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Technical market report for August 5, 2017

The good news is:

  • The Dow Jones Industrial Average (DJIA) closed at an all time high last Friday and the S&P 500 (SPX) closed at an all time high last Wednesday.

The Negatives

It is important that the Russell 2000 (R2K) and NASDAQ composite (OTC) which represent the secondaries and big tech respectively, were down for the week. 

New highs decreased while new lows rose to threatening levels.

The picture emerging is that of a cyclical top.

The first chart covers the past 6 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.  Dashed vertical lines have been drawn on the 1st trading day of each month.

OTC NH declined with the index.



The next chart is similar to the one above except it shows the SPX in red and NY NH, in green, has been calculated using NYSE data.

NY NH was falling while the SPX was bouncing around its all time high.

NY NH was far from confirming last Wednesday’s high for the SPX

The Positives

New highs decreased and new lows increased last week, but, new lows did not exceed new highs on any day last week.

The next chart covers the past 6 months showing the 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 horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50%, neutral, level.

OTC HL Ratio fell sharply, but remained above the neutral level.

The next chart is similar to the one above one except it shows the SPX in red and NY HL Ratio, in blue, has been calculated with NYSE data.

NY HL Ratio also fell, but finished the week at a healthy 74%.

Seasonality

Next week includes the 5 trading days prior to the 2nd Friday of August during the 1st year of the Presidential Cycle.  The tables below show the daily change, on a percentage basis for that period.

OTC data covers the period from 1963 to 2016 while SPX data runs from 1953 to 2016.  There are summaries for both the 1st 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 have been modestly up over all years, but modestly negative during the 1st year of the Presidential Cycle.

Report for the week before the 2nd Friday of August.

The number following the year is the position in the Presidential Cycle.

Daily returns from Monday to 2nd Friday.

OTC Presidential Year 1

 Year       Mon     Tue     Wed    Thur    Fri    Totals

 1965-1   0.82%   0.35%   0.45%   0.71%  -0.14%   2.18%

 1969-1   1.52%  -0.42%   0.56%   0.08%   0.33%   2.07%

 1973-1   0.37%   0.08%  -1.09%   0.02%  -0.78%  -1.40%

 1977-1  -0.31%  -0.03%   0.29%   0.13%  -0.18%  -0.10%

 1981-1  -0.25%   0.39%   0.13%   0.19%  -0.11%   0.36%

 1985-1  -0.78%  -0.64%  -0.67%   0.17%   0.14%  -1.78%

 1989-1   0.94%   0.34%  -0.19%   0.25%  -0.23%   1.11%

 1993-1   0.06%  -0.20%   0.24%  -0.23%   0.16%   0.03%

 Avg     -0.07%  -0.03%  -0.04%   0.10%  -0.04%  -0.08%

 1997-1   0.70%   1.00%   0.55%  -0.38%  -1.58%   0.29%

 2001-1  -1.55%  -0.32%  -3.03%  -0.15%  -0.35%  -5.40%

 2005-1  -0.62%   0.45%  -0.75%   0.78%  -0.81%  -0.96%

 2009-1  -0.40%  -1.13%   1.47%   0.53%  -1.19%  -0.71%

 2013-1   0.09%  -0.74%  -0.32%   0.41%  -0.25%  -0.80%

 Avg     -0.36%  -0.15%  -0.42%   0.24%  -0.83%  -1.52%

OTC summary for Presidential Year 1 1965 - 2013

 Avg      0.04%  -0.07%  -0.18%   0.19%  -0.38%  -0.39%

 Win%       54%     46%     54%     77%     23%     46%

 OTC summary for all years 1963 - 2016

 Avg     -0.29%   0.14%   0.11%   0.07%   0.04%   0.07%

 Win%       44%     54%     60%     62%     50%     59%

SPX Presidential Year 1

 Year       Mon     Tue     Wed    Thur    Fri    Totals

 1953-1  -0.12%  -0.12%   0.24%  -0.20%  -0.44%  -0.65%

 1957-1  -0.88%  -1.25%   0.77%  -0.28%   0.04%  -1.59%

 1961-1  -0.01%   0.22%  -0.12%   0.31%   0.16%   0.56%

 1965-1  -0.24%   0.01%   0.30%   0.29%   0.45%   0.81%

 1969-1  -0.51%   0.45%   0.55%   0.07%  -0.05%   0.51%

 1973-1   0.23%  -0.17%  -0.94%   0.06%  -0.80%  -1.62%

 Avg     -0.29%  -0.15%   0.11%   0.09%  -0.04%  -0.27%

 1977-1  -0.78%   0.06%   0.89%  -0.77%  -0.29%  -0.88%

 1981-1   0.60%   0.99%  -0.34%   0.08%  -0.76%   0.57%

 1985-1  -0.45%  -1.41%  -0.13%   0.68%  -0.33%  -1.65%

 1989-1   1.60%  -0.02%  -0.69%   0.38%  -1.01%   0.26%

 1993-1   0.45%  -0.28%   0.22%  -0.33%   0.26%   0.33%

 Avg      0.28%  -0.13%  -0.01%   0.01%  -0.43%  -0.28%

 1997-1   0.33%   0.22%   0.83%  -0.95%  -1.85%  -1.42%

 2001-1  -1.14%   0.33%  -1.73%  -0.01%   0.57%  -1.99%

 2005-1  -0.27%   0.67%  -0.18%   0.71%  -0.60%   0.33%

 2009-1  -0.33%  -1.27%   1.15%   0.69%  -0.85%  -0.61%

 2013-1  -0.15%  -0.57%  -0.38%   0.39%  -0.36%  -1.07%

 Avg     -0.31%  -0.12%  -0.06%   0.16%  -0.62%  -0.95%

SPX summary for Presidential Year 1 1953 - 2013

 Avg     -0.11%  -0.13%   0.03%   0.07%  -0.37%  -0.51%

 Win%       31%     50%     50%     63%     31%     44%

SPX summary for all years 1953 - 2016

 Avg     -0.28%   0.18%   0.06%   0.08%   0.07%   0.10%

 Win%       41%     59%     54%     50%     53%     58%

Conclusion

The breadth indicators deteriorated last week and the blue chips outperformed the secondaries.  This is the pattern of a developing cyclical top.  The next couple weeks have been seasonally weak so the conditions are in place for market weakness.

I expect the major averages to be lower on Friday August 11 than they were on Friday August 4.

Last week the DJIA and SPX were up while the OTC & R2K were down, so I am calling last weeks positive forecast a tie.


By Mike Burk

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