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Technical Market Report

The good news is:
• Seasonally, next week is very strong.

Last week was weak overall except for the techs. All of the major indices were down substantially except the NASDAQ composite (OTC). Prior to the early 1990's the OTC was considered a small cap index. Companies such as MSFT, DELL, INTC & CSCO would move to the NYSE as soon as they were large enough, that changed in the early 1990's.

The OTC is a capitalization weighted index and action last week illustrates the effect of those large companies on the index. Most of the issues in the Russell 2000 (R2K) are traded on the NASDAQ and the NDX is an index made up of the largest 100 non financial companies traded on the NASDAQ. Last week the R2K was down 2.43%, the NDX was up 1% and the OTC was up 0.48%. The S&P 500 which includes all of the largest issues in the NDX was down 1.48%.

Summation indices (SI) are running totals of oscillator values. When the oscillator is positive the SI rises when the oscillator is negative, the SI falls. The chart below shows NASDAQ SI's calculated from advancing issues - declining issues, new highs - new lows and upside volume - downside volume. When all of the SI's are headed in the same direction it is imprudent to bet against them. The NASDAQ SI's are still all headed upward.

The chart below is similar to the one above except the index is the SPX and the SI's are calculated from NYSE data. All of the NYSE SI's appear to be flattening or turning downward.

The next two charts are similar to the ones above, except the SI calculations are limited to the index components and new highs and new lows for the calculations have been calculated over the preceding 6 weeks rather than 52 weeks as reported by the exchanges.

The first chart shows the R2K and SI's calculated from its components. The SI's appear to be flattening a little, but are still headed upward.

The next chart shows the NDX and SI's calculated from its components. All of them are heading sharply upward.

Options began trading in significant volume in the mid 1980's. Option trading was blamed for increased volatility around their expiration on the 3rd Friday of the month and measures were taken to attenuate that volatility so the effect of option trading on the market is less than it was.

Defining next week as the week ending on the 3rd Friday of the 1st Presidential year there has been a pattern of strength. The OTC has been up 80% of the time since 1965 and the SPX has been up 68% of the time since 1929. The worst year 1973, the OTC was down 5.8%, enough to pull the overall average down nearly 0.5% and, unfortunately, there are similarities between this year and 1973. In the 1st year of the presidential cycle, 2005 and 1973 are the only two years that each of the 1st four months of the year were down.

The tables below include data on the week prior to the 3rd Friday of May for the R2K (all years), the OTC for the 1st year in the presidential cycle from 1965 with a summary for all years from 1963 and summaries for the SPX in the 1st year of the presidential cycle from 1929 and all years from 1928.

Witching Summary for R2K
Report for the week prior to witching Friday during May
Witching is options expiration the 3rd Friday of the month.
The number following the year is the position in the presidential cycle.

Year Mon Tue Wed Thur *Fri* Totals
1988-4 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
1989-1 0.12% -0.04% 0.60% 0.43% 0.38% 1.50%
1990-2 0.44% -0.11% 0.12% 0.65% 0.32% 1.42%
1991-3 0.05% -1.02% -1.80% 0.73% -0.06% -2.10%
1992-4 0.38% -0.23% -0.07% -0.75% -0.33% -1.00%
1993-1 -0.03% 0.22% 0.61% 0.43% -0.16% 1.07%
1994-2 -0.59% -0.09% 1.16% 0.75% -0.15% 1.10%
1995-3 0.40% 0.46% 0.23% -0.67% -0.15% 0.26%
1996-4 0.96% 0.83% 0.18% 0.18% 0.52% 2.68%
1997-1 0.65% -0.05% 0.25% 0.39% -0.17% 1.07%
1998-2 -0.54% -0.16% 0.28% -0.40% -0.65% -1.48%
1999-3 -0.40% 0.25% 0.83% 0.42% 0.25% 1.35%
2000-4 1.40% 1.64% -1.25% -1.74% -2.29% -2.24%
2001-1 -0.15% 0.61% 1.55% 1.52% 0.30% 3.83%
2002-2 1.42% 2.40% 0.36% -1.20% 0.30% 3.28%
2003-3 1.13% 0.25% 0.05% 0.62% -1.74% 0.30%
2004-4 -1.55% 1.35% -0.31% -0.02% 0.94% 0.40%
2005-1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
 
Avg 0.23% 0.39% 0.17% 0.08% -0.17% 0.72%
Win% 63% 56% 75% 63% 44% 75%
 
R2K presidential year 1
Year Mon Tue Wed Thur *Fri* Totals
1989-1 0.12% -0.04% 0.60% 0.43% 0.38% 1.50%
1993-1 -0.03% 0.22% 0.61% 0.43% -0.16% 1.07%
1997-1 0.65% -0.05% 0.25% 0.39% -0.17% 1.07%
2001-1 -0.15% 0.61% 1.55% 1.52% 0.30% 3.83%
2005-1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
 
Avg 0.15% 0.19% 0.75% 0.69% 0.09% 1.87%
Win% 50% 50% 100% 100% 50% 100%
 
OTC presidential year 1
Year Mon Tue Wed Thur Fri Totals
1965-1 -0.06% -0.35% -0.21% -0.23% -0.45% -1.31%
1969-1 0.18% -0.67% 0.36% 0.78% 0.36% 1.01%
1973-1 -2.42% -0.30% -0.04% -0.86% -2.19% -5.80%
1977-1 0.39% 0.11% 0.58% -0.11% -0.37% 0.61%
1981-1 -0.95% 0.16% 0.31% 0.65% 0.62% 0.78%
1985-1 0.24% -0.15% 0.21% 0.49% 0.67% 1.47%
 
Avg -0.51% -0.17% 0.29% 0.19% -0.18% -0.39%
 
1989-1 0.32% -0.13% 0.66% 0.29% 0.51% 1.65%
1993-1 0.24% 0.42% 1.42% 1.01% -0.45% 2.63%
1997-1 0.68% -0.79% 0.15% 1.35% -0.95% 0.44%
2001-1 -1.21% 0.18% 3.87% 1.26% 0.24% 4.34%
2005-1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
 
Avg 0.01% -0.08% 1.52% 0.98% -0.16% 2.27%
 
Avg -0.26% -0.15% 0.73% 0.46% -0.20% 0.58%
Win% 60% 40% 80% 70% 50% 80%
 
OTC summary for all years 1963 - 2004
Avg -0.05% 0.09% 0.10% 0.04% -0.29% -0.11%
Win% 48% 48% 60% 52% 39% 50%
 
SPX summary for all years 1928 - 2004
Avg -0.13% 0.04% 0.01% 0.07% -0.17% -0.18%
Win% 46% 55% 47% 56% 49% 47%
 
SPX summary for presidential year 1 1929 - 2004
Avg -0.30% 0.28% 0.39% 0.11% -0.06% 0.40%
Win% 47% 56% 63% 58% 58% 68%

The expected modest seasonal weakness last week turned into a rout. During the 1st year of the presidential cycle, Monday, Tuesday and Friday of next week have had mediocre returns while Wednesday and Thursday have had exceptional returns bringing the odds of the week being up to 80%.

I expect the major indices to be higher on Friday May 20 than they were on Friday May 13.

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