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Technical Market Report

The good news is:
 • Several of the major indices including the Dow Jones Industrials(DJIA), Dow Jones Transports hit multi-year highs last week and the Russell 2000(R2K) and S&P Mid cap closed at all time highs Friday.

Short term

The new high indicator (NH) is a 10% trend (19 day EMA) of new highs. NH is useful for sorting out the short term direction of the market in that if the indicator is rising and continues to rise on a down day it is likely the down day is not the beginning of a short term trend change. The same is true if the indicator is falling and continues to fall on an up day.

The four charts below show NH calculated from NASDAQ data, NYSE data and from the component issues of the S&P mid cap index and the R2K. For the R2K and mid cap index, new highs have been calculated over the past 6 weeks rather than 52 weeks as reported by the exchanges.

Except for the mid cap chart the indicators all peaked near the 1st of February; the mid cap chart peaked in late November.

NH on the R2K chart turned upward last week while NH on the NYSE chart continued downward and the OTC and mid cap indicators went flat on Friday after falling during the week.

NASDAQ composite (OTC) with NH calculated from NASDAQ new highs.

SPX with NH calculated from NYSE new highs.

S&P Mid cap with NH calculated from its component issues.

R2K with NH calculated from its component issues.

The next chart shows the OTC and momentum of oscillators derived from NASDAQ advancing - declining issues, upside volume - downside volume and new highs - new lows. Momentum of the oscillators appears to be a little extended to the upside.

The next chart is similar to the one above except the index is the R2K and the indicators have been calculated from the component issues of the R2K. The indicators are even more extended than those on the chart above.

Intermediate term

The secondaries lead both up and down.
Accutrack (AT) is a FastTrack relative strength indicator.
The chart below shows the OTC in red and AT comparing the R2K with the SPX in black.
AT turned sharply upward last week indicating the R2K significantly outperformed the SPX.

Momentum of NASDAQ downside volume has worked pretty well for the past year indicating market strength. In the past two weeks it has gone uncharacteristically flat.

Seasonality

Next week includes the last 5 trading days of March in the 2nd year of the Presidential Cycle.

Because there has been such a sharp split between the performance of the secondaries and blue chips I have included tables of the R2K as well as the OTC and SPX.

R2K data covers the period from 1979 - 2005.
OTC data covers the period from 1963 - 2005.
SPX data covers the period from 1928 - 2005.

The performance dichotomy between the secondaries and blue chips appears to have a seasonal basis. The R2K has been up 83% of the time during the last 5 trading days of April in the 2nd year of the Presidential cycle while the OTC has been up 60% of the time and the SPX up only 37% of the time. Interestingly the average return for all three indices has been negative indicating the gains during the up years have been modest while the losses in down years have been substantial.

The tables below show daily data for the 2nd year of the Presidential Cycle with summaries for both the 2nd year and all years combined.

Last 5 days of March.
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.

OTC Presidential Year 2
  Day5 Day4 Day3 Day2 Day1 Totals
1966-2 0.53% 5 0.49% 1 0.24% 2 -0.27% 3 -0.83% 4 0.16%
1970-2 0.24% 2 0.46% 3 1.66% 4 0.15% 1 -0.03% 2 2.48%
1974-2 -0.10% 1 -0.08% 2 -1.11% 3 -1.42% 4 -0.65% 5 -3.37%
1978-2 -0.09% 1 0.36% 2 0.38% 3 0.09% 4 0.02% 5 0.77%
1982-2 0.57% 4 -0.36% 5 0.17% 1 -0.05% 2 0.13% 3 0.46%
Avg 0.23% 0.18% 0.27% -0.30% -0.27% 0.10%
 
1986-2 -0.52% 1 -0.38% 2 0.36% 3 0.73% 4 0.38% 1 0.58%
1990-2 0.36% 1 0.15% 2 -0.64% 3 -0.29% 4 0.03% 5 -0.39%
1994-2 -0.41% 5 -1.40% 1 -2.23% 2 -1.37% 3 -0.19% 4 -5.61%
1998-2 0.63% 3 0.25% 4 -0.27% 5 -0.27% 1 0.93% 2 1.28%
2002-2 -0.93% 5 -2.10% 1 0.64% 2 0.14% 3 1.02% 4 -1.23%
Avg -0.17% -0.70% -0.43% -0.21% 0.43% -1.07%
 
OTC summary for Presidential Year 2 1966 - 2002
Averages 0.03% -0.26% -0.08% -0.26% 0.08% -0.49%
% Winners 50% 50% 60% 40% 60% 60%
MDD 3/31/1994 5.49% -- 3/29/1974 3.33% -- 3/25/2002 3.01%
 
OTC summary for all years 1963 - 2005
Averages 0.05% -0.01% -0.16% -0.04% 0.12% -0.04%
% Winners 49% 53% 58% 56% 64% 56%
MDD 3/30/2000 10.18% -- 3/27/1980 7.82% -- 3/29/2001 7.69%
 
SPX Presidential Year 2
  Day5 Day4 Day3 Day2 Day1 Totals
1930-2 1.53% 3 -0.20% 4 1.14% 5 0.80% 6 0.36% 1 3.63%
1934-2 2.88% 1 -2.71% 2 0.29% 3 1.63% 4 1.22% 6 3.31%
1938-2 -1.60% 6 0.76% 1 -5.83% 2 -1.26% 3 -1.39% 4 -9.32%
1942-2 -0.37% 4 -0.98% 5 0.00% 6 0.12% 1 -0.62% 2 -1.85%
 
1946-2 -0.06% 2 -0.61% 3 -0.11% 4 0.61% 5 0.22% 6 0.06%
1950-2 -0.85% 1 0.40% 2 -0.51% 3 -0.80% 4 -0.06% 5 -1.82%
1954-2 -0.19% 4 0.53% 5 0.38% 1 0.11% 2 0.94% 3 1.77%
1958-2 -0.33% 2 -0.33% 3 -0.31% 4 0.07% 5 -0.24% 1 -1.13%
1962-2 -0.79% 1 -0.27% 2 0.49% 3 -0.04% 4 -0.66% 5 -1.28%
Avg -0.44% -0.06% -0.01% -0.01% 0.04% -0.48%
 
1966-2 0.28% 5 0.09% 1 -0.39% 2 -0.55% 3 0.51% 4 -0.06%
1970-2 1.14% 2 2.03% 3 0.17% 4 -0.32% 1 0.00% 2 3.02%
1974-2 0.38% 1 0.32% 2 -1.39% 3 -1.83% 4 -0.89% 5 -3.41%
1978-2 -0.55% 1 0.71% 2 0.16% 3 -0.26% 4 -0.22% 5 -0.16%
1982-2 0.21% 4 -1.12% 5 0.32% 1 -0.03% 2 -0.28% 3 -0.89%
Avg 0.29% 0.41% -0.23% -0.60% -0.18% -0.30%
 
1986-2 0.85% 1 -0.26% 2 1.10% 3 0.70% 4 -0.03% 1 2.37%
1990-2 0.12% 1 1.15% 2 0.15% 3 -0.35% 4 -0.25% 5 0.81%
1994-2 -0.81% 5 -0.13% 1 -1.63% 2 -1.53% 3 0.05% 4 -4.05%
1998-2 -0.33% 3 -0.10% 4 -0.49% 5 -0.17% 1 0.75% 2 -0.35%
2002-2 -0.42% 5 -1.47% 1 0.58% 2 0.53% 3 0.25% 4 -0.52%
Avg -0.12% -0.16% -0.06% -0.16% 0.15% -0.35%
 
SPX summary for Presidential year 2 1930 - 2002
Averages 0.06% -0.12% -0.31% -0.13% -0.02% -0.52%
% Winners 42% 42% 53% 42% 42% 37%
MDD 3/31/1938 9.09% -- 3/29/1974 4.05% -- 3/30/1994 4.05%
 
SPX summary for all years 1928 - 2005
Averages -0.10% -0.01% -0.04% 0.00% -0.17% -0.32%
% Winners 34% 49% 53% 45% 43% 51%
MDD 3/31/1938 9.09% -- 3/31/1939 8.80% -- 3/31/1932 7.00%
 
R2K Presidential Year 2
  Day5 Day4 Day3 Day2 Day1 Totals
1982-2 0.66% 4 -0.35% 5 0.08% 1 0.05% 2 0.05% 3 0.47%
 
1986-2 -0.76% 1 -0.32% 2 0.54% 3 0.70% 4 0.16% 1 0.33%
1990-2 0.12% 1 0.16% 2 -0.16% 3 -0.24% 4 0.14% 5 0.01%
1994-2 -0.23% 5 -1.48% 1 -2.08% 2 -1.79% 3 -0.55% 4 -6.13%
1998-2 0.18% 3 0.14% 4 -0.14% 5 -0.19% 1 0.94% 2 0.93%
2002-2 -0.60% 5 -1.19% 1 1.06% 2 0.84% 3 0.12% 4 0.22%
Avg -0.26% -0.54% -0.16% -0.14% 0.16% -0.93%
 
R2K summary for Presidential year 2 1982 - 2002
Averages -0.10% -0.51% -0.12% -0.11% 0.14% -0.69%
% Winners 50% 33% 50% 50% 83% 83%
MDD 3/31/1994 5.99% -- 3/25/2002 1.79% -- 3/25/1986 1.07%
 
R2K summary for all years 1979 - 2005
Averages 0.12% -0.14% -0.33% 0.12% 0.40% 0.17%
% Winners 48% 52% 52% 52% 85% 74%
MDD 3/27/1980 8.64% -- 3/30/2000 7.39% -- 3/31/1994 5.99%

Conclusion

The secondaries were the hot performers last week and they appear to be overextended. Seasonally next week has delivered modest gains and large losses.

I expect the major indices to be lower on Friday March 31 than they were on Friday March 24.

Last week most of the blue chip indices were down slightly while the small cap indices were up so I am calling last weeks negative forecast a tie.

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