The good news is:
• The Dow Jones Industrial Average (DJIA) hit a multiyear high last week.
From a big picture perspective, there was a bull market from late 1974 to early 2000. During those 25 years the DJIA delivered a compound annual return (CAR) of a little over 11%. The chart below shows that period, there are dashed vertical red lines drawn on the 1st trading day of each year.
The previous bull market ran from 1942 to early 1966. During those 24 years the DJIA delivered a CAR of about 9.5%. That period is shown in the next chart.
From that perspective we are now 6 years into a bear market and, measured by the DJIA which is very near its all time high of 6 years ago, the CAR has been about 0%.
While the DJIA has gone nowhere during the past 6 years the small caps as measured by the Russell 2000 (R2K) have been doing a little better, delivering a CAR of a little over 7%. The chart below is similar to the one above but it shows both the DJIA and R2K on semi log scales. The R2K reached an all time high last month nearly 60% above its 2000 high while the DJIA is for all practical purposes unchanged.
The next chart shows the DJIA for the 6 years (exactly the same number of trading days as the previous 2 charts) following its early 1966 high. The CAR is, for all practical purposes, 0 like the current period.
Prior to the early 1990's the NASDAQ composite (OTC) represented the small caps and its movement was similar to the R2K. I do not have R2K data prior to 1979 so the next chart shows the OTC and DJIA on semi log scales for the period of 1966 to 1972. While the DJIA went nowhere, the OTC delivered a CAR of nearly 14%.
The 6 years following the early 2000 high have been similar to the 6 years following the 1966 high.
Both the OTC and DJIA peaked at all time highs in late 1972. Over the next 2 years the DJIA fell 43% and the OTC fell 59%. The chart below pictures the period.
Short term
Last week I commented on how unusual it was to have more than 3 consecutive down days followed by more than 3 consecutive up days. Things have gotten curiousor and curiousor. The 4 consecutive down days in the R2K followed by 4 consecutive up days were followed by 5 consecutive down days last week.
The chart below covers the period from early last November showing R2K in red with an indicator showing the percentage of the previous 5 trading days that were up in blue. There are dashed vertical black lines on the 1st trading day of each month and a dashed vertical red line on the 1st trading day of the year.
The last time there were 5 consecutive down days in the R2K was in March 2005 and before that late December 2004 / early January 2005. Both initiated short term down trends. The chart below covers the period from late October 2004 to late April 2005 so you can see how it worked.
The sell off last week was extreme in other ways, all of the breadth oscillators have fallen to their lowest lows since the October price low. The oscillator of NASDAQ volume of advancing issues - volume of declining issues shown in the chart below is at its lowest level since January 2005.
Intermediate term
As the market moves up and down volume of advancing issues (UV) increases during up moves and decreases during down moves while volume of declining issues (DV) does the opposite. This relationship has been out of synch since the 1st of the year with both UV and DV increasing as prices rose. This is an unusual event that is nearly always concluded by UV getting into synch with DV and taking prices down with it.
The chart below covers the period from the October low showing the OTC in red a 4% trend (55 day EMA) of volume of NASDAQ advancing issues (OTC UV) in green and a 4% trend of volume of NASDAQ declining issues in blue (OTC DV). OTC DV is plotted on an inverted Y axis so decreasing OTC DV moves the indicator upward while increasing OTC DV moves the indicator downward (up is good).
These indicators appeared to have gotten into synch last week when UV fell to its lowest level since January and DV rose to its highest level since 2002.
Seasonality
Next week includes 5 trading days prior to the 3rd Friday in May (options expiration) during the 2nd year of the Presidential cycle.
The tables below show daily returns for the OTC from 1963 - 2005 and for the S&P 500 (SPX) 1928 - 2005 during the 2nd year of the Presidential Cycle. There are summaries for both the 2nd year and all years combined.
The average returns are mostly negative while up and down years have been pretty evenly split.
Report for the week prior to the 3rd Friday in May.
The number following the year is the position in the presidential cycle.
| OTC Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1966-2 | -1.37% | -2.19% | -1.06% | 1.75% | -0.29% | -3.16% |
| 1970-2 | -0.69% | -1.33% | -1.34% | -2.32% | -1.88% | -7.56% |
| 1974-2 | -1.33% | -0.02% | 0.42% | -0.01% | -1.88% | -2.82% |
| 1978-2 | 0.34% | 0.82% | 0.88% | -0.15% | -0.07% | 1.81% |
| 1982-2 | -0.70% | -0.58% | -1.02% | -0.65% | -0.18% | -3.13% |
| Avg | -0.75% | -0.66% | -0.43% | -0.28% | -0.86% | -2.97% |
| 1986-2 | -0.10% | -0.52% | 0.18% | -0.69% | 0.00% | -1.14% |
| 1990-2 | 0.80% | 0.20% | 0.10% | 0.63% | 0.58% | 2.31% |
| 1994-2 | -0.70% | -0.05% | 1.46% | 0.75% | -0.08% | 1.37% |
| 1998-2 | -0.87% | 0.65% | 0.32% | -0.04% | -1.00% | -0.94% |
| 2002-2 | 3.23% | 4.02% | 0.38% | 0.28% | 0.63% | 8.55% |
| Avg | 0.47% | 0.86% | 0.49% | 0.19% | 0.03% | 2.03% |
| OTC summary for Presidential year 2 1966 - 2002 | ||||||
| Avg | -0.14% | 0.10% | 0.03% | -0.04% | -0.46% | -0.47% |
| Win% | 30% | 40% | 70% | 40% | 22% | 40% |
| OTC summary for all years 1963 - 2005 | ||||||
| Avg | -0.03% | 0.10% | 0.13% | 0.05% | -0.28% | -0.03% |
| Win% | 49% | 49% | 60% | 53% | 40% | 51% |
| SPX Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1930-2 | -0.17% | 1.37% | 0.61% | -1.63% | 0.46% | 0.65% |
| 1934-2 | 0.32% | 1.90% | -0.73% | 0.31% | 2.71% | 4.52% |
| 1938-2 | -1.95% | 0.60% | 0.69% | -0.98% | -1.48% | -3.12% |
| 1942-2 | 0.76% | -0.75% | -1.64% | -0.26% | 1.16% | -0.73% |
| 1946-2 | -0.32% | -0.64% | -0.75% | 0.59% | -0.21% | -1.33% |
| 1950-2 | 0.33% | 0.99% | 0.43% | 0.22% | 0.65% | 2.61% |
| 1954-2 | 0.14% | 0.03% | -0.45% | 0.35% | 0.59% | 0.66% |
| 1958-2 | -0.57% | -0.30% | -1.15% | 0.51% | 0.05% | -1.46% |
| 1962-2 | 0.72% | 1.89% | -0.03% | -0.53% | -0.17% | 1.87% |
| Avg | 0.06% | 0.39% | -0.39% | 0.23% | 0.18% | 0.47% |
| 1966-2 | -1.24% | -0.92% | 1.78% | -0.12% | 0.48% | -0.02% |
| 1970-2 | -1.06% | -0.95% | -1.70% | -1.42% | 1.94% | -3.20% |
| 1974-2 | -0.89% | 0.03% | -0.26% | -0.81% | -1.68% | -3.61% |
| 1978-2 | 0.70% | 0.60% | 0.25% | -0.98% | -0.51% | 0.06% |
| 1982-2 | -1.10% | -0.75% | -0.82% | -0.26% | 0.26% | -2.67% |
| Avg | -0.72% | -0.40% | -0.15% | -0.72% | 0.10% | -1.89% |
| 1986-2 | -0.11% | -0.49% | 0.48% | -1.31% | -0.71% | -2.15% |
| 1990-2 | 0.78% | -0.13% | -0.08% | 0.13% | 0.05% | 0.75% |
| 1994-2 | 0.08% | 1.10% | 0.96% | 0.61% | -0.34% | 2.41% |
| 1998-2 | -0.14% | 0.83% | 0.28% | -0.13% | -0.78% | 0.06% |
| 2002-2 | 1.86% | 2.11% | -0.57% | 0.66% | 0.76% | 4.82% |
| Avg | 0.49% | 0.68% | 0.21% | -0.01% | -0.20% | 1.18% |
| SPX summary for Presidential year 2 1930 - 2002 | ||||||
| Avg | -0.10% | 0.34% | -0.14% | -0.27% | 0.17% | 0.01% |
| Win% | 47% | 58% | 42% | 42% | 58% | 53% |
| SPX summary for all years 1928 - 2005 | ||||||
| Avg | -0.17% | -0.02% | 0.02% | 0.07% | -0.21% | -0.30% |
| Win% | 47% | 55% | 47% | 56% | 48% | 47% |
Conclusion
The market is oversold and likely to bounce. For the sake of symmetry with the 1966 - 1974 bear market it would be nice to see the DJIA bounce to a nominal new high, but, I am not counting on it.
I expect the major indices to be lower on Friday May 19 than they were on Friday May 12.
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