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Technical Market Report

The good news is:
• The blue chip indices hit multi year or all time highs last week.

Short Term

Some of the small cap short term indicators appeared to have bottomed and turned upward last week. Seasonally the last week and a half in May have been strong, so it appears likely the recent weakness in the small caps is ending.

The first chart covers the past 6 months showing the Russell 2000 (R2K) in red and an indicator showing the difference of momentum of new lows subtracted from momentum of new highs in blue. New highs and new lows have been calculated from the component issues of the R2K over the trailing 6 weeks rather than 52 weeks as reported by the exchanges. There are dashed vertical lines drawn on the 1st trading day of each month.

Last week the indicator reached a low point near its lowest level of the past 6 months and turned upward.

The next chart covers the past 6 months showing the NASDAQ composite (OTC) in red and an indicator plotting the ratio of NASDAQ upside volume to downside volume in blue.

This indicator also bounced off a low last week.

Intermediate term

The secondaries lead both up and down.

Recently the relationship of the secondaries to the blue chips has been troublesome.

The three charts below cover the past 1.5 years. The first chart shows the S&P 500 (SPX) in red and the percentage of the component issues of the SPX that are above their 50 day EMA in olive drab.

The second chart is similar to the 1st chart except the index is the S&P mid cap (MID) and the indicator has been calculated from the component issues of that index.

The third chart is similar to the 1st two except the index is the R2K and the indicator has been calculated from the component issues of that index.

81% of the component issues of the SPX are above their 50 day EMA's.
68% of the component issues of the MID are above their 50 day EMA's.
53% of the component issues of the R2K are above their 50 day EMA's.

This is not an encouraging pattern.

Seasonality

From 1868 to 1970 Memorial Day was observed on May 30. Congress passed the National Holiday Act of 1971 changing Memorial Day to the last Monday in May to ensure a three day weekend.

The tables below cover the week ahead of Memorial Day since 1971 during the 3rd year of the Presidential Cycle.

There are summaries for both the 3rd year of the Presidential Cycle and all years combined.

Both the OTC and SPX have been up 56% of the time during the 3rd year of the Presidential Cycle, slightly below their percentages for all years combined. Returns have been slightly positive for the OTC and slightly negative for the SPX. There has been a clear dichotomy between the 1st and 2nd halves of the week.

Report for the week before the 3rd Friday of May
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.

5 days before Memorial Day
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 3
  Day5 Day4 Day3 Day2 Day1 Totals
1971-3 -0.40% 1 -0.85% 2 0.03% 3 0.07% 4 0.60% 5 -0.55%
1975-3 -0.55% 1 -0.17% 2 -1.10% 3 0.75% 4 1.30% 5 0.24%
1979-3 0.11% 1 0.56% 2 0.17% 3 -0.02% 4 0.44% 5 1.27%
1983-3 0.10% 1 1.15% 2 0.59% 3 0.72% 4 0.21% 5 2.77%
 
1987-3 -1.27% 1 -1.30% 2 -0.39% 3 0.47% 4 -0.26% 5 -2.76%
1991-3 -0.27% 1 0.73% 2 0.76% 3 0.47% 4 0.63% 5 2.33%
1995-3 0.76% 1 0.97% 2 -0.19% 3 -0.08% 4 -0.62% 5 0.85%
1999-3 -2.63% 1 -2.97% 2 1.81% 3 -0.20% 4 2.12% 5 -1.87%
2003-3 -2.97% 1 -0.11% 2 -0.08% 3 1.19% 4 0.17% 5 -1.81%
Avg -1.28% -0.54% 0.38% 0.37% 0.41% -0.65%
 
OTC summary for Presidential Year 3 1971 - 2003
Averages -0.79% -0.22% 0.18% 0.38% 0.51% 0.05%
%Winners 33% 44% 56% 67% 78% 56%
MDD 5/25/1999 5.52% -- 5/21/2003 3.16% -- 5/20/1987 2.94%
 
OTC summary for all years 1971 - 2006
Averages -0.28% -0.19% 0.12% 0.25% 0.16% 0.07%
% Winners 43% 47% 61% 61% 64% 64%
 
SPX Presidential Year 3
  Day5 Day4 Day3 Day2 Day1 Totals
1971-3 -0.85% 1 -0.66% 2 0.12% 3 -0.19% 4 0.23% 5 -1.35%
1975-3 0.11% 1 -0.51% 2 -1.12% 3 0.37% 4 1.33% 5 0.18%
1979-3 0.21% 1 0.37% 2 -0.63% 3 0.05% 4 0.29% 5 0.29%
1983-3 0.80% 1 1.29% 2 0.40% 3 -0.44% 4 -0.62% 5 1.44%
 
1987-3 -0.27% 1 -2.45% 2 -0.50% 3 0.70% 4 0.71% 5 -1.81%
1991-3 -0.03% 1 0.82% 2 0.22% 3 -0.32% 4 0.67% 5 1.37%
1995-3 0.86% 1 0.94% 2 0.00% 3 0.00% 4 -0.93% 5 0.87%
1999-3 -1.77% 1 -1.71% 2 1.59% 3 -1.79% 4 1.59% 5 -2.09%
2003-3 -2.49% 1 -0.11% 2 0.40% 3 0.92% 4 0.14% 5 -1.14%
Avg -0.74% -0.50% 0.34% -0.10% 0.44% -0.56%
 
SPX summary for Presidential Year 3
Averages -0.38% -0.22% 0.05% -0.08% 0.38% -0.25%
%Winners 44% 44% 67% 44% 78% 56%
MDD 5/27/1999 3.68% -- 5/20/1987 3.21% -- 5/20/2003 2.60%
 
SPX summary for all years 1971 -2006
Averages -0.09% -0.05% 0.00% 0.11% 0.16% 0.13%
% Winners 53% 50% 56% 53% 61% 61%

Mutual Fund

Compliance issues demand that I not mention the mutual fund that I manage by name or symbol in this letter.

To see a current chart of the fund go to: http://finance.yahoo.com/q/bc?s=APHAX&t=6m&l=on&z=m&q=l&c=

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

The fund now has service class shares available.

Conclusion

The small cap indices have been down for two weeks in a row, many of the short term indicators appear to have bottomed and seasonal strength kicks in the second half of the week.

I expect the major indices to be higher on Friday May 25 than they were on Friday May 18.

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 and the small cap indices were down so I am calling last weeks negative forecast a tie.

 

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