The good news is:
• The blue chip decline is accelerating which suggests we are approaching at least an intermediate term low.
Short Term
This year there have been 3 sharp declines, the first in late February - early March the second in Late July - early August and last week.
Over the year to date the NASDAQ composite (OTC) and its big tech subset the NDX have been the strongest of the major indices up 10.34% and 15.79% YTD respectively.
The chart below covers this year showing the NDX in red and an indicator showing the percentage of the last 3 trading days that were up in black. The indicator hits the top of the chart when there have been 3 consecutive up days and it hits the bottom of the chart when there have been 3 consecutive down days.
YTD so far the NDX has not declined for more than 3 days consecutively and Friday was the 3rd. Unless things are different this time the market should rally for a day or two.
Intermediate Term
When forming a bottom and there a lot of new lows (lets say more than 400) as prices decline there is usually a retest of the old low (a return of prices to near the previous low) with fewer new lows.
On August 16 there were 1132 NYSE new lows, close to a record.
On Friday the Dow Jones Industrial Average (DJIA) closed 1.5% above its August low (close enough to be called a retest) and there were 434 new lows. 434 new lows is a lot, but also a lot fewer than 1132.
In 1990 there were a high number of new lows on the retest and that was followed by another retest each at progressively lower prices.
The chart below covers the past 6 months showing the DJIA in red and a 10% trend (19 day EMA) of NYSE new lows (NY NL) in maroon. NY NL has been plotted on an inverted Y axis so increasing new lows moves the indicator downward (up is good).
At this point the chart above looks encouraging in that the indicator is well above its August lows while the DJIA is approaching its previous low.
For bottom picking you want to see NYNL moving sharply upward for 5 consecutive days. The current value of the indicator is 214 so you want to see significantly fewer new lows than that for 5 consecutive days.
There is a problem with looking for a bottom at this point and that is the DJIA hit an all time high between the lows and that has never happened before.
It is easier to make a case for a developing top where you would expect the blue chips to be making new highs while the secondaries faded and new highs declined.
The next chart shows what has happened since the all time highs in most of the major indices in July. The chart shows the S&P 500 (SPX), the S&P mid cap (MID) and the Russell 2000 (R2K). The Y axis has been scaled logarithmically so you can see the relative performance of the indices. The SPX hit an all time high in early October while the MID and R2K did not and the R2K is still leading the way down.
The next chart covers the past year showing the DJIA in red and a 10% trend of NYSE new highs (NY NH) in green. NY NH has had progressively lower highs as the DJIA has had progressively higher highs.
I think there is likely to be a tradable rally before the August lows have been significantly penetrated. But, this will be a developing top until the secondaries begin outperforming the blue chips and new highs begin to make progressively higher highs.
Seasonality
Next week is the week prior to the 3rd Friday of November during the 3rd year of the Presidential Cycle.
The tables show the daily change of the OTC and S&P 500 (SPX) in the week prior to the 3rd Friday of November during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2003 and SPX data from 1953 - 2003. Prior to 1953 the market traded 6 days a week so that data has been ignored. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.
Over all years average returns for the week have been modestly positive.
During the 3rd year of the Presidential Cycle both the OTC and SPX have been up a little less than half of the time and the returns have been modestly negative.
Report for the week before the 3rd Friday of November
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.
| OTC Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1963-3 | 0.48% | 0.17% | -0.06% | 0.20% | -0.45% | 0.34% |
| 1967-3 | 0.24% | -0.10% | -0.25% | 0.67% | 1.04% | 1.59% |
| 1971-3 | -0.45% | 0.26% | -0.07% | -0.19% | -0.47% | -0.93% |
| 1975-3 | 0.15% | -0.61% | -0.95% | -0.26% | 0.09% | -1.58% |
| 1979-3 | 0.88% | 0.07% | 0.45% | 0.84% | 0.11% | 2.34% |
| 1983-3 | 0.86% | -0.21% | 0.37% | 0.47% | 0.01% | 1.49% |
| Avg | 0.33% | -0.12% | -0.09% | 0.31% | 0.15% | 0.58% |
| 1987-3 | -0.19% | -1.74% | 0.46% | -1.35% | -0.46% | -3.27% |
| 1991-3 | 0.48% | 0.90% | 0.09% | -0.24% | -4.24% | -3.01% |
| 1995-3 | -0.51% | -1.69% | 0.12% | 0.25% | 0.05% | -1.78% |
| 1999-3 | -0.05% | 2.29% | -0.73% | 2.39% | 0.66% | 4.56% |
| 2003-3 | -1.07% | -1.46% | 0.95% | -0.93% | 0.64% | -1.88% |
| Avg | -0.27% | -0.34% | 0.18% | 0.02% | -0.67% | -1.08% |
| OTC summary for Presidential Year 3 1963 - 2003 | ||||||
| Avg | 0.07% | -0.19% | 0.04% | 0.17% | -0.28% | -0.19% |
| Win% | 55% | 45% | 55% | 55% | 64% | 45% |
| OTC summary for all years 1963 - 2006 | ||||||
| Avg | -0.07% | 0.06% | 0.12% | 0.19% | -0.09% | 0.21% |
| Win% | 49% | 50% | 61% | 59% | 52% | 57% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | 2.59% | -0.43% | -0.65% | -0.70% | -0.11% | 0.70% |
| 1959-3 | -1.11% | 0.28% | 1.08% | -0.09% | 0.05% | 0.22% |
| 1963-3 | 0.22% | -0.39% | 0.08% | -0.46% | -0.82% | -1.38% |
| 1967-3 | -0.26% | -0.63% | 0.40% | 0.92% | 0.24% | 0.67% |
| 1971-3 | -0.34% | 0.98% | 0.15% | -0.78% | -0.56% | -0.55% |
| 1975-3 | 0.54% | -0.50% | -1.12% | -0.38% | -0.12% | -1.59% |
| 1979-3 | 1.97% | -0.55% | 0.44% | 0.72% | -0.33% | 2.25% |
| 1983-3 | 0.17% | -0.73% | 0.44% | 0.03% | -0.63% | -0.72% |
| Avg | 0.42% | -0.29% | 0.06% | 0.10% | -0.28% | 0.01% |
| 1987-3 | 0.46% | -1.51% | 1.03% | -2.24% | 0.81% | -1.45% |
| 1991-3 | 0.06% | 0.92% | 0.17% | -0.07% | -3.66% | -2.58% |
| 1995-3 | -0.07% | -0.51% | 0.79% | 0.57% | 0.46% | 1.24% |
| 1999-3 | -0.12% | 1.84% | -0.66% | 1.01% | -0.21% | 1.86% |
| 2003-3 | -0.64% | -0.91% | 0.80% | -0.84% | 0.16% | -1.43% |
| Avg | -0.06% | -0.03% | 0.43% | -0.31% | -0.49% | -0.47% |
| SPX summary for Presidential Year 3 1955 - 2003 | ||||||
| Avg | 0.27% | -0.16% | 0.23% | -0.18% | -0.36% | -0.21% |
| Win% | 54% | 31% | 77% | 38% | 38% | 46% |
| SPX summary for all years 1953 - 2006 | ||||||
| Avg | 0.03% | -0.05% | 0.11% | 0.09% | 0.01% | 0.19% |
| Win% | 47% | 44% | 67% | 52% | 60% | 54% |
Money Supply
Gordon Harms will be providing his report no more than once a month in the future, however he has agreed to provide the M2 money supply chart.
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 is oversold, but the indicators provide no suggestion of a bottom.
I expect the major indices to be lower on Friday November 16 than they were on Friday November 9.
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.
Roy Ashworth has been having medical difficulties and will not be providing his report until those have been resolved.
