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Technical Market Report for May 12, 2012

The good news is:
• There should be a good buying opportunity near the end of the month.


The negatives

New lows held above threatening levels most of last week.

The chart below covers the past 6 months showing the NASDAQ composite (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% levels of the indicator; the line is solid at the neutral 50% level.

OTC HL Ratio is below the neutral level.

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

NY HL Ratio usually has a little more positive bias than OTC HL Ratio and that shows here, but it is not strong enough to inspire confidence.


The positives

The market is oversold and the positives come in the form of "it is so bad it has to get better".

The chart below is a little arcane. It covers the past year showing the OTC in blue and an indicator OTC OBV %UP which is derived from OTC OBV, a running total of daily declining volume subtracted from advancing volume, in olive drab. OTC OBV %UP is the percentage of the last 7 trading days that OTC OBV has been up. OTC OBV %UP touches the top of the chart when OTC OBV has been up for 7 consecutive days and it touches the bottom of the chart when OTC OBV has been down for 7 consecutive days.

As of Friday's close, OTC OBV %UP touched the bottom of the chart for the 5th time in the past 4 years. A brief, sharp rally followed 3 of the 4 previous occurrences. The one failure was early last August and is the 1st occurrence shown on the chart below.

The next chart covers the past 6 months showing the OTC in blue and momentum of the NASDAQ AD line (OTC ADL MoM) in black. AD lines are running totals of declining issues subtracted from advancing issues.

OTC ADL MoM is about as low as it has been any time in the past 6 months.


Seasonality

Next week includes the 5 trading days prior to the 3rd Friday of May during the 4th 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 4th year of the Presidential Cycle.

OTC data covers the period from 1963 - 2011 and SPX data covers the period from 1953 - 2011. There are summaries for both the 4th 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 for the coming week have been slightly negative over all years and slightly positive during the 4th year of the Presidential Cycle and more often down than up over all periods.

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 4
Year Mon Tue Wed Thur Fri Totals
1964-4 0.13% -0.28% 0.25% -0.40% -0.38% -0.68%
1968-4 0.67% -0.38% -0.53% -0.07% -0.30% -0.62%
 
1972-4 0.70% 0.02% -0.46% 0.82% 1.02% 2.09%
1976-4 -0.32% 0.04% -0.31% 0.31% -0.16% -0.43%
1980-4 -0.07% 0.80% 1.08% 0.66% 0.42% 2.89%
1984-4 -0.68% 0.05% -0.13% -1.03% -0.61% -2.40%
1988-4 0.23% -0.29% -1.42% -0.20% -0.06% -1.74%
Avg -0.03% 0.12% -0.25% 0.11% 0.12% 0.08%
 
1992-4 0.23% -0.54% -0.27% -1.02% -0.35% -1.95%
1996-4 1.59% 1.03% -0.07% 0.46% 0.21% 3.22%
2000-4 2.23% 3.05% -1.95% -2.92% -4.19% -3.79%
2004-4 -1.45% 1.13% 0.02% -0.08% 0.82% 0.43%
2008-4 1.76% 0.27% 0.06% 1.48% -0.19% 3.38%
Avg 0.87% 0.99% -0.44% -0.41% -0.74% 0.26%
 
OTC summary for Presidential Year 4 1964 - 2008
Avg 0.42% 0.41% -0.31% -0.17% -0.31% 0.03%
Win% 67% 67% 33% 42% 33% 42%
 
OTC summary for all years 1963 - 2011
Avg -0.04% 0.02% 0.05% 0.01% -0.22% -0.19%
Win% 47% 47% 59% 53% 42% 47%
 
SPX Presidential Year 4
Year Mon Tue Wed Thur Fri Totals
1956-4 -0.55% -1.05% -0.69% 1.22% -0.47% -1.54%
1960-4 -0.09% 0.38% -0.04% 0.43% 0.27% 0.96%
1964-4 -0.12% 0.32% -0.23% -0.14% 0.30% 0.12%
1968-4 -0.31% -0.07% -0.05% -0.48% -0.72% -1.63%
 
1972-4 0.45% -0.19% 0.22% 0.98% 0.96% 2.43%
1976-4 -0.25% 0.17% -0.08% 0.81% -0.73% -0.07%
1980-4 0.06% 1.45% 0.52% 0.13% 0.34% 2.49%
1984-4 -0.62% 0.32% -0.01% -0.90% -0.51% -1.72%
1988-4 0.75% -1.28% -1.58% 0.49% 0.18% -1.45%
Avg 0.08% 0.09% -0.19% 0.30% 0.05% 0.33%
 
1992-4 0.59% -0.53% 0.04% -0.79% -0.74% -1.43%
1996-4 1.44% 0.62% -0.03% -0.09% 0.61% 2.56%
2000-4 2.21% 0.94% -1.24% -0.73% -2.10% -0.93%
2004-4 -1.06% 0.68% -0.26% 0.05% 0.40% -0.19%
2008-4 1.10% -0.04% 0.40% 1.06% 0.13% 2.65%
Avg 0.86% 0.33% -0.22% -0.10% -0.34% 0.53%
 
SPX summary for Presidential Year 4 1956 - 2008
Avg 0.26% 0.12% -0.22% 0.15% -0.15% 0.16%
Win% 50% 57% 29% 57% 57% 43%
 
SPX summary for all years 1953 - 2011
Avg -0.03% 0.07% 0.06% -0.04% -0.13% -0.07%
Win% 50% 53% 51% 53% 49% 49%


Money supply (M2)

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

M2


Conclusion

The market has been closely following the average seasonal pattern for May. That pattern suggests a modest rally early next week followed by a week of declines. The market is oversold so the rally could be strong.

I expect the major averages to be higher on Friday May 18 than they were on Friday May 11.

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 points out the futility of using emerging markets for diversification. You can get his bi-weekly letter for free by subscribing at the home page at www.alphaim.net.

Good Luck,

YTD W 6 /L7 /T 6

 

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