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Technical Market Report

The good news is:
• Many of the major indices have recovered around 50% of their losses since the May top.

Short term

The McClellan Oscillator (MCO) was developed in the 1960’s by Sherman McClellan and his late wife. It is calculated by subtracting a 5% trend (39 day EMA) from a 10% trend (19 day EMA) of NYSE advancing issues - declining issues. By their nature oscillators regress to 0 so an oscillator reversing from an extreme value is not always significant. However, oscillators are one of our best tools for identifying extremes.

The chart below shows the OTC in red and the MCO applied to NASDAQ advancing - declining issues in brown. The MCO is at its highest level in the past 6 months indicating an overbought extreme.

Intermediate term

The chart below shows the OTC in red and an indicator showing the percentage of the past 4 trading days that the OTC advance - decline line (OTC ADL) has been up. The OTC ADL is running total of the number of NASDAQ declining issues subtracted from advancing issues.

You need not look at this chart closely, just notice that for the past 3 months the indicator has not touched the top of the screen once while it has touched the bottom of the screen four times.

Seasonality

Next week includes the first 4 trading days of July during the 2nd year of the Presidential Cycle.

The tables below show daily returns for the OTC from 1966 - 2002 and S&P 500 (SPX) from 1930 - 2002 during the 2nd year of the Presidential Cycle. There are summaries for both the 2nd year of the Presidential Cycle and all years combined beginning with 1963 for the OTC and 1928 for the SPX.

During most years this period has been pretty strong, especially for the blue chips, however, the OTC during the 2nd year of the Presidential Cycle has only been up 30% of the time.

Report for the first 4 trading days of July.
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
  Day1 Day2 Day3 Day4 Totals
1966-2 -0.10% 5 0.30% 2 -0.09% 3 0.64% 4 0.75%
1970-2 -1.30% 3 -0.74% 4 -0.21% 1 -1.97% 2 -4.22%
1974-2 -0.75% 1 -2.10% 2 -0.20% 3 -0.12% 5 -3.17%
1978-2 -0.12% 1 -0.77% 3 -0.34% 4 0.30% 5 -0.93%
1982-2 -0.41% 4 -0.32% 5 -0.49% 2 -0.67% 3 -1.89%
Avg -0.54% -0.73% -0.26% -0.36% -1.89%
 
1986-2 0.52% 2 0.46% 3 0.41% 4 -2.48% 1 -1.09%
1990-2 -0.05% 1 -0.06% 2 -0.56% 4 0.29% 5 -0.38%
1994-2 0.13% 5 -0.46% 2 -0.37% 3 0.79% 4 0.09%
1998-2 1.05% 3 -1.07% 4 0.81% 1 -0.07% 2 0.72%
2002-2 -4.06% 1 -3.28% 2 1.65% 3 4.94% 5 -0.75%
Avg -0.49% -0.88% 0.39% 0.69% -0.28%
 
OTC summary for Presidential Year 2 1966 - 2002
Averages -0.51% -0.80% 0.06% 0.17% -1.09%
% Winners 30% 20% 30% 50% 30%
MDD 7/2/2002 7.20% -- 7/7/1970 4.16% -- 7/5/1974 3.15%
 
OTC summary for all years 1963 - 2005
Averages 0.00% -0.13% 0.02% 0.15% 0.03%
% Winners 56% 53% 47% 53% 58%
MDD 7/6/2001 7.24% -- 7/2/2002 7.20% -- 7/7/1970 4.16%
 
SPX Presidential Year 2
  Day1 Day2 Day3 Day4 Totals
1930-2 -1.08% 2 1.09% 3 -1.03% 4 -2.07% 1 -3.09%
1934-2 -1.22% 1 -0.31% 2 1.66% 4 0.92% 5 1.04%
1938-2 3.03% 5 1.93% 6 -1.32% 2 1.34% 3 4.98%
1942-2 -0.84% 3 1.58% 4 0.96% 5 1.07% 1 2.76%
 
1946-2 0.60% 1 -0.05% 2 -0.22% 3 -0.32% 5 0.00%
1950-2 -0.28% 1 0.96% 3 0.56% 4 -1.34% 5 -0.10%
1954-2 0.00% 4 1.30% 5 1.12% 2 0.07% 3 2.48%
1958-2 0.09% 2 0.09% 3 0.33% 4 0.33% 1 0.84%
1962-2 2.03% 1 1.13% 2 0.57% 4 -1.13% 5 2.60%
Avg 0.49% 0.69% 0.47% -0.48% 1.16%
 
1966-2 1.03% 5 0.25% 2 1.44% 3 0.37% 4 3.08%
1970-2 0.44% 3 -0.16% 4 -1.56% 1 -0.77% 2 -2.05%
1974-2 0.02% 1 -2.00% 2 -0.06% 3 -0.70% 5 -2.74%
1978-2 -0.46% 1 -0.86% 3 0.05% 4 0.60% 5 -0.67%
1982-2 -0.82% 4 -0.98% 5 -0.33% 2 -0.07% 3 -2.20%
Avg 0.04% -0.75% -0.09% -0.11% -0.91%
 
1986-2 0.48% 2 0.26% 3 -0.36% 4 -3.07% 1 -2.69%
1990-2 0.42% 1 0.17% 2 -1.24% 4 0.77% 5 0.12%
1994-2 0.43% 5 0.04% 2 -0.05% 3 0.50% 4 0.92%
1998-2 1.31% 3 -0.19% 4 0.95% 1 -0.22% 2 1.84%
2002-2 -2.22% 1 -2.12% 2 0.62% 3 3.67% 5 -0.05%
Avg 0.08% -0.37% -0.02% 0.33% 0.03%
 
SPX summary for Presidential Year 2 1930 - 2002
Averages 0.16% 0.11% 0.11% 0.00% 0.37%
% Winners 58% 58% 53% 53% 58%
MDD 7/2/2002 4.30% -- 7/7/1986 3.42% -- 7/7/1930 3.08%
 
SPX summary for all years 1928 - 2005
Averages 0.29% 0.27% 0.33% 0.05% 0.92%
% Winners 69% 62% 58% 59% 72%
MDD 7/2/2002 4.30% -- 7/6/2001 3.73% -- 7/7/1986 3.42%

July

July has been a better month for the blue chips than the small caps, however, during the 2nd year of the Presidential Cycle it has not been very good for either.

The number of trading days in any given month vary, but average 21. The charts below have been constructed by averaging the daily returns for the first 11 and the last 10 days of the month. A dashed vertical line has been drawn after the 1st trading day and after each 5 trading days thereafter, a solid vertical line has been drawn at the 11th day dividing point.

The first chart shows the OTC with an average of all years since 1963 in red and just the 2nd year of the Presidential Cycle in blue.

The next chart shows the SPX with an average of all years since 1928 in green and just the 2nd year of the Presidential Cycle in blue.

Conclusion

The market was oversold going into a seasonally strong period last week. Last weeks strong rally has left the market overbought going into a seasonally weak period next week.

I expect the major indices to be lower on Friday July 7 than they were on Friday June 29.

This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html. If it is not for you, reply with REMOVE in the subject line.

 

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