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Technical Market Report

The good news is:
• Historically January in the first year of the presidential cycle hasbeen the strongest month of the year.
• There is little technical evidence that the current rally is deteriorating.

The secondaries lead the market both up and down.
The chart below shows the Russell 2000 (R2K) in red, the S&P 500 (SPX) in green and a FastTrack relative strength indicator called Accutrack as a histogram in yellow.
The R2K has been outperforming the SPX since the mid August lows.

The small caps usually hit a soft patch around the 2nd week of December that lasts for about a week. There was little evidence of that in the averages last year (2004). There was evidence of that pattern in volume. The chart below shows the NASDAQ composite (OTC) in red, an oscillator of upside - downside NASDAQ volume in dark green and a summation index (SI) of the oscillator in light green. The SI is a running total of the oscillator so when the oscillator is above 0 the SI rises and when the oscillator is below 0 the SI falls. The oscillator fell from early to mid-December and began rising late mid-December. This indicator is the only one that traced out an idealized seasonal pattern, everything else, including prices went steadily upward throughout December.

The next three charts show variations of an average January. Since the elimination of Saturday trading January has had between 19 and 22 trading days. For the charts below I standardized on a 21 day month made up of the first 11 and the last 10 trading days of the month. The charts each have two lines, one representing the average of all Januarys and the other only those Januarys in the first year of the presidential cycle.

The first chart shows the average all Januarys for the NASDAQ composite from 1963 to the present in yellow and the average of Januarys in the first year of the presidential cycle in green. On average the first year of the presidential cycle gets off to a slow start but finishes close to the average.

All Januarys since 1963 - Average 3.7% - win% 68%
The average annual gain of the NASDAQ composite over its entire history has been 14.2% and it has been up 70% of those years. The 3.7% average gain in January represents 26% of the average annual gain.

Presidential Year 1
  Jan
1965-1 7.5%  
1969-1 -2.3%  
1973-1 -4.1%  
1977-1 -2.2%  
1981-1 -2.8%  
Avg -0.78%  (5 period average)
1985-1 13.3%  
1989-1 5.7%  
1993-1 3.7%  
1997-1 7.7%  
2001-1 21.0%  
Avg 10.29%  (5 period average)
Averages   4.8%  (All 10 period average)
Win% 60%  

The average annual gain in the NASDAQ composite for the first year of the presidential cycle has been 6.8% and it has been up 60% of those years. The 4.8% average gain in January represents 70% of the average annual gain in the first year of the presidential cycle. The data appear to be split in half, 4 out of 5 of the first years in the data base were down while all of the last 5 years were up.

The next chart is similar to the last one, but the data is limited to 1988 and later. The average of all years is in red and the first year of the presidential cycle is in orange. Recent Januarys in the first year of the presidential cycle have been much stronger than average.

The next chart is similar to the previous one except the average used is the R2K. The pattern is very similar to the NASDAQ composite.

The last chart shows an average of all Januarys for the SPX since 1929 in cyan (sorry about the bad choice of color) and only Januarys in the first year of the presidential cycle in green.

SPX from 1/4/1928 to 12/31/2004 Januarys - Average 1.5% - Win% 64%
The average annual gain of the SPX since 1/4/1928 has been 7.7% and it has been up 65% of those years. The 1.5% average gain in January represents 19% of the average annual gain.

Presidential year 1
  Jan
1929-1 3.7%  
1933-1 1.6%  
1937-1 4.8%  
1941-1 -3.9%  
1945-1 1.1%  
     
1949-1 1.8%  
1953-1 -0.6%  
1957-1 -3.2%  
1961-1 7.3%  
Avg 1.27%  (5 period average)
1965-1 4.0%  
1969-1 -0.9%  
1973-1 -2.6%  
1977-1 -4.6%  
1981-1 -5.0%  
Avg -1.83%  (5 period average)
1985-1 8.6%  
1989-1 8.0%  
1993-1 0.8%  
1997-1 6.7%  
2001-1 6.4%  
Avg 6.11%  (5 period average)
Average   1.8%  (entire database average)
Win% 63%  

The average annual gain in the first year of the presidential cycle has been 3.1% and it has been up 47% of those years. The 1.8% average gain in January represents 50% of the average annual gain in the first year of the presidential cycle.

Odds are January should be pretty good. Getting down to next week the picture is not quite as attractive. The first 5 days of January have been pretty good except for the first year of the presidential cycle when the NASDAQ composite has been up 50% of the time but averaged a small loss.

OTC for the first 5 days of January.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.

NASDAQ composite all Januarys 1964 - 2004
  Day1 Day2 Day3 Day4 Day5 Totals
Averages 0.21% 0.51% 0.39% 0.02% 0.15% 1.28%
% Winners 58% 73% 66% 66% 59% 68%
MDD 1/6/2000 6.39% -- 1/9/1978 4.62% -- 1/8/2001 4.38%
 
Presidential year 1
  Day1 Day2 Day3 Day4 Day5 Totals
1965-1 0.52% 1 -0.14% 2 0.25% 3 0.57% 4 0.81% 5 2.01%
1969-1 0.09% 4 0.25% 5 0.21% 1 -1.10% 2 -0.93% 3 -1.48%
1973-1 0.00% 2 0.67% 3 0.56% 4 0.04% 5 0.35% 1 1.62%
1977-1 -0.19% 1 -0.48% 2 -0.34% 3 0.41% 4 0.25% 5 -0.36%
1981-1 0.77% 5 0.30% 1 -0.05% 2 -3.29% 3 -0.74% 4 -3.01%
Avg (5 period) 0.24% 0.12% 0.13% -0.67% -0.05% -0.24%
1985-1 -0.58% 3 0.20% 4 -0.09% 5 -0.06% 1 -0.02% 2 -0.55%
1989-1 -0.48% 2 0.84% 3 0.27% 4 0.25% 5 0.14% 1 1.02%
1993-1 -0.76% 1 0.38% 2 1.11% 3 -0.53% 4 -0.15% 5 0.05%
1997-1 -0.80% 4 2.34% 5 0.43% 1 0.86% 2 -0.55% 3 2.29%
2001-1 -2.00% 2 2.00% 3 -1.91% 4 -2.00% 5 -0.49% 1 -4.40%
Avg (5 period) -0.92% 1.15% -0.04% -0.30% -0.21% -0.32%
Averages -0.34% 0.64% 0.04% -0.49% -0.13% -0.28%
%Winners 30% 80% 60% 50% 40% 50%
MDD 1/8/2001 4.38% -- 1/8/1981 4.06% -- 1/8/1969 2.02%

The last 3 days of December were down for the R2K and several of the other indices. There have been only 3 other occurrences of three consecutive down days since the rally began in mid-August. Five consecutive down days in early December is the most we have seen since this rally began. Those three other occurrences of three or more consecutive down days have all represented short term lows.

I expect the major indices to be higher on Friday January 7 than they were on Friday December 31.

The DJIA was down slightly last week while the rest of the major indices were up slightly so I am calling last weeks optimistic forecast a tie.

My forecasting record for last year was slightly better than a coin toss with 25 correct, 20 incorrect and 7 ties. The summary for the year is the last line in every report. I will be restarting the counter next week.

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