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Technical Market Report

The good news is:
• The NASDAQ composite (OTC) closed at a multi year high on Friday.

Short Term

For the past few weeks the market has been going from one extreme to another. After experiencing the most oversold condition since early March as measured by upside / downside volume ratios we are now looking at the most overbought condition by that same measure since March.

The first two charts cover the past 6 months with dashed vertical lines on the 1st trading day of each month and horizontal lines at 10% intervals for the indicator. The indicator is a 50% trend (3 day EMA) of upside volume / (upside volume + downside volume).

The first chart shows the NASDAQ composite (OTC) in orange and the indicator, calculated from NASADAQ data, in blue.

The next chart shows the S&P 500 (SPX) in blue and the indicator, calculated from NYSE data, in green.

Measured by the ratio of upside to downside volume the market is as overbought as it has been in the past several months.

Intermediate term

It makes sense that new highs should expand in a rising market. Lately that has not been the case.

The chart below covers the past year showing the OTC in orange and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.

When the OTC hit a multi year high on Friday the indicator was at its lowest level in two months.

The next chart is similar to the one above except the index is the SPX shown in blue and the indicator (NY NH) has been calculated from NYSE data. This chart looks similar to the one above except the cycle high for the indicator occurred in December.

The persistently shrinking number of new highs indicate we are nearing the top of this cycle.

An interesting chart

The chart below covers the past year showing the SPX in blue and an indicator showing the mean point change of the NYSE advance - decline line. That is the indicator is the mean of the absolute value of NYSE advancing issues - declining issues. The indicator reached the highest level ever recorded on Friday from over 70 years of data.

Seasonality

Next week is the week prior to the 4th Friday in June during the 3rd year of the Presidential Cycle.

The tables show the daily returns for the week prior to the 4th Friday of June during the 3rd year of the Presidential Cycle. NASDAQ data covers the period from 1963 - 2003 and SPX data from 1955 - 2003. There are summaries for both the 3rd year of the Presidential Cycle and all years combined. The SPX summary for all years combined begins with 1953 because prior to that the market traded 6 days a week.

Both indices have been, on average, flat over all periods with positive returns about half of the time.

Report for the week before the 4th Friday of June
The number following the year is the position in the presidential cycle.
Daily returns from Monday through the 4th Friday.

OTC Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1963-3 0.41% 0.20% -0.41% -0.79% -0.35% -0.94%
 
1967-3 1.04% 0.01% 0.33% -0.58% 0.24% 1.03%
1971-3 -1.53% -0.95% 0.47% 0.36% 0.18% -1.47%
1975-3 0.62% 0.54% 0.08% 0.17% 0.06% 1.47%
1979-3 -0.29% 0.15% 0.29% 0.19% 0.39% 0.73%
1983-3 -0.45% 0.41% 0.68% -0.26% 0.48% 0.86%
Avg -0.12% 0.03% 0.37% -0.02% 0.27% 0.52%
 
1987-3 0.04% -0.30% -0.17% -0.01% -0.12% -0.56%
1991-3 -2.18% -0.41% -0.05% 0.67% -0.07% -2.03%
1995-3 1.48% 0.84% -0.07% 1.17% -0.13% 3.29%
1999-3 2.61% -1.90% 0.69% -1.70% -0.05% -0.35%
2003-3 -2.07% -0.32% -0.18% 1.96% -0.54% -1.15%
Avg -0.02% -0.42% 0.04% 0.42% -0.18% -0.16%
 
OTC summary for Presidential Year 3 1963 - 2003
Avg -0.03% -0.16% 0.15% 0.11% 0.01% 0.08%
Win% 55% 55% 55% 55% 45% 45%
 
OTC summary for all years 1963 - 2006
Avg -0.08% 0.04% 0.09% -0.04% -0.09% -0.09%
Win% 42% 63% 52% 60% 53% 51%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 0.10% 0.92% 0.22% 0.37% 0.52% 2.13%
1959-3 0.00% -0.02% 0.51% 0.03% 0.96% 1.48%
1963-3 -0.07% -0.23% -0.90% -0.49% 0.43% -1.25%
 
1967-3 -0.03% -0.03% -0.30% -0.25% 0.03% -0.58%
1971-3 -1.11% -0.29% 0.84% -0.24% -0.18% -0.98%
1975-3 1.09% 0.61% 0.46% 0.20% 0.00% 2.36%
1979-3 -0.52% 0.02% 0.05% 0.45% 0.54% 0.54%
1983-3 -0.07% 0.89% 0.27% -0.25% -0.10% 0.75%
Avg -0.13% 0.24% 0.26% -0.02% 0.07% 0.42%
 
1987-3 0.87% -0.39% -0.51% 0.68% -0.58% 0.07%
1991-3 -1.80% -0.08% 0.25% 0.76% -0.87% -1.74%
1995-3 1.00% -0.04% -0.18% 1.30% -0.25% 1.83%
1999-3 0.45% -0.97% -0.21% -1.30% -0.04% -2.06%
2003-3 -1.31% 0.18% -0.83% 1.08% -0.97% -1.85%
Avg -0.16% -0.26% -0.30% 0.50% -0.54% -0.75%
 
SPX summary for Presidential Year 3 1955 - 2003
Avg -0.12% 0.04% -0.03% 0.18% -0.04% 0.05%
Win% 42% 38% 54% 62% 42% 54%
 
SPX summary for all years 1953 - 2006
Avg -0.17% 0.14% 0.07% -0.02% -0.12% -0.10%
Win% 38% 55% 54% 53% 45% 57%

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 market is a little overbought, breadth indicators have been deteriorating and seasonality offers little support.

I expect the major indices to be lower on Friday June 22 than they were on Friday June 15.

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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