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Technical Market Report

The good news is:
• Since 1953 the S&P 500 (SPX) has been down only once during the week following the 3rd Friday in January during the 3rd year of the Presidential Cycle (next week).

Short Term

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in magenta and an indicator showing momentum of NASDAQ downside volume in green. The indicator is plotted on an inverted Y axis decreasing downside volume moves the indicator upward.

During the rally that began last summer prices have moved upward most quickly when the indicator was also moving upward.

The indicator began moving sharply downward last week along with prices.

The duration of the downward periods have been lasting at least 2 weeks.

Intermediate term

The secondaries lead both up and down or, at least, move faster (higher betas).

The chart below is from FastTrack (http://fasttrack.net) covering the past 6 months showing the Russell 2000 (R2K) in red and the SPX in green. The histogram at the bottom of the screen is a relative strength indicator called Accutrack. When the indicator is moving upward or above the 0 line the secondaries are outperforming the blue chips.

The indicator peaked in mid October and has been negative since mid December.

Healthy bull markets are accompanied by expanding new highs.

The chart below covers the past six months showing the OTC in magenta and the NASDAQ new high indicator (OTC NH) in green. OTC NH is a 10% trend of NASDAQ new highs.

For the rally that began last summer, indicator peaked in mid November.

It is encouraging that the high of early last week was slightly higher than the high around the first of the year, however, the low during the 2nd week of January was the lowest point since early October.

If the indicator turns upward before dropping below the low of earlier this month we can call it an upward trend. The trend issue should be resolved this week. Friday was not encouraging because new highs decreased on an up day.

Seasonality

Next week is the week following January options expiration during the 3rd year of the Presidential Cycle.

In the tables below, OTC data covers the period from 1963 - 2003 and SPX data from 1955 - 2003 during the 3rd year of the Presidential Cycle. There are summaries for both the 3rd year of the Presidential Cycle and all years combined beginning with 1963 for the OTC and 1953 for the S&P 500. Data prior to 1953 has been omitted because the market traded 6 days a week.

Next week has been a strong week. The OTC has been up 73% of the time since 1963 and the SPX has only been down once since 1953 (up 92% of the time). The 3rd year is stronger than the averages for all years which are also very positive. Over all years the OTC has been up 73% of the time and the SPX 69% of the time.

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

OTC Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1963-3 0.10% -0.10% -0.29% -0.32% 0.00% -0.61%
1967-3 0.62% -0.34% -0.11% -0.10% 0.02% 0.08%
 
1971-3 0.50% 0.09% -0.29% -0.47% 0.91% 0.75%
1975-3 0.53% -0.40% -0.09% 0.58% 1.38% 1.99%
1979-3 0.01% 0.64% -0.10% 0.86% 0.49% 1.91%
1983-3 -2.97% 1.04% 0.94% 1.66% 0.61% 1.28%
1987-3 0.70% -0.14% -0.64% 0.93% -0.25% 0.60%
Avg -0.25% 0.25% -0.04% 0.71% 0.63% 1.31%
 
1991-3 0.72% -0.18% 1.29% 1.93% 0.75% 4.52%
1995-3 -0.33% 0.49% -0.29% -0.45% 0.18% -0.41%
1999-3 1.30% 2.71% -1.10% 2.93% 1.15% 7.00%
2003-3 -1.26% -0.87% -0.35% 2.12% -3.32% -3.68%
Avg 0.11% 0.54% -0.11% 1.63% -0.31% 1.86%
 
OTC summary for Presidential Year 3 1963 - 2003
Avg -0.01% 0.27% -0.09% 0.88% 0.19% 1.22%
Win% 73% 45% 18% 64% 80% 73%
 
OTC summary for all years 1063 - 2006
Avg -0.16% 0.06% 0.08% 0.17% 0.09% 0.25%
Win% 56% 45% 49% 49% 70% 61%
 
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 0.23% -0.03% 1.24% 0.11% 0.56% 2.10%
1959-3 -0.23% 0.07% 0.57% -0.12% 0.05% 0.34%
1963-3 0.15% 0.25% 0.28% 0.20% 0.26% 1.13%
1967-3 0.37% 0.14% -0.76% -0.05% 0.41% 0.11%
 
1971-3 0.42% 0.33% -0.73% 0.34% 0.70% 1.06%
1975-3 0.17% -0.53% 1.47% 0.46% 1.26% 2.83%
1979-3 0.15% 0.70% -0.44% 1.03% 0.66% 2.10%
1983-3 -2.70% 1.27% -0.15% 1.93% 0.17% 0.52%
1987-3 1.15% -0.11% -0.45% 2.27% -1.39% 1.47%
Avg -0.16% 0.33% -0.06% 1.20% 0.28% 1.60%
 
1991-3 -0.35% -0.83% 0.58% 1.38% 0.39% 1.17%
1995-3 0.22% 0.01% 0.34% 0.19% 0.44% 1.20%
1999-3 0.72% 1.48% -0.73% 1.79% 1.12% 4.38%
2003-3 -1.62% -1.57% -1.04% 1.02% -2.92% -6.13%
Avg -0.26% -0.23% -0.21% 1.10% -0.24% 0.15%
 
SPX summary for Presidential year 3 1055 - 2003
Avg -0.10% 0.09% 0.01% 0.81% 0.13% 0.94%
Win% 69% 62% 46% 85% 85% 92%
 
SPX summary for all years 1953 - 2006
Avg -0.12% 0.12% 0.07% 0.20% 0.07% 0.34%
Win% 48% 61% 52% 60% 58% 69%

Conclusion

Market internals are deteriorating, but last weeks sell off relieved the overbought condition we had at the end of the previous week and next week has an extremely strong positive bias.

I expect the major indices to be higher on Friday January 26 than they were on Friday January 19.

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 most of the major indices were down while the Dow Jones Industrial Average was up slightly so I am calling last weeks negative forecast a tie.

 

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