The good news is:
• Many of the major indices hit multi year or all time highs last week.

Short Term

The small caps lead both up and down and for the past month that leadership has left something to be desired.

The chart below covers the past year showing the S&P 500 (SPX) in green and the Russell 2000 (R2K) in red. At the bottom of the chart is a FastTrack (http://fasttrack.net) relative strength indicator called Accutrack (AT). When AT is above the neutral line and/or rising the R2K is outperforming the SPX. For the past month until about a week ago AT has been below the neutral line and falling to its lowest level since this up leg began last summer. Last week AT turned up and, although it is still below the neutral level, the direction is what we like to see.

Intermediate term

Advance decline lines (ADL) are a running total of the number of declining issues subtracted from the number of advancing issues.

Until about 3 years ago the all time high for the ADL calculated from NYSE data (NY ADL) had been set in March of 1956.

Until about 4 years ago the value of the NY ADL has been it its slightly negative bias, that is, the indicator would begin to weaken ahead of a weakening in prices. The unprecedented strength in the NY ADL over the past 4 years has led me to dismiss it as an indicator gone wild.

The chart below illustrates this phenomenon. The chart covers the past 65 years showing the SPX in blue and the NY ADL in green. Dashed vertical red lines have been drawn on the 1st trading day of each year.

The NY ADL hit an all time high last Monday but its rate of climb has been falling.

The chart below covers the past year showing the SPX in blue and momentum of the NY ADL in brown. For the past month momentum of the NY ADL has been declining while prices have been rising. This is an unusual occurrence with negative implications.

There was a similar occurrence in early 1987 ahead of weakness that lasted about 2 months.

Seasonality

Next week includes the last 3 trading days of May and the 1st trading day of June during the 3rd year of the Presidential Cycle.

The tables show the daily return of the NASDAQ composite (OTC) over that period from 1963 - 2003 and of the SPX from 1931 - 2003. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.

Over all periods both indices have been up about two thirds of the time. The average returns for the SPX are lower than those for the OTC because of some very weak years in the early 1930's.

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.

Report for the last 3 days of May and the first day of June.
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
	Day3	Day2	Day1	Day1	Totals
1963-3	0.24% 2	0.09% 3	1.05% 5	0.03% 1	1.41%
1967-3	0.87% 5	-0.16% 1	-0.63% 3	-1.76% 4	-1.67%
1971-3	0.03% 3	0.07% 4	0.60% 5	0.57% 2	1.27%
1975-3	-0.62% 3	-0.24% 4	1.61% 5	0.00% 1	0.75%
1979-3	-0.17% 2	-0.81% 3	0.02% 4	0.26% 5	-0.69%
1983-3	0.72% 4	0.21% 5	-1.06% 2	-0.25% 3	-0.38%
Avg	0.17%	-0.19%	0.11%	-0.24%	-0.14%
1987-3	0.28% 3	0.43% 4	0.53% 5	-0.37% 1	0.87%
1991-3	0.37% 3	0.83% 4	0.58% 5	0.20% 1	1.98%
1995-3	-0.62% 5	-1.51% 2	0.68% 3	0.49% 4	-0.96%
1999-3	1.81% 3	-0.20% 4	2.12% 5	-2.35% 2	1.39%
2003-3	0.42% 3	0.75% 4	1.33% 5	-0.32% 1	2.18%
Avg	0.45%	0.06%	1.05%	-0.47%	1.09%
OTC summary for Presidential Year 3 1963 - 2003
Averages	0.30%	-0.05%	0.62%	-0.32%	0.56%
% Winners	73%	55%	82%	45%	64%
MDD 6/1/1967 2.53% -- 6/1/1999 2.35% -- 5/30/1995 2.12%
OTC summary for all years 1963 - 2006
Averages	0.04%	0.14%	0.26%	0.28%	0.71%
% Winners	61%	55%	70%	60%	66%
MDD 5/30/2001 7.40% -- 6/3/2002 5.42% -- 6/1/1973 2.73%
SPX Presidential Year 3
	Day3	Day2	Day1	Day1	Totals
1931-3	-1.12% 3	0.38% 4	-2.18% 5	-4.76% 1	-7.68%
1935-3	-1.79% 2	-1.62% 3	-1.14% 5	-0.73% 6	-5.28%
1939-3	0.61% 6	0.78% 1	-0.43% 3	-1.55% 4	-0.59%
1943-3	0.25% 4	0.25% 5	0.50% 6	0.58% 2	1.58%
1947-3	-0.14% 2	1.56% 3	0.77% 4	-1.04% 1	1.15%
1951-3	0.62% 1	0.66% 2	0.80% 4	-0.19% 5	1.89%
1955-3	0.66% 4	0.21% 5	-0.05% 2	0.13% 3	0.96%
1959-3	0.17% 3	0.34% 4	0.50% 5	-0.09% 1	0.93%
1963-3	0.20% 2	0.46% 3	0.67% 5	-0.16% 1	1.17%
Avg	0.30%	0.65%	0.54%	-0.27%	1.22%
1967-3	-0.23% 5	-0.54% 1	-1.56% 3	1.29% 4	-1.04%
1971-3	0.12% 3	-0.19% 4	0.23% 5	0.57% 2	0.73%
1975-3	-0.70% 3	-0.03% 4	1.64% 5	1.57% 1	2.48%
1979-3	-0.17% 2	-0.94% 3	-0.03% 4	0.09% 5	-1.05%
1983-3	-0.44% 4	-0.62% 5	-1.26% 2	0.10% 3	-2.22%
Avg	-0.28%	-0.46%	-0.20%	0.72%	-0.22%
1987-3	-0.13% 3	0.70% 4	-0.23% 5	-0.09% 1	0.25%
1991-3	0.22% 3	1.09% 4	0.74% 5	-0.45% 1	1.60%
1995-3	-0.93% 5	-0.01% 2	1.88% 3	0.02% 4	0.94%
1999-3	1.59% 3	-1.79% 4	1.59% 5	-0.58% 2	0.81%
2003-3	0.18% 3	-0.38% 4	1.47% 5	0.35% 1	1.63%
Avg	0.19%	-0.08%	1.09%	-0.15%	1.05%
SPX summary for Presidential Year 3 1931 - 2003
Averages	-0.05%	0.02%	0.21%	-0.26%	-0.09%
% Winners	53%	53%	58%	47%	68%
MDD 6/1/1931 7.53% -- 6/1/1935 5.18% -- 5/31/1967 2.31%
SPX summary for all years 1928 - 2006
Averages	-0.04%	0.17%	0.04%	0.01%	0.18%
% Winners	48%	59%	58%	51%	63%
MDD 6/1/1932 13.89% -- 6/1/1931 7.53% -- 5/28/1962 6.68%

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 gained modestly last week breaking their relative underperformance to the blue chips and seasonally next week has been modestly positive.

I expect the major indices to be higher on Friday June 1 than they were on Friday May 25.

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 was the opposite of the previous week with the large cap indices down and the small cap indices up so I am calling last weeks positive forecast a tie.