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Technical Market Report

The good news is:
• The Dow Jones Industrial Average (DJIA) closed a new all time high above 12,000 on Thursday and up 0.35% for the week.

The market is out of synch with the typical seasonal pattern that would have it have it rising off its low for the year about now.

The chart below shows the DJIA, S&P 500 (SPX), NASDAQ composite (OTC) and the Russell 2000 (R2K) on log scales (Y axis only) for the past three months.

There are two lines in the legend for each index. The numbers following the symbol show it's (the index) current level relative to it's level at the beginning of the chart, the lowest low and highest high. The second line begins with MDD (Maximum Draw Down) for the period and the date it occurred along with the annualized rate of return for the period.

The major indices rising sharply off a mid summer low during the 2nd year of the Presidential Cycle is unusual. The charts that follow show every instance (beginning with the most recent) over the past 80 years along with a 2nd chart showing what happened during the remainder of the year.

The last time the market moved up sharply off a mid summer low was in 1982, often identified as the beginning of the bull market. Then the annualized rate of return was more than double what we have seen over the past 3 months.

The remainder of 1982 was a mixed bag with the secondaries gaining and the blue chips falling slightly.

1970 saw a strong rally, but the gains were only about half of what we have seen this year. R2K data only goes back to 1979.

The pace quickened in the last 2 ½ months of 1970.

In 1958 the gains were similar to what we have seen recently. OTC data only goes back to 1963.

The last 2 ½ months of 1958 continued the strong move.

1950 also had gains similar to the current period.

The last 2 ½ months of 1950 were volatile with modest gains.

The returns in 1942 were similar to those in 1970 and modest relative to what we have seen this year.

The last 2 ½ months of 1942 were also positive.

Including the current period, the market has rallied off a mid summer low during the 2nd year of the Presidential cycle 6 times or about one in four. With the exception of 1982 when the indices were mixed, the market has closed the year higher than it was in mid October.

You can find more about the Presidential Cycle at: http://alphaim.net/research/Pres_Cycle/index.html.

Seasonality

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

The tables below show daily returns for the week following 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. In this report I have included data for the R2K because the difference in performance between the secondaries and blue chips is dramatic. R2K data is shallower, beginning in 1979.

Over all years the coming week has been up less than 50% of the time with an average negative return. Restricting the period to include only the 2nd year of the Presidential Cycle, the small caps have been very strong and the blue chips neutral.

Report for the week after options expiration Friday during Oct
The number following the year is the position in the presidential cycle.
Daily returns from Monday to Friday after witching.

R2K Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1982-2 1.22% 0.11% 1.51% 0.46% 1.11% 4.41%
1986-2 -0.53% 0.10% 0.07% 0.62% 0.16% 0.42%
1990-2 -0.43% 0.56% -0.02% 0.11% -1.24% -1.02%
1994-2 -0.50% -0.41% 0.10% 0.57% 1.09% 0.85%
1998-2 2.79% 1.66% 0.45% 1.79% 0.18% 6.88%
2002-2 1.45% -1.62% 1.73% -0.79% 1.81% 2.58%
 
R2K summary for Presidential Year 2 1982 - 2002
Avg 0.67% 0.07% 0.64% 0.46% 0.52% 2.35%
Win% 50% 67% 83% 83% 83% 83%
 
R2K summary for all years 1979 - 2005
Avg -0.38% -0.46% 0.29% -0.33% 0.01% -0.87%
Win% 41% 44% 59% 44% 52% 37%
 
OTC Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1966-2 -0.33% 0.27% 0.45% 0.82% 1.33% 2.53%
1970-2 -0.20% -1.41% 0.41% -0.42% -0.48% -2.10%
1974-2 1.71% 0.50% -1.15% -1.26% 0.45% 0.24%
1978-2 -1.52% -0.66% 0.02% -2.61% -2.33% -7.10%
1982-2 1.05% 0.42% 1.55% 1.70% -0.13% 4.59%
1986-2 -0.62% -0.12% 0.23% 0.64% 0.13% 0.27%
1990-2 1.11% -0.01% -0.03% -0.36% -1.58% -0.87%
1994-2 -0.54% -0.39% 0.66% 0.55% 1.13% 1.41%
1998-2 1.71% -0.58% 2.17% 1.66% -0.51% 4.45%
2002-2 1.69% -1.29% 2.12% -1.63% 2.50% 3.39%
 
OTC summary for Presidential Year 2 1966 - 2002
Avg 0.41% -0.32% 0.64% -0.09% 0.05% 0.68%
Win% 50% 30% 80% 50% 50% 70%
 
OTC summary for all years 1963 - 2005
Avg -0.17% -0.41% 0.29% -0.18% -0.09% -0.57%
Win% 40% 40% 60% 47% 53% 47%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 0.38% 0.25% 0.81% -0.12% 0.00% 1.32%
1958-2 -0.37% 0.00% -0.39% -0.20% -0.31% -1.27%
1962-2 -1.13% -2.67% 3.22% -0.94% -0.27% -1.81%
1966-2 0.29% 0.61% 0.86% 0.82% 0.01% 2.60%
1970-2 -1.34% 0.59% 0.02% -0.33% 0.47% -0.59%
1974-2 1.69% -0.50% -2.87% -1.14% -0.14% -2.97%
1978-2 0.23% -0.70% -0.18% -1.32% -1.50% -3.47%
1982-2 2.37% -0.11% 1.94% -0.12% -0.14% 3.94%
1986-2 -1.20% -0.04% 0.16% 1.28% -0.43% -0.23%
1990-2 0.73% -0.76% 0.08% -0.78% -1.76% -2.49%
1994-2 -0.87% 0.15% 0.24% 0.70% 1.70% 1.91%
1998-2 0.57% 0.14% 0.56% 0.80% -0.72% 1.35%
2002-2 1.73% -1.06% 0.67% -1.52% 1.72% 1.54%
 
SPX summary for Presidential Year 2 1954 - 2002
Avg 0.24% -0.34% 0.39% -0.22% -0.11% -0.01%
Win% 62% 42% 77% 31% 33% 46%
 
SPX summary for all years 1953 - 2005
Avg -0.33% -0.02% 0.33% -0.33% 0.00% -0.35%
Win% 49% 44% 62% 32% 46% 43%

Conclusion

Market strength like we have seen for the past three months is unusual. The value of our usual methods of analysis in this environment is questionable.

Seasonally the coming week has been mixed with the secondaries strong and the blue chips neutral. If that pattern holds it will be the opposite of what we saw last week.

I expect the major indices to be higher on Friday October 27 than they were on Friday October 20.

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.

Last week the large cap indices were up slightly and the small cap indices were down slightly so I am calling last weeks positive forecast a tie.

 

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