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Technical Market Report for May 14, 2011

The good news is:
• The secondaries held up better than the blue chips last week.


The negatives

The market appears to be developing a top.

Most of the major indices came close to their previous highs on Tuesday while the breadth indicators continued to deteriorate.

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.

The 3 day rally that ended on Tuesday failed to generate enough new highs to move OTC NH upward.

The next chart shows the OTC in blue and a 10% trend of NASDAQ new lows (OTC NL) in black. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).

The rally that ended last Tuesday failed to turn OTC NL upward. The actual number of new lows is not yet serious, but they have been going in the wrong direction. Several consecutive days with more than 70 new lows on the NASDAQ would be serious.

The next chart is similar to the first one except it shows the S&P 500 (SPX) in red and NY NH, in green, has been calculated from NYSE data.

The pattern is similar the OTC chart.

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

NY NL has been much more volatile than OTC NL because of the turmoil in the bond market, but, like the OTC chart, the recent pattern has been down.


The positives

Positives are hard to find.

The level of deterioration in the breadth indicators has been no more severe than you might expect in a routine pull back within a bull market.

The chart below is an update of one I usually show covering 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 horizontal lines have been drawn at 10% increments for the indicator. The horizontal line is solid at the neutral 50% level.

OTC HL Ratio is still positive and did not deteriorate badly last week. How is that for desperation?

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 is still holding up pretty well and actually turned slightly upward on Friday.


Seasonality

Next week includes the 5 trading days prior to the 3rd 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 3rd 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 negative for the coming week.

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

OTC Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1963-3 -0.06% 0.09% 0.06% 0.18% -0.06% 0.21%
1967-3 -0.35% -0.52% 0.78% 0.23% 0.03% 0.16%
 
1971-3 -1.44% -0.69% -0.06% 0.36% 0.12% -1.71%
1975-3 -0.63% 1.28% -0.53% -0.14% -0.42% -0.45%
1979-3 -0.54% 0.02% 0.26% 0.84% 0.44% 1.02%
1983-3 -1.43% 0.47% 0.83% -0.23% 0.24% -0.11%
1987-3 -0.24% -0.39% 0.33% 0.18% -0.89% -1.01%
Avg -0.85% 0.14% 0.17% 0.20% -0.10% -0.45%
 
1991-3 0.10% -1.04% -2.19% 0.77% -0.08% -2.44%
1995-3 0.48% 0.60% 0.42% -0.90% 0.06% 0.66%
1999-3 1.34% -0.13% 0.74% -1.37% -0.87% -0.28%
2003-3 1.40% -0.11% -0.31% 1.07% -0.83% 1.22%
2007-3 -0.62% -0.83% 0.88% -0.32% 0.75% -0.13%
Avg 0.54% -0.30% -0.09% -0.15% -0.19% -0.19%
 
OTC summary for Presidential Year 3 1963 - 2007
Avg -0.16% -0.10% 0.10% 0.06% -0.13% -0.24%
Win% 33% 42% 67% 58% 50% 42%
 
OTC summary for all years 1963 - 2010
Avg -0.01% 0.02% 0.02% 0.00% -0.21% -0.18%
Win% 48% 46% 58% 52% 43% 48%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 -1.12% -0.14% 0.84% 0.56% 0.67% 0.81%
1959-3 0.42% 0.16% 0.56% 0.69% -0.36% 1.46%
1963-3 -0.06% -0.38% 0.31% -0.26% 0.06% -0.33%
1967-3 -0.82% 0.46% -0.39% -0.27% -0.50% -1.51%
 
1971-3 -1.49% 0.14% 0.24% 0.24% -0.32% -1.19%
1975-3 0.09% 1.07% 0.75% -0.93% -1.07% -0.09%
1979-3 -0.47% 0.08% 0.29% 1.54% -0.01% 1.43%
1983-3 -0.91% 0.19% -0.27% -0.78% 0.09% -1.68%
1987-3 -0.61% 0.59% 0.23% 0.09% -2.31% -2.01%
Avg -0.68% 0.41% 0.25% 0.03% -0.72% -0.71%
 
1991-3 0.27% -1.36% -0.82% 0.98% 0.05% -0.88%
1995-3 0.42% 0.09% -0.21% -1.42% -0.08% -1.21%
1999-3 0.13% -0.46% 0.82% -0.39% -0.64% -0.55%
2003-3 1.25% -0.30% -0.32% 0.79% -0.25% 1.17%
2007-3 -0.18% -0.13% 0.86% -0.09% 0.66% 1.12%
Avg 0.38% -0.43% 0.07% -0.03% -0.05% -0.07%
 
SPX summary for Presidential Year 3 1955-2007
Avg -0.22% 0.00% 0.21% 0.05% -0.29% -0.25%
Win% 43% 57% 64% 50% 36% 36%
 
SPX summary for all years 1953 - 2010
Avg -0.02% 0.07% 0.04% -0.04% -0.12% -0.07%
Win% 51% 53% 50% 52% 50% 50%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2 has been increasing above trend.


Conclusion

The breadth indicators deteriorated last week and Seasonality for the coming week is negative.

I expect the major averages to be lower on Friday May 20 than they were on Friday May 13.

Last week the blue chips were down a little and the small caps were up a little, so, I am calling last weeks positive 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. If it is not for you, reply with REMOVE in the subject line.

In his latest newsletter, Jerry Minton examines the usefulness of valuations in predicting market returns. Read about it at: http://alphaim.net/

Thank you,

 

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