The good news is:
• The market is approaching an oversold level near its recent extremes.
Short Term
For the past few weeks the market has been bouncing from one extreme to another. It has gone from an oversold low early this month to an overbought high the end of last week and, if the current trend continues, will be at another oversold low in a few days.
The first two charts cover the past 6 months with dashed vertical lines on the 1st trading day of each month. The NASDAQ composite (OTC) is shown in red and the indicators are oscillators of NASDAQ breadth data.
The indicator in the 1st chart is an oscillator of NASDAQ advancing issues - declining issues. A dashed horizontal line has been drawn at the 0 level and a solid horizontal line has been drawn at an average low for the indicator.
The next chart is similar to the one above except the indicator has been calculated from NASDAQ new highs - new lows.
These oscillators are at or near their average lows for the past 6 months.
Intermediate term
In 2004 the NYSE advance - decline line (NY ADL) surpassed its previous all time high set in 1956. I have not mentioned the NY ADL very often because it failed to confirm the strength in the market in 1999 then in late 2000 it strengthened as the market was collapsing into 2002. In 2002 indicator took off with the rest of the market and since 2004 has been hitting all time highs on a regular basis. The 1999 - 2002 period was an anomaly for this indicator and my suspicions persist.
The chart below covers the past 10 years showing the S&P 500 (SPX) in blue and the NY ADL in green, dashed vertical lines have been drawn on the 1st trading day of the year.
Over the years the NY ADL has been best at identifying market tops and it has been weakening lately as prices have been making new highs.
The chart below covers the past year and a half showing the SPX in blue and momentum of NY ADL (NY ADL MoM) in brown, dashed vertical lines have been drawn on the 1st trading day of each month.
NY ADL MoM has been falling off since early May while prices have been rising.
The next chart is similar to the one above except it covers the past 3 years with dashed vertical lines drawn on the 1st trading day of the year.
Declines in NY ADL MoM have preceded price declines and currently we are looking at a pretty severe example.
The NY ADL was deceptively weak in 1999 also the 3rd of the Presidential Cycle and it is weakening now after a sustained period of exceptional strength.
Seasonality
Next week includes last 5 trading days in June during the 3rd year of the Presidential Cycle.
The tables show the daily returns for the last 5 trading days of June during the 3rd year of the Presidential Cycle. NASDAQ data covers the period from 1963 - 2003 and SPX data from 1931 - 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 1928.
During the 3rd year of the Presidential Cycle the SPX has been up only 37% of the time and had an average loss of 0.43%. All other measures have been modestly positive. Friday, when end of month seasonality kicks in, has been the strongest day of the week.
Last 5 trading days 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 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1963-3 | 0.41% 1 | 0.20% 2 | -0.41% 3 | -0.79% 4 | -0.35% 5 | -0.94% |
| 1967-3 | 0.30% 1 | -0.62% 2 | -0.07% 3 | 0.22% 4 | 0.47% 5 | 0.30% |
| 1971-3 | 0.36% 4 | 0.18% 5 | -0.10% 1 | 0.72% 2 | 0.54% 3 | 1.70% |
| 1975-3 | 0.54% 2 | 0.08% 3 | 0.17% 4 | 0.06% 5 | 0.60% 1 | 1.45% |
| 1979-3 | -0.26% 1 | -0.26% 2 | 0.64% 3 | 0.49% 4 | 0.04% 5 | 0.65% |
| 1983-3 | 0.48% 5 | -1.39% 1 | -2.00% 2 | 0.12% 3 | 0.78% 4 | -2.01% |
| Avg | 0.28% | -0.40% | -0.27% | 0.32% | 0.49% | 0.42% |
| 1987-3 | -0.17% 3 | -0.01% 4 | -0.12% 5 | -0.05% 1 | -0.42% 2 | -0.78% |
| 1991-3 | -2.00% 1 | -0.41% 2 | -0.05% 3 | 0.67% 4 | -0.07% 5 | -1.85% |
| 1995-3 | -1.27% 1 | -0.80% 2 | 0.10% 3 | 0.68% 4 | 0.72% 5 | -0.56% |
| 1999-3 | -1.70% 4 | -0.05% 5 | 1.95% 1 | 1.53% 2 | 1.65% 3 | 3.37% |
| 2003-3 | -0.32% 2 | -0.18% 3 | 1.96% 4 | -0.54% 5 | -0.15% 1 | 0.77% |
| Avg | -1.09% | -0.29% | 0.77% | 0.46% | 0.34% | 0.19% |
| OTC summary for Presidential Year 3 1963 - 2003 | ||||||
| Averages | -0.33% | -0.30% | 0.19% | 0.28% | 0.34% | 0.19% |
| % Winners | 45% | 27% | 45% | 73% | 64% | 55% |
| MDD 6/28/1983 3.36% -- 6/26/1991 2.44% -- 6/27/1995 2.06% | ||||||
| OTC summary for all years 1963 - 2006 | ||||||
| Averages | -0.07% | -0.16% | 0.08% | 0.17% | 0.26% | 0.28% |
| % Winners | 48% | 41% | 55% | 64% | 66% | 64% |
| MDD 6/30/1970 5.73% -- 6/29/1965 4.67% -- 6/28/1974 4.27% | ||||||
| SPX Presidential Year 3 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1931-3 | -0.66% 4 | 2.00% 5 | 0.98% 6 | -2.00% 1 | -1.72% 2 | -1.41% |
| 1935-3 | -1.43% 2 | -1.16% 3 | -0.49% 4 | 0.89% 5 | -0.10% 6 | -2.30% |
| 1939-3 | -2.00% 1 | 0.44% 2 | -2.00% 3 | -2.00% 4 | 0.65% 5 | -4.91% |
| 1943-3 | 2.00% 5 | 0.33% 6 | 0.57% 1 | -0.32% 2 | 0.57% 3 | 3.14% |
| 1947-3 | -1.97% 2 | 0.80% 3 | 0.40% 4 | 0.00% 5 | 0.60% 1 | -0.17% |
| 1951-3 | -1.21% 1 | 0.05% 2 | 0.33% 3 | -1.26% 4 | -0.66% 5 | -2.76% |
| 1955-3 | 0.52% 5 | 0.07% 1 | -0.54% 2 | 0.05% 3 | 0.59% 4 | 0.69% |
| 1959-3 | 0.51% 3 | 0.03% 4 | 0.96% 5 | 0.67% 1 | 0.17% 2 | 2.34% |
| 1963-3 | -0.07% 1 | -0.23% 2 | -0.90% 3 | -0.49% 4 | 0.43% 5 | -1.25% |
| Avg | -0.44% | 0.15% | 0.05% | -0.21% | 0.23% | -0.23% |
| 1967-3 | -0.39% 1 | -0.37% 2 | 0.01% 3 | -0.50% 4 | -0.23% 5 | -1.49% |
| 1971-3 | -0.24% 4 | -0.18% 5 | -0.26% 1 | 1.10% 2 | 0.89% 3 | 1.31% |
| 1975-3 | 0.61% 2 | 0.46% 3 | 0.20% 4 | 0.00% 5 | 0.40% 1 | 1.67% |
| 1979-3 | -0.54% 1 | -0.42% 2 | 0.60% 3 | 0.52% 4 | 0.11% 5 | 0.27% |
| 1983-3 | -0.10% 5 | -1.14% 1 | -1.65% 2 | 0.58% 3 | 0.88% 4 | -1.43% |
| Avg | -0.13% | -0.33% | -0.22% | 0.34% | 0.41% | 0.07% |
| 1987-3 | -0.51% 3 | 0.68% 4 | -0.58% 5 | 0.24% 1 | -1.27% 2 | -1.43% |
| 1991-3 | -1.80% 1 | -0.08% 2 | 0.25% 3 | 0.76% 4 | -0.87% 5 | -1.74% |
| 1995-3 | -1.02% 1 | -0.31% 2 | 0.42% 3 | -0.16% 4 | 0.16% 5 | -0.90% |
| 1999-3 | -1.30% 4 | -0.04% 5 | 1.22% 1 | 1.51% 2 | 1.57% 3 | 2.97% |
| 2003-3 | 0.18% 2 | -0.83% 3 | 1.08% 4 | -0.97% 5 | -0.18% 1 | -0.72% |
| Avg | -0.89% | -0.11% | 0.48% | 0.28% | -0.12% | -0.36% |
| SPX summary for Presidential Year 3 1931 - 2003 | ||||||
| Averages | -0.50% | 0.01% | 0.03% | -0.07% | 0.11% | -0.43% |
| % Winners | 26% | 47% | 63% | 47% | 63% | 37% |
| MDD 6/29/1939 5.46% -- 6/30/1931 3.69% -- 6/27/1935 3.06% | ||||||
| SPX summary for all years 1928 - 2006 | ||||||
| Averages | -0.12% | -0.05% | -0.07% | 0.15% | 0.13% | 0.02% |
| % Winners | 46% | 42% | 51% | 59% | 58% | 51% |
| MDD 6/29/1939 5.46% -- 6/29/1950 3.96% -- 6/30/1931 3.69% | ||||||
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
Short term the market is in a downtrend that should end in the next few days as end of month seasonality kicks in.
I expect the major indices to be higher on Friday June 29 than they were on Friday June 22.
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