The good news is:
• The Dow Jones Industrial Average (DJIA) closed up 0.93% for the week at a new all time high underperforming all of the other major indices.
Short Term
The market is overbought.
The indicator in the charts below attempts to force price action into a 45 day cycle. The indicator is constructed by putting a momentum indicator on the result of subtracting a 22.5 day EMA from a 45 day EMA. The momentum indicator accentuates the difference between the EMA's producing a result that is nearly binary.
The chart covers the past year showing the NASDAQ composite (OTC) in magenta and the indicator in green. Dashed vertical lines have been drawn on the first trading day of each month. The dashed vertical line is red on the 1st trading day of the year.
The indicator began rising about 2 ½ months ago and after a brief decline at the end of September has resumed moving upward. It takes an unusually strong movement in prices to hold this indicator up for this long.
The next chart shows most of 2004 and January 2005 when a somewhat similar pattern developed at nearly the same time of the year. The run lasted about 4 ½ months and the OTC gained about 20%.
The next chart covers the period from April 1999 to April 2000.
The rise beginning in October and holding until early January has a pattern similar to what we are seeing now.
The last chart runs from March 1998 to March 1999.
The OTC gained about 10% in the 4 months from early October to Early February.
The indicators arrested decline and sharp upward movement since early this month suggests this run has further to go.
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), mid cap S&P 400 (MID) and the tech heavy OTC on semi log scales (Y axis only).
The chart covers the past 2 weeks and, although the DJIA has been getting all the publicity, the small and mid cap indices have been taking the lead.
The chart below offers another way to look at the relative strength of the secondaries to the blue chips. The chart covers the past 100 trading days showing the OTC in red with an indicator that shows the relative strength of the R2K to the SPX in black. When the indicator is moving upward the R2K is outperforming the SPX.
Since early this month the secondaries have resumed upward leadership.
Seasonality
Next week is the week prior to options expiration in October during the 2nd year of the Presidential Cycle.
The tables below show daily returns for the week prior to the 3rd 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.
Although not as strong as last week, the coming week has had a strong positive bias. The OTC has been up 70% of the time during the 2nd year of the Presidential Cycle. The SPX has been up 62% of the time. Both indices have had average gains and been up over half the time over all periods.
Report for the week before options expiration Friday during Oct
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 | -0.02% | 0.77% | 1.80% | -1.12% | -0.21% | 1.22% |
| 1970-2 | -0.66% | -0.85% | -0.56% | 0.19% | 0.39% | -1.50% |
| 1974-2 | 2.17% | -0.53% | -0.34% | 1.39% | 1.14% | 3.83% |
| 1978-2 | -1.21% | -2.22% | -1.56% | -1.32% | -2.67% | -8.98% |
| 1982-2 | 1.72% | -0.07% | 1.49% | -0.16% | -0.19% | 2.79% |
| 1986-2 | 0.15% | -0.08% | 0.53% | 0.20% | -0.18% | 0.62% |
| Avg | 0.43% | -0.75% | -0.09% | 0.06% | -0.30% | -0.65% |
| 1990-2 | 0.61% | -1.24% | 0.41% | 2.22% | 1.00% | 2.99% |
| 1994-2 | -0.17% | -0.13% | 0.76% | -0.31% | -0.37% | -0.22% |
| 1998-2 | 3.59% | -2.37% | 2.11% | 4.52% | 0.62% | 8.47% |
| 2002-2 | 0.83% | 5.07% | -3.90% | 3.24% | 1.22% | 6.46% |
| Avg | 1.22% | 0.33% | -0.16% | 2.42% | 0.62% | 4.43% |
| OTC summary for Presidential Year 2 1966 - 2002 | ||||||
| Avg | 0.70% | -0.17% | 0.07% | 0.89% | 0.07% | 1.57% |
| Win% | 60% | 20% | 60% | 60% | 50% | 70% |
| OTC summary for all years 1963 - 2005 | ||||||
| Avg | 0.21% | 0.02% | -0.13% | 0.42% | -0.13% | 0.39% |
| Win% | 62% | 53% | 48% | 65% | 56% | 53% |
| SPX Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1954-2 | -0.80% | -0.40% | -0.03% | -1.21% | -0.53% | -2.97% |
| 1958-2 | 0.45% | -0.70% | -1.33% | 0.71% | 1.02% | 0.16% |
| 1962-2 | 0.56% | -0.33% | -0.33% | -0.97% | -1.33% | -2.40% |
| 1966-2 | 1.14% | 1.56% | -0.80% | -0.27% | 0.45% | 2.08% |
| 1970-2 | -1.07% | -0.13% | 0.15% | 0.55% | -0.44% | -0.94% |
| 1974-2 | 2.25% | -1.79% | -1.55% | 1.19% | 1.56% | 1.66% |
| 1978-2 | -1.96% | -1.32% | -0.76% | -1.15% | -1.39% | -6.58% |
| 1982-2 | 2.61% | -0.02% | 1.69% | -1.57% | -0.74% | 1.97% |
| 1986-2 | 0.18% | -0.23% | 1.46% | 0.31% | -0.29% | 1.43% |
| Avg | 0.40% | -0.70% | 0.20% | -0.13% | -0.26% | -0.49% |
| 1990-2 | 1.07% | -1.42% | -0.05% | 2.34% | 2.20% | 4.13% |
| 1994-2 | -0.03% | -0.28% | 0.56% | -0.73% | -0.42% | -0.90% |
| 1998-2 | 1.36% | -0.29% | 1.08% | 4.18% | 0.85% | 7.17% |
| 2002-2 | 0.73% | 4.73% | -2.41% | 2.23% | 0.59% | 5.88% |
| Avg | 0.78% | 0.69% | -0.21% | 2.00% | 0.81% | 4.07% |
| SPX summary for Presidential Year 2 1954 - 2002 | ||||||
| Avg | 0.50% | -0.05% | -0.18% | 0.43% | 0.12% | 0.82% |
| Win% | 69% | 15% | 38% | 54% | 46% | 62% |
| SPX summary for all years 1953 - 2005 | ||||||
| Avg | 0.29% | -0.02% | -0.18% | 0.20% | -0.16% | 0.13% |
| Win% | 63% | 38% | 44% | 58% | 48% | 57% |
Conclusion
The market is still overbought and it appears to have gotten back into gear with the seasonal pattern.
I expect the major indices to be higher on Friday October 20 than they were on Friday October 13.
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In my negative forecast last week I chose to ignore the extremely strong seasonal bias because the market was overbought, that was a mistake.
