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Technical Market Report

The good news is:
• The NASDAQ 100 (NDX) hit a multi year high last Thursday.

Short Term

I believe the 1987 crash was triggered by a speech given by then Treasury Secretary James Baker over the weekend prior Monday October 19, 1987 where he declared that we would continue to let the dollar fall to improve our trade balance.

I doubt any politicians will be giving similar speeches this weekend; however, the Federal Reserve has been doing essentially that with their aggressive rate cuts.

There are other similarities between 1987 and now:

  • The week prior to the crash was a bad one as was last week.
  • On the Friday prior to the Monday crash the major indices were down 3% - 5%. Last Friday they were down 2% - 3%.
  • The ratio of declining volume to advancing volume on the NYSE on Friday October 16, 1987 was 100 to one.
  • The ratio of declining volume to advancing volume on the NYSE last Friday was a much stronger, but still very weak 20 to 1.
  • 1987 was the 3rd year of the Presidential Cycle as is 2007.
  • There was talk of trade sanctions then as now.

Monday could be interesting; you don't want to miss it.

Intermediate Term

The late July - early August decline presented some interpretation difficulties. If the August low was a cycle low the extreme number of new lows implied a retest. If the July - August decline was the beginning of a developing top the bottom would be much lower.

I favor the second scenario because the secondaries have been underperforming the blue chips and the breadth indicators have been deteriorating since the July highs.

The chart below covers the past 65 trading days from the July high to last Friday showing the Dow Jones Industrial Average (DJIA) in green, the S&P 500 (SPX) in red, the NASDAQ composite (OTC) in blue and the Russell 2000 (R2K) in magenta. The Y axis is scaled logarithmically so you can see the relative performance of each index.

The NDX (not shown) which is made up of the largest 100 non financial companies in the NASDAQ hit a multi year high last Thursday but the OTC which tracks the NDX very closely was dragged down by the small caps and did not reach a new high.

The next chart covers this calendar year showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.

Each higher high in the OTC has been accompanied by a lower high in OTC NH.

When the market is declining, volume of advancing issues usually declines while volume of declining issues usually increases. The July August decline was odd in that volume of advancing issues shot up to an all time high during the decline.

The chart below covers the past 6 months showing the OTC in blue and a 5% trend (39 day EMA) of volume of OTC advancing issues (OTC UV) in green.

It may be early, but, so far OTC UV has not been rising.

Volume usually increases during a sell off, but, so far, that has not happened.

The chart below covers the past 6 months showing the SPX in red and a 5% trend of NYSE total volume in black.

I think we are at the beginning of a cyclical decline that will take the market below the August lows. The Fed may retard the decline by lowering rates again at the end of the month.

Seasonality

Next week includes the week prior to the 4th 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 4th 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 in the 3rd year of the Presidential cycle the OTC has been up only 27% of the time with an average loss of over 2%. The SPX has been slightly worse, up only 23% of the time but with an average loss still over 1%. Over all years the averages have been up less than half of the time and the returns, on average, have been modestly negative. Average returns have been distorted by the 1987 crash.

Report for the week before the 4th Friday of October.
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 0.49% -0.06% -0.14% 0.37% 0.60% 1.25%
 
1967-3 -0.22% -0.38% -0.40% -0.62% 0.62% -0.99%
1971-3 -0.49% -0.98% -1.31% 0.03% 0.18% -2.57%
1975-3 0.64% 0.38% 0.61% 0.19% -0.56% 1.27%
1979-3 -2.51% -0.41% 0.31% -0.22% 0.77% -2.06%
1983-3 -0.96% 0.65% -0.27% -0.13% -0.49% -1.20%
Avg -0.71% -0.15% -0.21% -0.15% 0.10% -1.11%
 
1987-3 -11.35% -9.00% 7.34% -4.47% -2.28% -19.76%
1991-3 -0.36% 0.03% -0.37% -1.20% -0.68% -2.58%
1995-3 -0.25% 0.22% -1.22% -0.87% 0.79% -1.33%
1999-3 -1.56% -0.03% 3.72% 0.49% 0.52% 3.14%
2003-3 0.67% 0.82% -2.21% -0.66% -1.06% -2.44%
Avg -2.57% -1.59% 1.45% -1.34% -0.54% -4.59%
 
OTC summary for Presidential Year 3 1963 - 2003
Avg -1.45% -0.80% 0.55% -0.64% -0.15% -2.48%
Win% 27% 45% 36% 36% 55% 27%
 
OTC summary for all years 1963 - 2006
Avg -0.13% -0.41% 0.29% -0.15% -0.12% -0.52%
Win% 43% 39% 60% 48% 52% 48%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 0.75% -0.65% -0.80% -0.35% 0.55% -0.51%
1959-3 -0.56% -0.61% -0.19% -0.97% 1.00% -1.34%
1963-3 0.08% -0.57% 0.05% 0.38% 1.00% 0.94%
 
1967-3 -0.44% -0.57% 0.11% 0.44% 0.02% -0.44%
1971-3 -0.45% -0.36% -1.39% -0.05% -0.09% -2.35%
1975-3 1.08% 0.82% 0.17% 0.58% -1.55% 1.11%
1979-3 -0.88% -0.43% 0.16% -0.44% 0.57% -1.01%
1983-3 0.02% 0.29% -0.65% -0.33% -0.89% -1.56%
Avg -0.13% -0.05% -0.32% 0.04% -0.39% -0.85%
 
1987-3 -20.47% 5.33% 9.10% -3.92% -0.01% -9.97%
1991-3 -0.63% -0.56% 0.03% -0.74% -0.23% -2.13%
1995-3 -0.41% 0.26% -0.70% -0.99% 0.52% -1.32%
1999-3 0.55% 0.57% 2.24% -0.46% 1.41% 4.30%
2003-3 0.52% 0.13% -1.50% 0.33% -0.47% -0.99%
Avg -4.09% 1.14% 1.83% -1.15% 0.24% -2.02%
 
SPX summary for Presidential Year 3 1955 - 2003
Avg -1.60% 0.28% 0.51% -0.50% 0.14% -1.17%
Win% 46% 46% 54% 31% 54% 23%
 
SPX summary for all years 1953 - 2006
Avg -0.31% -0.02% 0.33% -0.31% -0.01% -0.33%
Win% 52% 45% 62% 33% 45% 44%

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 appears to have entered a cyclical decline as seasonal patterns are deteriorating.

I expect the major indices to be lower on Friday October 26 than they were on Friday October 19.

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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