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Technical Market Report

The good news is:
• Seasonally next week is one of the strongest weeks of the year.
New lows resumed their build up last week taking the small cap indices to new lows for the year. The large cap indices did not make new yearly lows last week and ended the week with modest gains. The superior performance of the large cap indices is a negative.

I have been showing the chart below for the past several weeks. It shows the NASDAQ composite (OTC) in red and a 10% trend (19 day EMA) of NASDAQ new lows in blue. The new low indicator (NL) has been plotted on an inverted Y axis so when new lows are decreasing the indicator moves upward and when new lows are increasing the indicator moves downward. The chart begins July 30, 2004 and dashed vertical lines indicate the 1st trading day of each month. When a bottom has been reached new lows diminish rapidly causing the indicator to move sharply upward like it did last August. Very short term the indicator can give false signals so it is prudent to wait for 5 consecutive trading days of upward movement before assuming a bottom is in. For the past week the indicator moved sharply downward.

A similar chart using NYSE data shows NL well below its level of last August. The S&P 500 (SPX) is shown in red and NL calculated from NYSE data is shown in brown.

Defining next week as the first 5 trading days of May, the tables below show the daily performance of the OTC and SPX during the first year of the presidential cycle.

The first 5 trading days in May during the 1st year of the presidential cycle have been up about 90% of the time since 1928. Long term, the strongest 5 day period I can recall.

First 5 days of May.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.
MDD = Maximum Draw Down
Avg = Mean of the previous 5 periods.
Averages = Mean for all periods.

OTC Presidential year 1
  Day1 Day2 Day3 Day4 Day5 Totals
1965-1 0.27% 1 -0.04% 2 0.31% 3 0.04% 4 0.13% 5 0.72%
1969-1 0.26% 4 0.12% 5 0.34% 1 0.19% 2 -0.38% 3 0.53%
1973-1 0.10% 2 1.01% 3 0.70% 4 0.98% 5 -0.37% 1 2.42%
1977-1 0.37% 1 0.40% 2 0.44% 3 0.27% 4 0.01% 5 1.48%
1981-1 -0.03% 5 -1.55% 1 -0.83% 2 0.20% 3 0.79% 4 -1.41%
Avg 0.19% -0.01% 0.19% 0.34% 0.04% 0.75%
 
1985-1 -0.33% 3 -0.22% 4 0.47% 5 -0.16% 1 0.37% 2 0.12%
1989-1 -0.02% 1 0.13% 2 0.19% 3 0.09% 4 0.35% 5 0.74%
1993-1 0.80% 1 1.72% 2 0.75% 3 -0.47% 4 0.21% 5 3.00%
1997-1 0.77% 4 2.74% 5 2.60% 1 -0.81% 2 -0.41% 3 4.89%
2001-1 2.46% 2 2.42% 3 -3.35% 4 2.11% 5 -0.82% 1 2.82%
Avg 0.74% 1.36% 0.13% 0.15% -0.06% 2.31%
 
Averages 0.47% 0.67% 0.16% 0.24% -0.01% 1.53%
% Winners 70% 70% 80% 70% 60% 90%
MDD 5/3/2001 3.35% -- 5/5/1981 2.39% -- 5/7/1997 1.22%
 
OTC summary for all years 1963 - 2004
Averages 0.29% 0.18% 0.10% 0.03% 0.01% 0.60%
% Winners 61% 71% 66% 57% 55% 62%
MDD 5/7/2002 6.78% -- 5/3/2000 6.34% -- 5/6/1966 3.58%
 
SPX presidential year 1
  Day1 Day2 Day3 Day4 Day5 Totals
1929-1 0.19% 3 0.46% 4 1.00% 5 0.42% 6 -0.60% 1 1.46%
1933-1 1.32% 1 0.36% 2 -0.59% 3 2.85% 4 1.04% 5 4.98%
1937-1 0.00% 6 0.24% 1 1.58% 2 -0.84% 3 0.72% 4 1.71%
1941-1 -0.11% 4 0.32% 5 0.21% 6 -0.11% 1 1.71% 2 2.04%
 
1945-1 -0.34% 2 -0.14% 3 0.68% 4 0.34% 5 0.20% 6 0.74%
1949-1 0.27% 1 0.47% 2 1.14% 3 -0.07% 4 -0.60% 5 1.22%
1953-1 0.45% 5 1.09% 1 0.12% 2 -0.12% 3 -0.40% 4 1.14%
1957-1 0.61% 3 0.80% 4 -0.11% 5 -0.15% 1 -0.30% 2 0.85%
1961-1 -0.21% 1 0.72% 2 0.82% 3 0.39% 4 0.12% 5 1.84%
Avg 0.16% 0.59% 0.53% 0.08% -0.20% 1.16%
 
1965-1 0.13% 1 0.31% 2 0.22% 3 0.23% 4 -0.08% 5 0.83%
1969-1 -0.17% 4 0.47% 5 0.36% 1 0.47% 2 -0.18% 3 0.94%
1973-1 0.12% 2 1.24% 3 1.65% 4 0.71% 5 -0.42% 1 3.30%
1977-1 0.50% 1 0.51% 2 0.53% 3 0.15% 4 -0.62% 5 1.07%
1981-1 -0.07% 5 -1.54% 1 -0.27% 2 0.35% 3 0.68% 4 -0.85%
Avg 0.10% 0.20% 0.50% 0.38% -0.12% 1.06%
 
1985-1 -0.81% 3 0.36% 4 0.60% 5 -0.05% 1 0.43% 2 0.52%
1989-1 -0.17% 1 -0.32% 2 0.01% 3 -0.13% 4 -0.05% 5 -0.66%
1993-1 0.52% 1 0.36% 2 0.11% 3 -0.28% 4 -0.21% 5 0.48%
1997-1 -0.35% 4 1.81% 5 2.13% 1 -0.31% 2 -1.47% 3 1.82%
2001-1 1.36% 2 0.08% 3 -1.49% 4 1.44% 5 -0.24% 1 1.15%
Avg 0.11% 0.46% 0.27% 0.14% -0.31% 0.66%
 
Averages 0.17% 0.40% 0.46% 0.28% -0.01% 1.29%
% Winners 53% 84% 79% 53% 37% 89%
MDD 5/5/1981 1.87% -- 5/7/1997 1.77% -- 5/3/2001 1.49%
 
SPX summary for all years 1928 - 2004
Averages 0.07% 0.16% 0.25% -0.01% 0.11% 0.57%
% Winners 53% 71% 68% 44% 47% 66%
MDD 5/3/1930 8.27% -- 5/4/2000 4.01% -- 5/5/1970 3.58%

Typically, measured by the OTC, May is the 4th strongest month in the 1st year of the presidential cycle. Returns in May follow January, October and April.

So far this year has not been typical. As measured by the OTC, the first 4 months of this year have been down. That has happened twice before since 1963. In 1973, also the 1st year of the presidential cycle the OTC was down in each of the 1st 6 months of the year and finished the year down 31.1%. The other occurrence was in 1984 (the 4th year of the presidential cycle) when every month through May was down and the OTC finished down 11.2% for the year.

The chart below shows the average performance for the OTC in May during the 1st year of the presidential cycle in white and all years in yellow. Data covers 1963 - 2004.

Typically, measured by the SPX, May is also the 4th strongest month of the 1st year of the presidential cycle. The order of returns for the SPX are a little different, May follows April, January and July. In February of this year the SPX rose 1.2% so it does not have the impressive negative record of the OTC.

The chart below shows the average performance of the SPX in May during the 1st year of the presidential cycle in white and all years in maroon. Data covers 1928 - 2004.

Prices were mixed last week, the blue chips up and the secondaries down, add increasing new lows and the picture is bleak. Seasonally, however, next week has been one of the strongest in the 1st year of the presidential cycle.

I expect the major indices to be higher on Friday May 6 than they were on Friday April 29.

The major indices were mixed last week so I am calling last weeks positive forecast a tie.

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