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Technical Market Report for May 19, 2012

The good news is:
• There should be a good buying opportunity near the end of the month and it should be easy to identify.


The negatives

Many of the breadth indicators are near record low levels. OTC OBV %UP, an indicator I discussed last week, is at the lowest point ever with data going back to 1976.

The chart below covers the past year 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 at a dangerous level and falling.

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 is also nearly falling off the chart.


The positives

The indicators have gotten bad enough that a bottom should be easy to spot and rapidly diminishing new lows are the data to watch.

The chart below covers the past year showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in orange. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).

The value of OTC NL is 97 so it will take less than 97 new lows to turn the indicator upward. This, when it happens, should NOT be subtle.

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

The value of NY NL is 80 so it will require less than 80 NYSE new lows to turn NY NL upward.


Seasonality

Next week includes the 5 trading days prior to the 4th Friday of May during the 4th year of the Presidential Cycle. It is also the 5 trading days prior to Memorial Day, but, Memorial Day has only been defined as the last Monday in May since 1972 so marking the period from the 4th Friday gives us deeper data.

The tables below show the return on a percentage basis for the 5 trading days prior to the 4th 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 negative by all measures. May is seasonally weak and that period of weakness ends next Friday.

Report for the week before the 4th Friday of May.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through the 4th Friday.

OTC Presidential Year 4
Year Mon Tue Wed Thur Fri Totals
1964-4 0.05% -0.82% -0.08% 0.49% 0.28% -0.07%
1968-4 -0.38% -0.22% 0.66% 0.56% 0.67% 1.29%
 
1972-4 0.17% 0.26% 0.57% 0.25% 0.11% 1.35%
1976-4 -1.39% -0.39% 0.33% -0.36% 0.30% -1.51%
1980-4 0.00% -0.21% -0.12% 0.82% 1.03% 1.52%
1984-4 -0.60% -0.97% -0.51% -1.75% -0.07% -3.89%
1988-4 -0.76% 0.52% 0.16% 0.43% -0.17% 0.18%
Avg -0.64% -0.16% 0.08% -0.12% 0.24% -0.47%
 
1992-4 0.37% 0.26% 0.39% -0.21% 0.21% 1.02%
1996-4 0.50% -0.30% 0.24% 0.10% -0.07% 0.48%
2000-4 -0.77% -5.93% 3.35% -1.99% -0.01% -5.36%
2004-4 0.57% 2.17% 0.59% 0.42% 0.11% 3.86%
2008-4 -0.50% -0.95% -1.77% 0.67% -0.81% -3.36%
Avg 0.03% -0.95% 0.56% -0.20% -0.11% -0.67%
 
OTC summary for Presidential Year 4 1964 - 2008
Avg -0.25% -0.55% 0.32% -0.05% 0.13% -0.38%
Win% 45% 33% 67% 67% 58% 58%
 
OTC summary for all years 1963 - 2011
Avg -0.16% -0.21% 0.02% 0.16% 0.12% -0.06%
Win% 44% 41% 55% 59% 63% 55%
 
SPX Presidential Year 4
Year Mon Tue Wed Thur Fri Totals
1956-4 -0.86% -1.59% -0.53% -0.93% 0.04% -3.87%
1960-4 -0.13% -0.11% -0.05% 0.07% 0.05% -0.16%
1964-4 -0.47% -0.52% 0.45% 0.05% 0.04% -0.45%
1968-4 -0.46% 0.50% 0.26% -0.22% 0.19% 0.26%
 
1972-4 0.65% 0.08% 0.48% 0.14% 0.18% 1.53%
1976-4 -1.80% 0.05% -0.15% 0.04% 0.80% -1.05%
1980-4 0.30% -0.05% 0.09% 1.20% 1.48% 3.02%
1984-4 -0.67% -0.55% -0.47% -1.25% 0.26% -2.69%
1988-4 -0.87% 1.07% 0.10% 0.34% -0.48% 0.17%
Avg -0.48% 0.12% 0.01% 0.09% 0.45% 0.20%
 
1992-4 0.66% 0.86% -0.24% -0.67% 0.34% 0.96%
1996-4 0.63% -0.06% 0.84% -0.36% 0.37% 1.43%
2000-4 -0.45% -1.91% 1.83% -1.26% -0.25% -2.04%
2004-4 0.17% 1.61% 0.17% 0.57% -0.05% 2.46%
2008-4 0.09% -0.93% -1.61% 0.26% -1.32% -3.50%
Avg 0.22% -0.08% 0.20% -0.29% -0.18% -0.14%
 
SPX summary for Presidential Year 4 1956 - 2008
Avg -0.23% -0.11% 0.08% -0.14% 0.12% -0.28%
Win% 43% 43% 57% 57% 71% 50%
 
SPX summary for all years 1953 - 2011
Avg -0.14% -0.14% -0.12% 0.06% 0.08% -0.25%
Win% 44% 44% 48% 53% 63% 54%


Money supply (M2)

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

M2


Conclusion

Seasonally May is week and this May has been one of the weakest. The seasonally weak period ends this Friday.

I expect the major averages to be lower on Friday May 25 than they were on Friday May 18.

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 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 /L8 /T 6

 

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