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Technical Market Report

The good news is:
• We are half way through September and all of the major averages are up for the month.

Short term

The market is overbought.

My favorite way of defining overbought and oversold is to count the number of days an index has been going in the same direction. Most of the time, most indices do not move in the same direction for more than 3 consecutive days.

The chart below covers the past year showing the NASDAQ composite (OTC) in magenta and an indicator that shows the percentage of the past 6 trading days that have been up in blue. Grey dashed vertical lines have been drawn on the 1st trading day of each month and a dashed red line has been drawn on the 1st trading day of the year.

As of Friday's close the indicator is touching the top of the screen indicating that the OTC has been up every one of the past 6 trading days. The indicator has touched the top of the screen twice before in the past year and both times the index was at or near a high that was not surpassed for over a month.

The next chart covers this calendar year showing the OTC in magenta and an indicator showing momentum of an oscillator of NASDAQ upside - downside volume.

If, as suggested in the previous chart, we are at or near a short term high for the index, that high will be unconfirmed by the indicator. A pattern similar to, but not as drastic as, what we saw last April.

The next chart also covers this calendar year showing the OTC in magenta and an indicator showing momentum of NASDAQ downside volume in green. To make the chart easier to read, the indicator has been put on an inverted Y axis so increasing downside volume moves the indicator downward (up is good). The strong rally of the past week an a half was not accompanied by a large decrease in downside volume. On Friday, in spite of rising prices, the indicator turned downward.

Intermediate term

Summation indices (SI) are a running total of oscillator values. When the oscillator value is above 0 the SI moves upward and when the value is below 0 the SI moves downward.

The chart below covers the past 2 years showing the OTC in magenta and an SI calculated from an oscillator of NASDAQ upside - downside volume. The indicator turns lag price turns by a week or two so you would call it a trend following indicator, but it does not change direction very often so it is easy to read.

The indicator has been moving upward for the past month.

Seasonality

Next week is the week following options expiration in September during the 2nd year of the Presidential Cycle.

The tables below show daily returns for the 5 days following the September triple witching Friday. OTC data covers the period from 1966 - 2002 and S&P 500 (SPX) data from 1954 - 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 1953 for the SPX. The period prior to 1954 has been excluded because the market traded 6 days a week.

The coming week has been up less than half of the time by all measures and the average returns have all been negative.

Report for the week after options expiration during Sept
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through Friday.

OTC Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1966-2 0.34% -0.15% 0.13% -1.18% 0.54% -0.31%
 
1970-2 -0.01% -0.71% -0.14% 1.10% 2.26% 2.50%
1974-2 -0.40% -1.36% -0.15% -1.51% -1.30% -4.72%
1978-2 -1.24% -1.17% -1.04% -0.42% 0.15% -3.73%
1982-2 -0.33% 1.03% 0.38% -0.25% 0.24% 1.07%
1986-2 0.89% 0.23% 0.33% -0.85% 0.03% 0.63%
 
Avg -0.22% -0.40% -0.13% -0.39% 0.28% -0.85%
 
1990-2 -2.79% 0.74% -1.34% -2.53% 0.97% -4.93%
1994-2 -0.15% -1.28% -0.79% -0.04% -0.39% -2.65%
1998-2 1.00% 1.04% 3.68% -2.27% 1.35% 4.80%
2002-2 -2.96% -0.23% 3.39% -0.06% -1.84% -1.69%
 
Avg -1.23% 0.07% 1.24% -1.22% 0.02% -1.12%
 
OTC summary for Presidential Year 2 1966 - 2002
Avg -0.57% -0.19% 0.44% -0.80% 0.20% -0.91%
Win% 30% 40% 50% 10% 70% 40%
 
OTC summary for all years 1963 - 2005
Avg -0.25% 0.01% 0.21% -0.34% -0.16% -0.54%
Win% 37% 53% 57% 37% 52% 42%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 -0.44% 0.70% 0.66% 0.56% 0.68% 2.16%
1958-2 -0.40% 0.73% 0.44% -0.42% 0.18% 0.53%
1962-2 -1.84% 0.58% -1.42% -0.68% 0.90% -2.46%
1966-2 -0.50% -0.69% -1.68% 0.30% -0.35% -2.92%
 
1970-2 -0.86% -0.31% 1.43% 1.30% 0.07% 1.64%
1974-2 -1.03% -2.02% -0.66% -1.64% -2.29% -7.63%
1978-2 -0.87% -0.66% -0.78% 0.17% -0.06% -2.20%
1982-2 -0.03% 1.93% -0.71% -0.15% -0.40% 0.65%
1986-2 1.17% 0.31% 0.26% -1.88% 0.17% 0.03%
 
Avg -0.32% -0.15% -0.09% -0.44% -0.50% -1.50%
 
1990-2 -2.16% 1.20% -1.04% -1.34% 1.69% -1.65%
1994-2 -0.07% -1.59% -0.41% -0.04% -0.35% -2.46%
1998-2 0.37% 0.58% 3.52% -2.19% 0.19% 2.47%
2002-2 -1.38% -1.73% 2.49% 1.82% -3.23% -2.03%
 
Avg -0.81% -0.38% 1.14% -0.44% -0.42% -0.92%
 
SPX Summary for Presidential Year 2 1954 - 2002
Avg -0.62% -0.07% 0.16% -0.32% -0.21% -1.07%
Win% 15% 54% 46% 38% 54% 46%
 
SPX summary for all years 1953 - 2005
Avg -0.39% 0.04% 0.02% -0.20% -0.19% -0.72%
Win% 32% 52% 54% 38% 42% 38%

Conclusion

The market is overbought going into a seasonally weak week.

I expect the major indices to be lower on Friday September 22 than they were on Friday September 15.

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