The good news is:
• The market is over sold and at or near a short term low.
The negatives
New highs hit their lowest level since mid March.
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.
OTC NH has been trending downward all year and hit its low for the year last Friday.
New lows have been increasing and hit critical levels last week.
The chart below covers the past 6 months showing 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).
OTC NL hit its low for the year Friday.
The positives
Most of the major indices closed at a multi week low on Friday while some of the breadth indicators failed to confirm that low and others reached extremes from which rallies begin.
Advance - Decline lines (ADL) are running totals of declining issues subtracted from advancing issues. Their properties vary and change.
The chart below covers the past 6 months showing the OTC in blue and an ADL constructed from NASDAQ issues (OTC ADL) in green.
OTC ADL usually has a negative bias. You can see on the chart that it hit its high for the year in mid February and failed to confirm the late April index high. On Friday OTC ADL hit a higher short term low while the index hit a lower short term low. This is a positive non confirmation.
The next chart covers the past 6 months showing the S&P 500 (SPX) in red and a 5% trend (39 day EMA) of NYSE upside volume (NY UV) in green.
NY UV hit a decade low a week and a half ago then, like OTC ADL, failed to confirm the multi week low in the index last Friday.
The next chart is a example of how things have gotten so bad, they are good.
The chart covers the past year showing the SPX in red and the percentage of the component issues of the SPX that are above their 21 day EMA in olive drab.
Over the past year, when the indicator has reached its current level, a rally followed.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of June 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 June during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and SPX data covers the period 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 have been flat by all measures.
Report for the week before the 2nd Friday of June.
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 | -0.21% | -0.30% | 0.21% | 0.39% | -0.18% | -0.09% |
| 1967-3 | -1.39% | -1.02% | 1.26% | 0.94% | 0.83% | 0.61% |
| 1971-3 | 0.09% | -0.67% | -0.21% | 0.25% | 0.13% | -0.41% |
| 1975-3 | -0.90% | -0.73% | 0.24% | -0.73% | 0.53% | -1.58% |
| 1979-3 | 0.14% | 0.81% | 0.45% | 0.70% | 0.30% | 2.41% |
| 1983-3 | 0.52% | -0.42% | -0.53% | 0.08% | 0.80% | 0.45% |
| 1987-3 | 0.38% | 0.54% | 0.27% | 0.13% | 0.47% | 1.80% |
| Avg | 0.05% | -0.09% | 0.04% | 0.08% | 0.45% | 0.53% |
| 1991-3 | -0.54% | 0.16% | -1.12% | 0.02% | 0.80% | -0.69% |
| 1995-3 | 1.13% | -0.39% | 0.25% | 0.52% | -0.20% | 1.31% |
| 1999-3 | 2.44% | -1.97% | 1.81% | -1.38% | -1.48% | -0.57% |
| 2003-3 | -1.44% | 1.48% | 1.13% | 0.46% | -1.64% | -0.01% |
| 2007-3 | 0.17% | -0.27% | -0.92% | -1.77% | 1.27% | -1.53% |
| Avg | 0.35% | -0.20% | 0.23% | -0.43% | -0.25% | -0.30% |
| OTC summary for Presidential Year 3 1963 - 2007 | ||||||
| Avg | 0.03% | -0.23% | 0.24% | -0.03% | 0.14% | 0.14% |
| Win% | 58% | 33% | 67% | 75% | 67% | 42% |
| OTC summary for all years 1963 - 2010 | ||||||
| Avg | -0.22% | -0.19% | 0.00% | 0.06% | 0.13% | -0.23% |
| Win% | 48% | 29% | 53% | 66% | 63% | 40% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | 0.83% | 0.70% | 0.67% | -0.54% | 0.62% | 2.28% |
| 1959-3 | -1.30% | -0.70% | 1.47% | 0.10% | 0.07% | -0.36% |
| 1963-3 | -0.67% | 0.13% | 0.54% | -0.26% | 0.03% | -0.22% |
| 1967-3 | -1.51% | 2.04% | 0.75% | 0.54% | 0.18% | 1.99% |
| 1971-3 | -0.16% | -0.81% | -0.03% | 0.35% | 0.43% | -0.22% |
| 1975-3 | -1.37% | -0.84% | 0.12% | -0.52% | 0.49% | -2.13% |
| 1979-3 | 0.15% | 1.31% | 0.68% | 0.48% | -0.29% | 2.32% |
| 1983-3 | 0.25% | -1.25% | -0.87% | 0.29% | 0.53% | -1.05% |
| 1987-3 | 1.11% | 0.19% | 0.06% | 0.42% | 0.97% | 2.76% |
| Avg | 0.00% | -0.28% | -0.01% | 0.21% | 0.42% | 0.34% |
| 1991-3 | -0.23% | 0.66% | -1.15% | 0.26% | 1.23% | 0.77% |
| 1995-3 | 0.58% | -0.01% | -0.45% | -0.15% | -0.83% | -0.86% |
| 1999-3 | 0.50% | -1.28% | 0.10% | -1.21% | -0.70% | -2.58% |
| 2003-3 | -1.20% | 0.91% | 1.28% | 0.10% | -0.99% | 0.11% |
| 2007-3 | 0.18% | -0.53% | -0.89% | -1.76% | 1.14% | -1.86% |
| Avg | -0.03% | -0.05% | -0.22% | -0.55% | -0.03% | -0.88% |
| SPX summary for Presidential Year 3 1955 - 2007 | ||||||
| Avg | -0.20% | 0.04% | 0.16% | -0.13% | 0.20% | 0.07% |
| Win% | 50% | 50% | 64% | 57% | 71% | 43% |
| SPX summary for all years 1953 - 2010 | ||||||
| Avg | -0.22% | -0.06% | 0.01% | 0.07% | 0.19% | -0.02% |
| Win% | 45% | 43% | 47% | 59% | 62% | 47% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth is flattening.
Conclusion
The market is oversold reaching levels that usually mark the beginning of rallies and some breadth indicators failed to confirm Friday's low.
I expect the major averages to be higher on Friday June 10 than they were on Friday June 3.
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 recent DALBAR report on investor behavior and offers his own cure for foot-shooting investors. Read about it at: http://alphaim.net/
Thank you,
