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Technical Market Report for November 26, 2011

The good news is:
• The market is extremely oversold early in a seasonally strong period.


The negatives

We got some serious numbers of new lows last week, the worst for a Thanksgiving week since 1973.

Technical indicators have not been of much value recently. The equity market has been almost perfectly inversely correlated with the dollar index.

The chart below covers the past year showing the S&P 500 (SPX) in green, the Dollar index (DXY-Z) in red and a moving 20 day correlation of the 2 indices in black. The correlation looks back over a 20 trading day period at the percentage of those 20 days both indices were up or down. Dashed vertical lines have been drawn on the 1st trading day of each month and dashed horizontal lines have been drawn at 25% levels of the indicator. Values below the 50% level represent inverse correlation.

Data for the following charts came from FastTrack.Net.

The current value of the indicator is 20% which means the SPX and DXY-Z have moved in the same direction in only 4 of the past 20 trading days.

The next chart is similar to the one above except it covers the past 10 years. The extreme levels of inverse correlation are relatively recent phenomena.

The next chart is similar to those above except it covers the period from 1998 through 2001.

Before the currency race to the bottom, a strong dollar attracted money from all over and pushed all of our financial assets up.


The positives

The only positive I can come up with is the recent sell off was on very low volume.

The chart below covers the past 6 months showing the OTC in blue and a 5% trend (39 day EMA) of NASDAQ downside volume (OTC DV) in black.

Recently OTC DV has not been keeping up with the OTC to the downside as it has in past months.

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

The pattern is similar to the chart above.


Seasonality

Next week includes the last 3 trading days in November and the 1st 2 trading days of December during the 3rd year of the Presidential Cycle.

The tables below show the return on a percentage basis for the last 3 trading days in November and the 1st 2 trading days of December during the 3rd year of the Presidential Cycle.

OTC data covers the period from 1963 - 2010 and SPX data covers the period from 1928 - 2010. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.

Average returns for the coming week have been positive by all measures and a little stronger during the 3rd year of the Presidential Cycle than other years.

Report for the last 3 days of November and first 2 days of December.
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.

OTC Presidential Year 3
  Day3 Day2 Day1 Day1 Day2 Totals
1963-3 -1.48% 2 0.97% 3 0.09% 5 0.70% 1 0.64% 2 0.92%
1967-3 0.22% 2 0.95% 3 1.00% 4 0.74% 5 0.87% 1 3.78%
 
1971-3 1.24% 5 1.42% 1 0.86% 2 1.81% 3 0.28% 4 5.61%
1975-3 0.33% 2 0.49% 3 0.31% 5 -0.18% 1 -1.27% 2 -0.32%
1979-3 0.69% 3 0.44% 4 0.07% 5 -0.28% 1 0.65% 2 1.57%
1983-3 -0.36% 1 0.40% 2 0.02% 3 0.14% 4 -0.76% 5 -0.55%
1987-3 0.35% 3 -0.41% 5 -3.57% 1 0.03% 2 -0.01% 3 -3.62%
Avg 0.45% 0.47% -0.46% 0.30% -0.22% 0.54%
 
1991-3 -0.12% 2 0.11% 3 0.21% 5 1.34% 1 0.46% 2 1.99%
1995-3 2.02% 2 0.71% 3 0.15% 4 -0.37% 5 1.37% 1 3.89%
1999-3 0.80% 5 -0.77% 1 -2.49% 2 0.52% 3 2.95% 4 1.02%
2003-3 -0.21% 2 0.53% 3 0.36% 5 1.51% 1 -0.49% 2 1.69%
2007-3 3.18% 3 0.20% 4 -0.27% 5 -0.90% 1 -0.66% 2 1.56%
Avg 1.13% 0.16% -0.41% 0.42% 0.73% 2 .03%
 
OTC summary for Presidential Year 3 1963 - 2007
Averages 0.55% 0.42% -0.27% 0.42% 0.34% 1 .46%
% Winners 67% 83% 75% 67% 58% 75%
MDD 11/30/1987 3.97% -- 11/30/1999 3.24% -- 12/4/2007 1.81%
 
OTC summary for all years 1963 - 2010
Averages 0.05% 0.38% -0.10% 0.21% 0.21% 0.75%
% Winners 65% 69% 65% 65% 65% 73%
MDD 11/30/2000 9.81% -- 12/1/2008 8.95% -- 11/30/1987 3.97%
 
SPX Presidential Year 3
  Day3 Day2 Day1 Day1 Day2 Totals
1931-3 -2.31% 5 -1.50% 6 3.60% 1 -1.26% 2 -3.52% 3 -4.99%
1935-3 0.77% 3 -1.15% 5 0.08% 6 -1.54% 1 2.75% 2 0.90%
1939-3 -0.40% 2 -1.12% 3 -1.05% 4 0.74% 5 0.08% 6 -1.76%
1943-3 -0.27% 6 -1.17% 1 0.27% 2 1.00% 3 0.81% 4 0.64%
1947-3 -0.46% 3 -0.99% 5 0.07% 6 0.53% 1 0.13% 2 -0.72%
Avg -0.53% -1.19% 0.59% -0.11% 0.05% -1.19%
 
1951-3 -0.22% 3 0.27% 4 0.93% 5 0.26% 6 0.31% 1 1.54%
1955-3 -0.66% 1 0.40% 2 -0.11% 3 -0.35% 4 0.20% 5 -0.52%
1959-3 0.16% 3 0.45% 5 1.01% 1 0.72% 2 -0.17% 3 2.17%
1963-3 3.98% 2 -0.18% 3 1.36% 5 0.59% 1 -0.05% 2 5.69%
1967-3 0.32% 2 0.00% 3 -0.50% 4 0.53% 5 0.63% 1 0.99%
Avg 0.72% 0.19% 0.54% 0.35% 0.18% 1 .97%
 
1971-3 1.78% 5 1.60% 1 0.62% 2 1.65% 3 0.31% 4 5.97%
1975-3 1.13% 2 0.25% 3 0.33% 5 -0.62% 1 -1.48% 2 -0.39%
1979-3 0.37% 3 0.04% 4 -0.61% 5 -0.31% 1 0.91% 2 0.39%
1983-3 -0.38% 1 0.82% 2 -0.90% 3 0.05% 4 -0.63% 5 -1.04%
1987-3 -0.93% 3 -1.54% 5 -4.18% 1 0.74% 2 0.62% 3 -5.28%
Avg 0.39% 0.23% -0.95% 0.30% -0.05% -0.07%
 
1991-3 0.70% 2 -0.37% 3 -0.35% 5 1.65% 1 -0.12% 2 1.50%
1995-3 0.85% 2 0.20% 3 -0.37% 4 0.27% 5 1.10% 1 2.05%
1999-3 -0.04% 5 -0.61% 1 -1.34% 2 0.62% 3 0.82% 4 -0.55%
2003-3 0.17% 2 0.43% 3 -0.02% 5 1.13% 1 -0.33% 2 1.38%
2007-3 2.86% 3 0.05% 4 0.78% 5 -0.59% 1 -0.65% 2 2.44%
Avg 0.91% -0.06% -0.26% 0.61% 0.16% 1 .36%
 
SPX summary for Presidential Year 3 1931 - 2007
Averages 0.37% -0.21% -0.02% 0.29% 0.09% 0.52%
% Winners 55% 50% 50% 70% 60% 60%
MDD 11/30/1987 6.53% -- 12/2/1931 5.04% -- 12/2/1935 2.60%
 
SPX summary for all years 1928 - 2010
Averages -0.01% 0.03% 0.15% -0.01% 0.15% 0.31%
% Winners 51% 53% 56% 52% 58% 60%
MDD 12/1/2008 8.93% -- 11/30/1987 6.53% -- 12/2/1931 5.04%


Money supply (M2)

The money supply chart was provided by Gordon Harms. M2 growth was flat last week.


December

Since 1963, over all years, the OTC in December has been up 65% of the time with an average gain of 1.9%. During the 3rd year of the Presidential Cycle December has been up 75% time with an average gain of 4.6%. The best December for the OTC was 1999 (+21.3%), the worst 2002 (-10.1%).

The average month has 21 trading days. The chart below has been calculated by averaging the daily percentage change of the OTC for each of the 1st 11 trading days and each of the last 10. In months when there were more than 21 trading days some of the days in the middle were not counted. In months when there were less than 21 trading days some of the days in the middle of the month were counted twice. Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that. The line is solid on the 11th trading day, the dividing point.

In the chart below the blue line shows the average of the OTC in December over all years since 1963 while the black line shows the average during the 3rd year of the Presidential Cycle over the same period.

Since 1928 the SPX has been up 75% of the time in December with an average gain of 1.5%. During the 3rd year of the Presidential Cycle the SPX has been up 80% of the time with an average gain of 2.2%. The best December for the SPX was 2008 (+10.7%) the worst 1931 (-13.4%).

The chart below is similar to the one above except it shows the daily average performance over all years for the SPX in December in red and the performance during the 3rd year of the Presidential Cycle in black.

Since 1979 the Russell 2000 (R2K) has been up 75% of the time in December with an average gain of 3.0%. During the 3rd year of the Presidential Cycle the R2K has been up 88% of the time with an average gain of 4.4%. The only down year during the 3rd year of the Presidential Cycle for the R2K was 1983, down 2.1%. The best December for the R2K 2008 (+19.8%) following a November that was down 12.1%, the worst 1983 (-2.1%).

The chart below is similar to those above except it shows the daily performance over all years of the R2K in December in green and the performance during the 3rd year of the Presidential Cycle in black.

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 70% of the time in December with an average gain of 1.2%. During the 3rd year of the Presidential Cycle the DJIA has been up 77% of the time in December with an average gain of 1.3%. The best December for the DJIA 1903 (+10.7%), the worst 1931 (-14.6%).

The chart below is similar to those above except it shows the daily performance over all years of the DJIA in December in Magenta and the performance during the 3rd year of the Presidential Cycle in black.


Conclusion

Most of the major indices have been down for 7 consecutive days making the market extremely oversold and we are in one of the seasonally strongest periods of the year.

I expect the major averages to be higher on Friday December 2 than they were on Friday November 25.

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, titled "Foot-Shooting", Jerry Minton takes a look the performance persistence of mutual funds. To read about it and to sign up for his free newsletter, go to www.alphaim.net.

Thank you,

 

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