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Technical Market Report

The good news is:
• Last week most of the major indices hit new multiyear or all time highs.

Short Term

In April 2004 the Russell 2000 (R2K) topped after moving upward for 8 consecutive days. After that high it fell 14.7% to its August 13 low. That is the only example I would find where the index made a significant top concluding with 6 or more consecutive up days.

On average the R2K moves upward for 6 or more consecutive days about twice a year and those moves are usually in the midst of a larger upward move.

The chart below covers the past year showing the R2K in orange and an indicator showing the percentage of the last 6 trading days that were up in black. The indicator touches the top of the chart when there have been 6 or more consecutive up days and it touches the bottom of the chart when there have been 6 or more consecutive down days.

The indicator hit the top of the screen as of Friday indicating a short term overbought condition and suggesting a pull back for the next few days, but the longer term implications are positive.

Intermediate term

The secondaries lead both up and down or, at least, have higher betas.

The chart below shows the R2K in red, the S&P 500 (SPX) in green and a FastTrack relative strength indicator called Accutrack (AT) as a histogram in yellow.

AT moves upward and holds above the neutral line when the R2K is outperforming the SPX.

AT bottomed about 2 weeks ago and crossed from below to above the 0 line about a week ago.

You can learn more about accutrack at: http://fasttrack.net/

Seasonality

Next week is the week before the 2nd Friday in February during the 3rd year of the Presidential Cycle.

In the tables below, OTC data covers the period from 1963 - 2003 and S&P 500 (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 SPX. 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 up 85% of the time. The 3rd year has been much stronger than the averages for all years. Over all years the OTC has been up 59% of the time and the SPX 56% of the time.

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

OTC Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1963-3 -0.42% -0.03% -0.03% 0.42% -0.93% -1.00%
1967-3 0.21% 0.31% -0.13% 0.95% 0.83% 2.16%
 
1971-3 0.84% -0.08% -0.07% 0.75% 0.59% 2.04%
1975-3 -0.42% 0.01% 1.07% 1.80% 0.52% 2.99%
1979-3 -1.18% -0.02% -1.21% 0.50% 0.28% -1.63%
1983-3 0.15% -0.37% 0.11% 1.35% 0.73% 1.98%
1987-3 -0.28% -0.56% 0.62% 0.78% 0.81% 1.37%
Avg -0.18% -0.20% 0.10% 1.04% 0.59% 1.35%
 
1991-3 1.70% 1.74% 1.63% -0.96% 0.41% 4.52%
1995-3 0.88% 0.02% 0.62% 0.21% 0.64% 2.36%
1999-3 1.32% -3.91% -0.06% 4.16% -3.48% -1.97%
2003-3 1.11% -0.09% -1.27% -0.12% 2.56% 2.18%
Avg 1.25% -0.56% 0.23% 0.82% 0.03% 1.77%
 
OTC summary for Presidential Year 3 1963 - 2003
Avg 0.36% -0.27% 0.12% 0.89% 0.27% 1.36%
Win% 64% 36% 45% 82% 82% 73%
 
OTC summary for all years 1963 - 2006
Avg -0.05% 0.02% 0.09% 0.23% -0.05% 0.24%
Win% 42% 52% 57% 68% 56% 59%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 4.68% -5.14% -0.33% 0.19% 0.14% -0.46%
1959-3 0.15% -0.39% 0.39% 0.95% 0.91% 2.01%
1963-3 -0.62% 0.11% 0.49% 0.30% 0.09% 0.37%
1967-3 0.10% 0.67% 0.11% -0.46% 0.03% 0.46%
 
1971-3 0.00% 0.23% -0.47% -0.65% -0.84% -1.72%
1975-3 0.00% -0.70% 0.63% 0.95% 0.50% 1.37%
1979-3 0.34% 0.74% -0.06% -0.14% -0.06% 0.82%
1983-3 0.87% -0.42% -0.59% 0.01% 0.38% 0.26%
1987-3 0.00% 2.07% -0.02% 0.05% -0.03% 2.07%
Avg 0.61% 0.39% -0.10% 0.04% -0.01% 0.56%
 
1991-3 2.57% -0.84% 0.96% -1.30% 1.33% 2.72%
1995-3 0.04% 0.19% 0.41% 0.14% -0.67% 0.11%
1999-3 0.00% 0.96% -1.44% 1.09% 0.15% 0.76%
2003-3 0.00% 1.95% -0.71% -0.95% 1.32% 1.61%
Avg 1.30% 0.57% -0.19% -0.26% 0.53% 1.30%
 
SPX summary for Presidential Year 3 1955- 2003
Avg 1.02% -0.04% -0.05% 0.01% 0.25% 0.80%
Win% 88% 62% 46% 62% 69% 85%
 
SPX summary for all years 1953 - 2006
Avg 0.04% -0.03% 0.15% -0.03% 0.02% 0.15%
Win% 45% 53% 57% 46% 46% 56%

February

The OTC has been up 56% of all Februarys since 1963 with an average gain of 0.3%. However, during the 3rd year of the Presidential Cycle the OTC has been up 75% of the time with an average gain of 2.1%.

The SPX has been up 54% of all Februarys since 1928 with an average loss of -0.2%. However, during the 3rd year of the Presidential Cycle the SPX has been up 70% of the time with an average gain of 1.3%.

The chart below plots the average daily return of the OTC over all years in magenta and during the 3rd year of the Presidential Cycle in blue.

The average month has 21 trading days and the chart has been constructed by averaging the performance of the first 11 trading days and the last 10 trading days. A solid line has been drawn on the dividing point, the eleventh day. This methodology usually offers a pretty accurate picture of the average month, however, February usually has 19 trading days so two days in the middle of the month have been counted twice. You can see it in the chart, the two days before and after the dividing point are identical, they are also two of the strongest days of the month making the month look a little stronger than it really has been.

The next chart is similar to the one above except it shows the SPX.

The Alpha Fund (APHAX)

The Alpha Fund, which I manage, opened last October. The funds web site became operational last week. Beginning this week, I will be reporting the weekly and year to date performance of the fund.

Last week YTD
APHAX +1.8% +2.7%

For information about the fund go to: http://www.thealphafunds.com/index.htm

Conclusion

The market is overbought, but, seasonality is positive and none of the breadth indicators is suggesting a reversal.

I expect the major indices to be higher on Friday February 9 than they were on Friday February 2.

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.

 

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