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Technical Market Report

The good news is:
• The Dow Jones Industrial Average (DJIA) closed at a new all time high for 3 consecutive days last week.

Short Term

The market is overbought.

Bollinger bands are typically drawn 2 standard deviations either side of a 20 day simple moving average. An index is considered overbought when it penetrates the upper band and oversold when it penetrates the lower band. The charts that follow show several indices with Bollinger bands, all of the indices penetrated the upper band last week.

Wilshire 5000 with Bollinger bands.

NASDAQ composite (OTC) with Bollinger bands.

The S&P mid cap index has been one of the worst performing indices in the past few months poked through its upper Bollinger band last week.

In a strong market indices can stay near the upper Bollinger band for quite a while, however, more often than not the band represents short term resistance.

Intermediate term

Small capitalization issues lead both up and down.

The chart below shows several indices including the large cap DJIA and S&P 500 (SPX), the small cap Russell 2000 (R2K) and the tech heavy OTC on semi log scales (Y axis only). The large cap indices (DJIA, SPX) hit their lows in mid June while the small cap indices (OTC, R2K) hit their lows in mid July. The legend shows the range of values in percentage terms from the starting day, maximum drawdown (MDD) and annualized return (CAR). The chart covers the period from mid June to include the lows for the large cap indices; 82 trading days.

All of the indices have had nearly identical returns over the period.

The next chart is similar to the one above covering 82 trading days, but it begins at the August 2003 low. The OTC and R2K rose at nearly double the rate of the DJIA and SPX.

The next chart is similar to the one above but it begins at the August 2004 low. Again the OTC and R2K rose about twice as fast as the DJIA or SPX.

You can argue that the secondaries do not lead, but just have higher betas.

However you define it, the first chart presents an unusual picture because the secondaries have not been producing significantly higher betas (or leading) in the rally of the past few months.

Back in April there was deterioration in the breadth indicators that led me to think a decline was immanent. It was frustrating waiting for that decline to finally commence in mid May. Many of the breadth indicators are demonstrating a patterns similar to last April.

The chart below covers the past year showing the OTC in pink and an indicator that is momentum of a ratio of NASDAQ advancing issues to advancing issues + declining issues. There are grey vertical dashed lines drawn on the first trading day of each month and I have marked April on the chart.

The current pattern of the indicator rising to barely reach the neutral line as the index made a new cycle high is similar to pattern it traced out last April. The OTC made its high for the year in April, but some of the other indices including the R2K made their highs around mid May.

Seasonality

Next week is the 2nd week of October during the 2nd year of the Presidential Cycle.

The tables below show daily returns for the week prior to the 2nd Friday of October during the 2nd year of the Presidential Cycle. OTC data covers the period from 1966 - 2002 and SPX data from 1953 - 2002 during the 2nd year of the Presidential Cycle. The market traded 6 days a week prior to 1953 so data prior to 1953 has been omitted. 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 coming week has had a very strong positive bias. The OTC has been up an unusually strong 80% of the time during the 2nd year of the Presidential Cycle. The SPX has been up an impressive 69% of the time. For both indices, the gains over all years combined, although positive, have not been as impressive.

2nd Friday Summary for OTC
Report for the week before the 2nd Friday during Oct
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.

OTC Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1966-2 -1.42% 1.32% 0.22% 2.35% 0.32% 2.79%
 
1970-2 1.56% 0.69% 0.30% 0.21% -0.13% 2.63%
1974-2 2.56% -0.78% 2.57% 2.71% 2.18% 9.24%
1978-2 0.48% 0.22% 0.25% 0.22% 0.01% 1.17%
1982-2 -0.36% 0.40% 1.70% 1.88% 1.69% 5.31%
1986-2 0.13% -0.23% 0.15% 0.05% 0.13% 0.22%
Avg 0.87% 0.06% 0.99% 1.01% 0.78% 3.71%
 
1990-2 0.22% -2.59% -1.73% -2.29% 0.60% -5.79%
1994-2 0.91% 1.16% 0.19% 0.12% -0.11% 2.27%
1998-2 -4.85% -1.68% -3.20% -2.97% 5.17% -7.53%
2002-2 -1.80% 0.88% -1.34% 4.42% 4.05% 6.21%
Avg -1.38% -0.56% -1.52% -0.18% 2.43% -1.21%
 
OTC summary for Presidential Year 2 1966 -2002
Avg -0.26% -0.06% -0.09% 0.67% 1.39% 1.65%
Win% 60% 60% 70% 80% 80% 80%
 
OTC summary for all years 1963 - 2005
Avg -0.02% -0.30% -0.10% 0.33% 0.52% 0.44%
Win% 60% 44% 50% 72% 67% 56%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 0.56% 0.49% 0.40% -0.21% -0.06% 1.17%
1958-2 0.62% 0.57% 0.18% -0.02% 0.67% 2.01%
1962-2 0.00% 0.23% 0.07% -0.33% -0.18% -0.21%
1966-2 1.82% 0.51% 2.84% -0.19% -0.38% 4.60%
 
1970-2 1.54% 0.44% 0.05% -1.08% -1.01% -0.07%
1974-2 4.19% -0.17% 4.60% 2.90% 1.93% 13.45%
1978-2 1.03% -0.12% 0.89% -0.48% -0.21% 1.11%
1982-2 -0.38% 0.39% 3.27% 2.25% 1.75% 7.27%
1986-2 0.46% -0.16% 0.97% -0.35% -0.16% 0.76%
Avg 1.37% 0.08% 1.95% 0.65% 0.46% 4.50%
 
1990-2 0.64% -2.67% -1.54% -1.64% 1.55% -3.68%
1994-2 0.87% 1.47% -0.07% 0.50% 0.28% 3.05%
1998-2 -1.40% -0.40% -1.41% -1.16% 2.59% -1.78%
2002-2 -1.91% 1.69% -2.73% 3.50% 3.91% 4.45%
Avg -0.45% 0.02% -1.44% 0.30% 2.08% 0.51%
 
SPX summary for Presidential Year 2 1953 - 2002
Avg 0.67% 0.17% 0.58% 0.28% 0.82% 2.47%
Win% 75% 62% 69% 31% 54% 69%
 
SPX summary for all years 1954 - 2005
Avg 0.13% -0.22% 0.14% 0.02% 0.16% 0.22%
Win% 58% 33% 48% 43% 53% 55%

Conclusion

The market is overbought and has not been following the seasonal pattern for the past few weeks.

I expect the major indices to be lower on Friday October 13 than they were on Friday October 6.

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.

My negative forecast last week based on deteriorating indicators and negative seasonality was a miss.

Gordon Harms produces a Power point (PPT) for our local timing group. You can get a copy of PPT at: http://www.stockmarket-ta.com/.

 

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