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Technical Market Report

The good news is:
• In spite of a couple of dramatic down days last week there was no significant build up of new lows on either the NYSE or NASDAQ.

Short Term

Momentum of downside volume is an indicator that works pretty well from time to time. The chart below covers the past 6 months showing the NASDAQ composite (OTC) in magenta and momentum of NASDAQ downside volume in green. Dashed vertical grey lines have been drawn on the 1st trading day of each month. The indicator has been plotted on an inverted Y axis so increasing downside volume pushes the indicator downward (up is good).

Since this rally began prices have moved up sharply when the indicator was moving upward and have continued to move upward, but not as quickly when the indicator was moving downward.

The indicator is currently moving downward so prices are unlikely to rise very quickly until the indicator changes direction.

Intermediate term

Prices for all of the broad based indices have been moving upward in a very narrow channel since the July lows.

The chart below shows the Russell 2000 (R2K) in a standard deviation channel with bands just 0.4 standard deviations apart. On Tuesday and Friday of last week the index dropped below the lower channel line intraday and recovered.

The gain annualized works out to about 31%, extraordinary for the 3rd quarter of the 2nd year of the Presidential Cycle, but not for the 4th quarter or even the upcoming 3rd year.

Charts of the other broad based indices look similar to this one.

The NASDAQ new low indicator (OTC NL) is a 10% trend (19 day EMA) of NASDAQ new lows plotted on an inverted Y axis to make the chart easier to read (increasing new lows move the indicator downward, up is good).

In the chart below the OTC is plotted in magenta and OTC NL is plotted in blue.

New lows usually begin to increase prior to a cyclical high pushing the indicator downward as the index hits new highs.

There is no suggestion of a downward trend in this indicator.

Seasonality

In the tables below next week is defined as the week prior to the 2nd Friday in December during the 2nd year of the Presidential Cycle.

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. Prior to 1953 the market traded 6 days a week so that data is been omitted.

Historically both indices have been up about 50% of the time over all periods. Big losses in 1994 and 2002 give the OTC an average negative return during the 2nd year of the Presidential Cycle otherwise the average gains have been modest. The first 3 days of the week have been stronger than Thursday and Friday.

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

Year 2
Year Mon Tue Wed Thur Fri Totals
1966-2 0.13% -0.38% 0.13% 0.67% -0.24% 0.31%
 
1970-2 1.07% 0.16% -0.83% 0.73% 0.67% 1.80%
1974-2 -0.52% 1.47% 0.87% 0.15% -0.24% 1.74%
1978-2 0.33% 0.94% 0.66% 0.08% 0.19% 2.20%
1982-2 0.90% 0.57% 0.02% -1.44% -1.43% -1.38%
1986-2 -0.54% -0.55% 0.01% -0.37% -0.50% -1.95%
Avg 0.25% 0.52% 0.15% -0.17% -0.26% 0.48%
 
1990-2 -0.02% -0.94% 0.66% 0.29% -0.72% -0.72%
1994-2 0.09% -0.60% -0.94% -2.06% -0.01% -3.52%
1998-2 1.87% -0.28% 0.77% -1.68% 0.66% 1.33%
2002-2 -3.89% 1.73% 0.42% 0.21% -2.65% -4.18%
Avg -0.49% -0.02% 0.23% -0.81% -0.68% -1.77%
 
OTC summary for Presidential Year 2 1966 - 2002
Avg -0.06% 0.21% 0.18% -0.34% -0.43% -0.44%
Win% 60% 50% 80% 60% 30% 50%
 
OTC summary for all years 1963 - 2005
Avg 0.02% 0.14% -0.03% -0.30% 0.22% 0.05%
Win% 58% 51% 52% 49% 56% 51%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 0.78% 0.46% -0.17% -0.49% -0.37% 0.21%
1958-2 0.11% 0.57% 1.21% -0.21% -0.24% 1.45%
1962-2 -1.25% 0.08% 0.50% -0.34% 0.24% -0.77%
1966-2 0.14% 0.75% 1.09% 0.40% 0.11% 2.49%
 
1970-2 0.54% -0.52% 0.08% 0.42% 0.38% 0.89%
1974-2 0.91% 2.56% 0.58% -0.33% -0.56% 3.16%
1978-2 -0.14% 1.34% 0.05% -0.42% -0.46% 0.37%
1982-2 2.22% 0.67% -0.64% -1.28% -0.31% 0.67%
1986-2 0.00% -0.75% 0.67% -1.11% -0.33% -1.52%
Avg 0.71% 0.66% 0.15% -0.54% -0.26% 0.72%
 
1990-2 0.35% -0.74% 1.15% -0.26% -0.77% -0.27%
1994-2 0.01% -0.05% -0.41% -1.28% 0.34% -1.40%
1998-2 0.93% -0.53% 0.18% -1.56% 0.13% -0.85%
2002-2 -2.22% 1.40% 0.06% -0.37% -1.34% -2.48%
Avg -0.23% 0.02% 0.24% -0.87% -0.41% -1.25%
 
SPX summary for Presidential Year 2 1954 - 2002
Avg 0.18% 0.40% 0.33% -0.52% -0.25% 0.15%
Win% 69% 62% 77% 15% 38% 54%
 
SPX summary for all years 1953 - 2005
Avg 0.10% 0.10% -0.01% -0.26% 0.22% 0.15%
Win% 57% 46% 50% 40% 66% 53%

December

Since 1963 the OTC has been up 60% of the time in December making it, by that measure, an average month. However, the average gain in December has been 1.6% making it second only to November at 1.7%. During the 2nd year of the Presidential Cycle the OTC has also been up 60% of the time but the average gain has been a more modest 0.6%.

The chart below shows the average December return over all years in magenta and the average return for the 2nd year of the Presidential Cycle in blue. An average month has 21 trading days but vary from 18 to 22 trading days. To force the data into a 21 day month the average return is calculated for each of the 1st 11 trading days and each of the last 10. In months with more than 21 trading days some days are omitted and in months with less than 21 some days are counted twice. A solid vertical orange line has been drawn at the dividing point.

This chart is of the OTC using data from 1963 to the present.

Since 1928 the SPX has been up 74% of the time in December with an average gain of 1.4%. During the 2nd year of the Presidential Cycle the SPX has also been up 74% of the time but the average gain has been a little higher at 1.6%.

The next chart shows the SPX using data from 1928 to the present. The average of all years is in orange while the average for the 2nd year of the Presidential Cycle is in blue.

For more information about the Presidential Cycle, go to: http://alphaim.net/research/Pres_Cycle/index.html.

Conclusion

There is no evidence of a developing top and last weeks weakness pushed most of the major indices to the bottom of narrow channels that have contained their movements since the July lows.

I expect the major indices to be higher on Friday December 8 than they were on Friday December 1.

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 major indices were down making last weeks positive forecast based on seasonal strength a miss.

 

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