The good news is:
Many of the major indices hit all time or multi year highs last week.
Short Term
The market deteriorated last week, but, that deterioration was interrupted by a run to new highs by the blue chip indices on Thursday.
Most of the short term indicators are falling, but, have not yet reached levels low enough to suggest a rebound.
Intermediate term
When the market is rising new lows are usually low or declining while new highs are rising. Recently we have been witnessing an unusual condition where both new highs and new lows have been increasing.
The first chart covers the past two years showing the OTC in orange and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green and a 10% trend of NASDAQ new lows (OTC NL) in black. Dashed vertical lines have been drawn on the 1st trading day of each month; the lines are red on the 1st trading day of the year.
OTC NL has been plotted on an inverted Y axis so increasing new lows move the indicator downward (up is good).
I have included this longer term chart to show how these indicators usually move together.
The next two charts are similar to the one above, but, are more detailed.
The first covers the past 6 months and you can see that in the past couple weeks the indicators have been diverging, i.e. both new highs and new lows have been increasing.
On Friday there were 180 new lows on the NASDAQ while the high for the week on the NYSE was 174 on Wednesday. These were the highest numbers of new lows on the NASDAQ since July 21, 2006 when there were 240 and 180 on the NYSE July 18, 2006 near the lows for the cycle.
The next chart shows the indicators with a similar pattern in March of 2000.
The NDX index is a capitalization weighted index made up of the 100 largest non financial companies on the NASDAQ. The NASDAQ composite (OTC) is a capitalization weighted index including every issue traded on the NASDAQ.
The chart below shows the NDX in red, the OTC in green and a FastTrack (http://fasttrack.net/) relative strength indicator called Accutrack as a histogram in yellow.
Accutrack shows the NDX outperforming the OTC by the greatest margin of the past year.
The next chart is similar to the one above except is shows the year prior to mid April 2000. NDX strength relative to the OTC peaked a couple weeks after the index highs.
I have often said the small caps lead both up and down and they are deteriorating relative to the blue chips. Tops can take a long time to develop, but, that development appears to be underway.
Seasonality
Next week includes the week prior to the 4th Friday in July during the 3rd year of the Presidential Cycle.
The tables show the daily returns for the week prior to the 4th. Friday in July during the 3rd year of the Presidential Cycle. NASDAQ data covers the period from 1963 - 2003 and SPX data from 1953 - 2003. Data prior to 1953 has been omitted because the market traded 6 days a week. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.
The week has usually started weak and then improved. The S&P 500 has been up 73% of the time with an average return of 0.63% while the OTC has been mostly flat.
Report for the week before the 4th Friday of July
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 | -0.27% | 0.30% | -0.39% | 0.99% | -0.36% | 0.28% |
| 1967-3 | 0.21% | -0.33% | -0.06% | 0.37% | 0.76% | 0.95% |
| 1971-3 | -0.55% | 0.38% | -0.05% | -0.18% | 0.08% | -0.32% |
| 1975-3 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1979-3 | -0.30% | 0.33% | 0.69% | 0.40% | 0.36% | 1.47% |
| 1983-3 | -0.82% | 0.28% | 1.80% | 0.80% | -2.69% | -0.63% |
| Avg | -0.37% | 0.17% | 0.59% | 0.34% | -0.37% | 0.37% |
| 1987-3 | -0.06% | 0.26% | 0.29% | 0.55% | 0.31% | 1.35% |
| 1991-3 | -0.51% | -1.08% | -0.46% | 0.59% | 0.49% | -0.97% |
| 1995-3 | 1.75% | 1.55% | 0.65% | 1.05% | -0.53% | 4.46% |
| 1999-3 | -1.19% | -3.47% | 1.08% | -2.80% | 0.30% | -6.08% |
| 2003-3 | -1.59% | 1.47% | 0.77% | -1.03% | 1.72% | 1.34% |
| Avg | 0.00% | -0.68% | 0.39% | -0.15% | 0.14% | -0.31% |
| OTC summary for Presidential Year 3 1963 - 2003 | ||||||
| Avg | -0.19% | -0.20% | 0.39% | 0.19% | -0.14% | 0.06% |
| Win% | 22% | 67% | 56% | 78% | 67% | 56% |
| OTC summary for all years 1963 - 2006 | ||||||
| Avg | -0.36% | -0.16% | 0.19% | 0.00% | -0.09% | -0.42% |
| Win% | 38% | 57% | 57% | 62% | 62% | 49% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | -0.09% | -0.61% | 0.31% | 0.97% | 0.84% | 1.42% |
| 1959-3 | 0.62% | 0.50% | 0.50% | -0.20% | 0.02% | 1.44% |
| 1963-3 | -0.66% | 0.01% | 0.54% | -0.03% | 0.41% | 0.28% |
| 1967-3 | -0.33% | 0.01% | 0.34% | 0.31% | 0.15% | 0.48% |
| 1971-3 | -0.18% | 0.39% | -0.04% | -0.17% | -0.17% | -0.17% |
| 1975-3 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1979-3 | -0.23% | 0.37% | 1.09% | 0.02% | 0.00% | 1.26% |
| 1983-3 | -0.21% | 0.54% | 2.71% | -0.14% | -0.10% | 2.80% |
| Avg | -0.24% | 0.33% | 1.02% | 0.01% | -0.04% | 1.09% |
| 1987-3 | 0.45% | 0.54% | 1.06% | 0.76% | 0.19% | 3.00% |
| 1991-3 | -0.35% | -0.90% | -0.21% | 0.61% | -0.01% | -0.85% |
| 1995-3 | 0.54% | 0.80% | 0.09% | 0.64% | -0.41% | 1.68% |
| 1999-3 | -0.78% | -2.17% | 0.16% | -1.33% | -0.29% | -4.42% |
| 2003-3 | -1.46% | 0.95% | 0.05% | -0.71% | 1.74% | 0.57% |
| Avg | -0.04% | -0.43% | 0.28% | 0.17% | -0.13% | -0.15% |
| SPX summary for Presidential Year 3 1955 - 2003 | ||||||
| Avg | -0.11% | -0.05% | 0.60% | 0.13% | 0.06% | 0.63% |
| Win% | 27% | 73% | 82% | 55% | 50% | 73% |
| SPX summary for all years 1953 - 2006 | ||||||
| Avg | -0.20% | -0.14% | 0.38% | 0.13% | -0.04% | 0.13% |
| Win% | 28% | 55% | 65% | 62% | 59% | 54% |
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
A significant top appears to be developing, however, seasonal factors are likely to prolong that development. Short term the sell off has a way to go but end of month seasonal influences are likely to arrest the decline in a few days.
I expect the major indices to be higher on Friday July 27 than they were on Friday July 20.
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.
