The good news is:
• The Federal Reserve Bank cut its discount rate 0.5% to 5.75% on Friday.
What is going on?
Technical analysis is the study of trading patterns as technicians we look for repeating patterns.
The current patterns are so extreme there are not enough examples to draw conclusions.
On Thursday there were 1132 new lows on the NYSE the 3rd highest number ever recorded and 33% of the total issues traded.
The records are:
Date | Total issues traded | New lows | Percent of total |
10/20/1987 | 2076 | 1174 | 57% |
8/31/1998 | 3571 | 1183 | 33% |
8/16/2007 | 3453 | 1132 | 33% |
In the late 1980's I found when ever there had been more than 200 new lows on the NYSE there was always a retest of the low. There are nearly twice as many issues traded now so it is probably safe to double that number. The 1132 new lows last Thursday makes a retest of Thursday's low likely.
On October 19, 1987 the Dow Jones Industrial Average (DJIA) closed at 1738.74; in two days it rallied 17% to close at 2027.85 then fell over the next 6 weeks to 1766.74 on December 4, 1987, 1.6% above the crash low. The crash low occurred 37 trading days after the all time high of 2722.42 reached on August 25, 1987.
On August 31, 1998 the DJIA closed at 7539.07, 19.3% off its all time high set 31 trading days earlier on 7/17/1998. It then rallied 8.2% over 16 trading days before retesting its low on October 1, 1998. The DJIA reached 7632.53 on October 1, 1998 1.2% above its August 31 low.
On August 16, 2007 the DJIA closed at 12,845.78, 8.2% off its all time high set 20 trading days earlier on 7/19/2007. At this point there is nothing to suggest last Thursday's low will hold as the low for this down leg.
The all time record for new lows on the NASDAQ was set on October 26, 1987 at 1534, 32% of the 4851 issues traded that day. On October 8, 1998 there were 1343 new lows or 28% of the 4849 issues traded on that day. The 480 new lows on the NASDAQ August 6, 2007 represented 15% of the 3182 issues traded and ranks 42 among the all time high number of new lows for that exchange.
The Federal Reserve Bank cut the discount rate by 0.5% on Friday and the Dollar Index dropped 3.1%. That will not be encouraging to foreign investors. On the weekend before the 1987 crash then Treasury Secretary James Brady gave a speech where he stated we would let the dollar fall to defend our balance of trade. I think that speech triggered the crash.
Evidence of a bottom will take time to develop and lows of last week are likely to be retested. The DJIA, S&P 500 and NASDAQ composite (OTC) all registered 10% intraday declines on Thursday from their highs last month. It appears 10% was a threshold that triggered some massive buy programs.
Seasonality
Next week includes the week prior to the 4th. Friday in August during the 3rd year of the Presidential Cycle.
The tables show the daily returns for the week during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2003 and S&P 500 (SPX) data from 1953 - 2003. There are summaries for both the 3rd year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.
During the 3rd year of the Presidential Cycle, in the coming week, returns have been modest. The SPX has been up 69% of the time, but, the average return has only been 0.08%.
Report for the week before the 4th Friday of Aug
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 | 0.26% | -0.14% | -0.06% | 0.06% | 0.58% | 0.69% |
| 1967-3 | -0.02% | 0.10% | -0.11% | -0.34% | -0.23% | -0.61% |
| 1971-3 | 0.34% | 0.31% | 0.23% | 0.11% | 0.30% | 1.30% |
| 1975-3 | -0.70% | -1.77% | -1.47% | 0.50% | 0.72% | -2.71% |
| 1979-3 | 0.07% | 0.03% | 0.51% | 0.26% | 0.18% | 1.05% |
| 1983-3 | -0.11% | -1.71% | -0.95% | -0.46% | 0.27% | -2.96% |
| Avg | -0.08% | -0.61% | -0.36% | 0.02% | 0.25% | -0.79% |
| 1987-3 | -0.31% | 0.29% | 0.04% | -0.10% | -0.33% | -0.42% |
| 1991-3 | -2.89% | 0.89% | 3.17% | 0.06% | 0.53% | 1.76% |
| 1995-3 | -1.12% | 0.55% | 0.28% | -0.71% | -0.09% | -1.09% |
| 1999-3 | 2.69% | 1.21% | 1.93% | -1.10% | -0.57% | 4.16% |
| 2003-3 | 2.20% | 1.24% | -0.03% | 0.97% | -0.69% | 3.69% |
| Avg | 0.11% | 0.83% | 1.08% | -0.18% | -0.23% | 1.62% |
| OTC summary for Presidential Year 3 1963 - 2003 | ||||||
| Avg | 0.04% | 0.09% | 0.32% | -0.07% | 0.06% | 0.44% |
| Win% | 45% | 73% | 55% | 55% | 55% | 55% |
| OTC summary for all years 1963 - 2006 | ||||||
| Avg | -0.07% | -0.03% | 0.33% | -0.11% | 0.06% | 0.16% |
| Win% | 41% | 55% | 64% | 55% | 57% | 59% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | -0.10% | 1.36% | 0.14% | 0.45% | 0.44% | 2.29% |
| 1959-3 | -0.36% | 0.20% | 0.14% | 0.96% | -0.25% | 0.70% |
| 1963-3 | -0.07% | -0.08% | -0.13% | 0.35% | 0.31% | 0.38% |
| 1967-3 | -0.56% | -0.54% | -0.14% | -0.56% | -0.42% | -2.21% |
| 1971-3 | 1.03% | 1.07% | 0.01% | -0.17% | 0.24% | 2.17% |
| 1975-3 | -0.19% | -1.45% | -2.04% | -0.18% | 1.46% | -2.40% |
| 1979-3 | 0.49% | 0.07% | 0.07% | -0.33% | -0.03% | 0.28% |
| 1983-3 | 0.22% | -0.96% | -0.93% | -0.25% | 0.81% | -1.12% |
| Avg | 0.20% | -0.36% | -0.61% | -0.30% | 0.41% | -0.65% |
| 1987-3 | -0.77% | 1.03% | -0.65% | -0.95% | -1.31% | -2.65% |
| 1991-3 | -2.36% | 0.79% | 2.94% | 0.19% | 0.73% | 2.28% |
| 1995-3 | -0.20% | 0.25% | -0.43% | 0.06% | 0.47% | 0.16% |
| 1999-3 | 1.77% | 0.24% | 1.34% | -1.43% | -1.01% | 0.91% |
| 2003-3 | 0.92% | 0.26% | -0.20% | 0.30% | -1.02% | 0.25% |
| Avg | -0.13% | 0.51% | 0.60% | -0.37% | -0.43% | 0.19% |
| SPX summary for Presidential Year 3 1955 - 2003 | ||||||
| Avg | -0.01% | 0.17% | 0.01% | -0.12% | 0.03% | 0.08% |
| Win% | 38% | 69% | 46% | 46% | 54% | 69% |
| SPX summary for all years 1953 - 2006 | ||||||
| Avg | -0.12% | 0.03% | 0.17% | -0.18% | -0.07% | -0.18% |
| Win% | 44% | 56% | 56% | 46% | 46% | 59% |
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
We are only 21 trading days from the all time high set for the DJIA on July 19 and number of new lows suggests this decline will be significant. There is probably further to go on the downside.
I expect the major indices to be lower on Friday August 24 than they were on Friday August 17.
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Last week's positive forecast based on entering a seasonally strong week from an oversold position was a miss.
