.04% -0.12%
Win% 40% 47% 53% 47% 54% 43%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2 has been holding a little above trend.


Conclusion

The market worked off its overbought condition last week and the breadth indicators have been deteriorating, but, because all of the major indices hit multiyear highs a week ago, there is likely to be a new higher high at least in the blue chips.

I expect the major averages to be higher on Friday May 13 than they were on Friday May 6.

Last weeks positive forecast was a miss. 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 newsletter, Jerry Minton looks at the current craze for dividend stocks as a replacement for bonds. Read about it at: http://alphaim.net/

Thank you,

 

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