The good news is:
• The blue chip indices closed at all time highs on Monday and/or Friday last week and the NASDAQ composite (OTC) closed at a multi year high on Friday.
Short Term
The market is overbought.
The chart below covers the past year showing the OTC in blue and a 30 day oscillator of the OTC in black. There are dashed vertical lines drawn on the 1st trading day of each month.
The oscillator is at its highest level since January of 2004. From the index and oscillator high on January 26, 2004 the index fell 6.5% in the next 7 trading days.
It is likely the market is at or near a short term top.
Intermediate Term
The patterns that define a cycle top are a high in all of the major indices confirmed by the breadth indicators then a decline, followed by a return to new highs in the blue chip indices unconfirmed by the breadth indicators and the small cap indices.
The chart below covers the past year showing the SPX in red and the NYSE advance-decline line (NYSE ADL) in green. The NYSE ADL and SPX hit their all time highs around June 1. The SPX hit another all time high on July 19 but the NYSE ADL did not. Last Friday the SPX hit another all time high while the NYSE ADL was well off its old highs.
The next chart shows the SPX in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH) in green. NY NH peaked in December of 2006 and has been reaching progressively lower highs with each higher high in the SPX.
The next chart is similar to the one above except it shows the OTC in blue and the new high indicator OTC NH has been calculated from NASDAQ data.
Seasonality
Next week includes the week prior to the 2nd Friday in October during the 3rd year of the Presidential Cycle.
The tables show the daily change of the indices during the week prior to the 2nd Friday in October. OTC data covers the period from 1963 - 2003 and 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.
The coming week during the 3rd year of the Presidential cycle has been up slightly less than half of the time and the returns, on average, have been modestly negative. Over all years the averages have been up slightly more than half of the time and the returns, on average, have been modestly positive.
Report for the week before the 2nd Friday of October.
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1963-3 | -0.26% | -0.17% | 0.20% | -0.58% | 0.09% | -0.72% |
| 1967-3 | 0.49% | 0.36% | -0.51% | -0.41% | -0.39% | -0.45% |
| 1971-3 | 0.35% | 0.03% | 0.63% | 0.27% | -0.22% | 1.06% |
| 1975-3 | 0.70% | -0.20% | 0.96% | 0.34% | 0.12% | 1.92% |
| 1979-3 | -0.86% | -3.83% | -4.06% | 0.56% | 0.44% | -7.74% |
| 1983-3 | 0.02% | -0.68% | -1.29% | -0.39% | -0.14% | -2.48% |
| Avg | 0.14% | -0.86% | -0.85% | 0.07% | -0.04% | -1.54% |
| 1987-3 | 0.45% | -1.35% | -0.64% | -1.04% | -0.36% | -2.94% |
| 1991-3 | -0.81% | 0.20% | -0.67% | 0.41% | 0.60% | -0.25% |
| 1995-3 | -2.69% | -0.13% | 1.84% | 1.40% | 0.28% | 0.69% |
| 1999-3 | 2.16% | 0.13% | 2.05% | 0.12% | 0.91% | 5.37% |
| 2003-3 | 0.69% | 0.76% | -0.74% | 0.96% | 0.18% | 1.84% |
| Avg | -0.04% | -0.08% | 0.37% | 0.37% | 0.32% | 0.94% |
| OTC summary for Presidential Year 3 1963 - 2003 | ||||||
| Avg | 0.02% | -0.44% | -0.20% | 0.15% | 0.14% | -0.34% |
| Win% | 64% | 45% | 45% | 64% | 64% | 45% |
| OTC summary for all years 1963 - 2006 | ||||||
| Avg | -0.01% | -0.29% | -0.10% | 0.36% | 0.52% | 0.49% |
| Win% | 61% | 45% | 49% | 73% | 68% | 57% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | -2.90% | -0.85% | 1.76% | -0.31% | -0.41% | -2.71% |
| 1959-3 | -0.10% | -0.09% | -0.26% | -0.23% | 0.33% | -0.35% |
| 1963-3 | -0.21% | -0.14% | -0.58% | 0.03% | 0.10% | -0.80% |
| 1967-3 | 0.26% | -0.69% | -0.49% | -0.64% | 0.26% | -1.30% |
| 1971-3 | 0.28% | -0.10% | 0.72% | 0.20% | -0.66% | 0.44% |
| 1975-3 | 1.08% | -0.13% | 1.35% | 0.49% | -0.18% | 2.61% |
| 1979-3 | -1.25% | -2.96% | -1.25% | -0.24% | -0.53% | -6.22% |
| 1983-3 | 1.08% | -1.34% | -0.42% | 0.15% | -0.01% | -0.54% |
| Avg | 0.29% | -1.04% | -0.02% | -0.01% | -0.22% | -1.00% |
| 1987-3 | 0.00% | -2.70% | -0.21% | -1.38% | -0.98% | -5.27% |
| 1991-3 | -0.46% | 0.31% | -1.02% | 1.00% | 0.24% | 0.07% |
| 1995-3 | -0.71% | -0.15% | 0.33% | 0.37% | 0.49% | 0.35% |
| 1999-3 | 1.70% | -0.25% | 1.84% | -0.58% | 1.39% | 4.11% |
| 2003-3 | 0.44% | 0.47% | -0.53% | 0.48% | -0.06% | 0.80% |
| Avg | 0.20% | -0.46% | 0.08% | -0.02% | 0.21% | 0.01% |
| SPX summary for Presidential Year 3 1955 - 2003 | ||||||
| Avg | -0.06% | -0.66% | 0.10% | -0.05% | 0.00% | -0.68% |
| Win% | 54% | 15% | 38% | 54% | 46% | 46% |
| SPX summary for all years 1953 - 2006 | ||||||
| Avg | 0.12% | -0.21% | 0.13% | 0.04% | 0.16% | 0.24% |
| Win% | 58% | 34% | 47% | 44% | 54% | 56% |
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
As of Friday's close everything is in place to indicate a market cycle high. If this scenario is correct there could be another move to modestly higher highs before a decline into a cycle low begins. If the R2K makes a new high this interpretation is wrong.
I expect the major indices to be lower on Friday October 12 than they were on Friday October 5.
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.
Gordon Harms produces a Power Point for our local timing group meetings. You can get a copy of that at: http://www.stockmarket-ta.com/.
