The good news is:
• While the Dow Jones Industrial Average (DJIA) continued to make new all time highs last week, it was joined in multi year highs by numerous broader indices including the S&P 500 (SPX), NASDAQ composite (OTC) and Wilshire 5000.
Seasonally we are entering the strongest period of the 4 year Presidential Cycle, the strongest period of the year, the strongest quarter of the year and the strongest period of the 4th quarter.
Most of the major indices are already 10% - 15% off their mid summer lows, can it get any better?
The Advance - Decline line (ADL) is a running total of the number of declining issues on an exchange or in an index subtracted from the number of advancing issues. The ADL is probably the oldest and most studied of all breadth indicators. Most indexes are capitalization weighted and larger issues such as GE, Microsoft, Exxon etc. account for most of the movement of the index. Some indexes such as the Dow Jones indexes are price weighted, in those the higher priced issues have a greater influence on the index. In the ADL every issue is represented equally.
Until early 2004 the all time high for the NYSE ADL was reached in March 1956. The all time low was October 1, 1975. The NYSE ADL has had a modestly negative bias making it decline in advance of major tops.
The chart below covers the period from August 1928 through last Friday (78 years). The DJIA is shown in red and the NYSE ADL is shown in black, there are dashed vertical red lines drawn on the 1st trading day of each year.
In the past few years the ADL has gone ballistic closing at an all time high last Thursday, a good case for the bulls.
Gregory L. Morris has written "The Complete Guide to Market Breadth Indicators", the best book I have read on the subject. You can get it at Amazon.
Seasonality
I left out short and intermediate term indicators again this week because the seasonal patterns are extreme. Next week includes the last two days of October and the first three days of November during the 2nd year of the Presidential Cycle. It is likely the strongest week in the entire 4 year cycle.
The tables below show daily returns for the last 2 days of October and the first 3 days of November during the 2nd year of the Presidential Cycle. OTC data covers the period from 1966 - 2002 and SPX data 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.
The OTC over all years has been up less than 81% of the time and the SPX 73% of the time. Restricting the period to include only the 2nd year of the Presidential Cycle, the OTC has been up 100% of the time and the SPX 95%, 1930 was the only down year for the SPX.
Last 2 days of October and first 3 days of November.
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 | ||||||
| Day2 | Day1 | Day1 | Day2 | Day3 | Totals | |
| 1966-2 | 1.33% 5 | 0.40% 1 | -0.30% 2 | 0.57% 3 | 0.40% 4 | 2.39% |
| 1970-2 | -0.55% 4 | 0.22% 5 | 0.15% 1 | -0.17% 2 | 0.71% 3 | 0.36% |
| 1974-2 | 1.90% 3 | 0.54% 4 | -0.26% 5 | -0.68% 1 | 2.12% 2 | 3.62% |
| 1978-2 | -2.47% 1 | -1.14% 2 | 3.18% 3 | -0.02% 4 | 0.75% 5 | 0.30% |
| 1982-2 | -0.16% 4 | 0.36% 5 | 0.89% 1 | 1.46% 2 | 2.35% 3 | 4.90% |
| Avg | 0.01% | 0.08% | 0.73% | 0.23% | 1.27% | 2.31% |
| 1986-2 | 0.73% 4 | -0.08% 5 | 0.10% 1 | 0.21% 2 | 0.05% 3 | 1.01% |
| 1990-2 | -0.29% 2 | 0.00% 3 | 0.23% 4 | 1.77% 5 | 1.28% 1 | 2.99% |
| 1994-2 | 1.13% 5 | 0.17% 1 | -0.68% 2 | -0.05% 3 | 0.04% 4 | 0.61% |
| 1998-2 | 1.20% 4 | 0.81% 5 | 1.67% 1 | -0.68% 2 | 1.96% 3 | 4.95% |
| 2002-2 | 2.01% 3 | 0.23% 4 | 2.33% 5 | 2.63% 1 | 0.33% 2 | 7.53% |
| Avg | 0.95% | 0.23% | 0.73% | 0.78% | 0.73% | 3.42% |
| OTC summary for Presidential Year 2 1966 - 2002 | ||||||
| Averages | 0.48% | 0.15% | 0.73% | 0.50% | 1.00% | 2.87% |
| % Winners | 60% | 80% | 70% | 50% | 100% | 100% |
| MDD 10/31/1978 3.58% -- 11/4/1974 .94% -- 11/2/1994 .73% | ||||||
| OTC summary for all years 1963 - 2005 | ||||||
| Averages | 0.20% | 0.56% | 0.40% | 0.16% | 0.39% | 1.72% |
| % Winners | 53% | 70% | 67% | 51% | 72% | 81% |
| MDD 11/5/1973 4.43% -- 10/31/1978 3.58% -- 11/6/1968 2.72% | ||||||
| SPX Presidential Year 2 | ||||||
| Day2 | Day1 | Day1 | Day2 | Day3 | Totals | |
| 1930-2 | -1.20% 4 | -2.31% 5 | 0.89% 6 | 0.23% 1 | -2.98% 3 | -5.36% |
| 1934-2 | 0.34% 2 | 0.23% 3 | -0.45% 4 | 1.14% 5 | 0.90% 6 | 2.16% |
| 1938-2 | -0.23% 6 | 0.46% 1 | -0.53% 2 | 0.38% 3 | 0.30% 4 | 0.38% |
| 1942-2 | 0.65% 5 | 0.64% 6 | 0.64% 1 | -0.42% 3 | 0.21% 4 | 1.71% |
| 1946-2 | 0.42% 3 | 3.63% 4 | 1.55% 5 | 0.73% 6 | 0.99% 1 | 7.32% |
| 1950-2 | -0.91% 1 | -0.41% 2 | 0.15% 3 | 0.87% 4 | 0.61% 5 | 0.31% |
| 1954-2 | -0.44% 4 | -0.63% 5 | 0.35% 1 | 2.04% 3 | 1.17% 4 | 2.50% |
| 1958-2 | 0.16% 4 | 0.12% 5 | 0.45% 1 | 0.91% 3 | 0.81% 4 | 2.44% |
| 1962-2 | 1.47% 2 | -0.04% 3 | 1.06% 4 | 1.10% 5 | 1.04% 1 | 4.64% |
| Avg | 0.14% | 0.54% | 0.71% | 1.13% | 0.92% | 3.44% |
| 1966-2 | 0.01% 5 | -0.05% 1 | 0.76% 2 | 0.09% 3 | -0.40% 4 | 0.41% |
| 1970-2 | -0.08% 4 | -0.13% 5 | 0.31% 1 | 0.85% 2 | 0.20% 3 | 1.15% |
| 1974-2 | 2.03% 3 | -0.55% 4 | -0.03% 5 | -1.08% 1 | 2.78% 2 | 3.15% |
| 1978-2 | 0.50% 1 | -2.01% 2 | 3.97% 3 | -1.28% 4 | 0.60% 5 | 1.78% |
| 1982-2 | -1.25% 4 | 0.09% 5 | 1.32% 1 | 1.49% 2 | 3.91% 3 | 5.56% |
| Avg | 0.24% | -0.53% | 1.27% | 0.01% | 1.42% | 2.41% |
| 1986-2 | 1.15% 4 | 0.11% 5 | 0.75% 1 | 0.16% 2 | 0.15% 3 | 2.32% |
| 1990-2 | 0.72% 2 | -0.02% 3 | 0.99% 4 | 1.57% 5 | 0.88% 1 | 4.15% |
| 1994-2 | 1.70% 5 | -0.30% 1 | -0.83% 2 | -0.41% 3 | 0.30% 4 | 0.46% |
| 1998-2 | 1.67% 4 | 1.18% 5 | 1.17% 1 | -0.07% 2 | 0.71% 3 | 4.66% |
| 2002-2 | 0.97% 3 | -0.55% 4 | 1.71% 5 | 0.82% 1 | 0.78% 2 | 3.73% |
| Avg | 1.24% | 0.08% | 0.76% | 0.42% | 0.56% | 3.06% |
| SPX summary for Presidential Year 2 1930 - 2002 | ||||||
| Averages | 0.40% | -0.03% | 0.75% | 0.48% | 0.68% | 2.29% |
| % Winners | 68% | 42% | 79% | 74% | 89% | 95% |
| MDD 11/5/1930 5.30% -- 10/31/1978 2.01% -- 11/4/1974 1.66% | ||||||
| SPX summary for all years 1928 - 2005 | ||||||
| Averages | 0.38% | 0.27% | 0.30% | -0.09% | 0.35% | 1.19% |
| % Winners | 57% | 58% | 64% | 56% | 68% | 73% |
| MDD 11/6/1929 14.66% -- 11/3/1932 8.60% -- 11/4/1937 7.28% | ||||||
November
November has been one of the better months for the OTC. The index has been up 67% of the time with an average gain of 1.6%. During the 2nd year of the Presidential Cycle the performance has been even better, up 70% of the time with an average gain of 3.5%. The SPX has been up 55% of the time in November with an average gain of 0.4% and up 53% of the time during the 2nd year of the Presidential Cycle with an average gain of 1.4%.
The charts below show a composite November. There is a dashed vertical line drawn after the 1st trading day and again after each additional 5 trading days. The number of trading days in a month varies, but the average is 21. The charts show the average daily return of the 1st 11 trading days and the last 10. A solid vertical line has been drawn on the 11th trading day, the break point.
OTC composite November.
The magenta line is a composite of all years combined from 1963.
The blue line is a composite of the 2nd year of the Presidential Cycle.
SPX composite November.
The orange line is a composite of all years combined from 1928.
The blue line is a composite of the 2nd year of the Presidential Cycle.
For more information about the Presidential Cycle go to:
http://alphaim.net/
Select:
Alpha News
Alpha Research Reports
The 4 year Presidential Cycle
The Alpha Fund (APHAX)
Earlier this month Alpha Investment Management launched a mutual fund and I am the manager. You can track it on Yahoo.
Conclusion
Seasonal strength is the only consideration this week.
I expect the major indices to be higher on Friday November 3 than they were on Friday October 27.
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.
