The good news is:
• The market is oversold going into a seasonally strong period.
Short Term
Last Monday the market extended its decline to a fourth consecutive down day setting up for the big counter trend rally on Tuesday. After rallying on Tuesday the Russell 2000 (R2K) fell for 3 consecutive days for the first time since last August. In this calendar year the R2K has not declined for more than 3 consecutive days so a rally is due.
The chart below covers this year showing the R2K 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 R2K has not declined for more than 3 days consecutively and Friday was the 3rd.
Intermediate Term
The secondaries lead both up and down.
Since the July highs the R2K has been the weakest of the major indices 10.1% off its all time high set last July while the S&P 500 (SPX) is 6.8% off its all time high.
The chart below covers the past 2.5 years showing the SPX in red and the R2K in blue. Dashed vertical lines have been drawn on the 1st trading day of each month and the vertical lines are red on the 1st trading day of the year. The Y axis has been scaled logarithmically to better show the relative performance of the indices.
The R2K outperformed the SPX on the way up to its all time high last July, but fell short of another high in early October when the SPX made its most recent record high.
There was a run to new highs in June of 1983 following the August 82 low. The R2K led the way up to the highs in June of 1983 and began deteriorating while the SPX hit its final high for the cycle in October 1983.
The chart below covers the period from July 1982 showing the August low to July 1984 ending just before the August 1984 low. The Y axis has been scaled logarithmically so you can see the relative performance of the indices.
The R2K outperformed the SPX on the way up to the June 1983 highs then underperformed it on the way down to the August 84 lows.
The next chart is similar to the one above except the Y axis is linear.
In this chart it is easier to see the final high set by the SPX in October 83 while the R2K had fallen away. 1983 like the current year was also the 3rd year of the Presidential cycle.
The patterns we are seeing are consistent with a developing top.
Seasonality
Next week is the week of Thanksgiving during the 3rd year of the Presidential Cycle.
The tables show the daily change of the OTC and S&P 500 (SPX) during the week of Thanksgiving 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.
By any measure the week has been up about 2/3's of the time with average gains of a little over 0.5%.
3 days before Thanksgiving and 1 day after. Day1 = the day after
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.
| OTC Presidential Year 3 | |||||
| Day4 | Day3 | Day2 | Day1 | Totals | |
| 1963-3 | -1.20% 5 | -1.48% 2 | 0.97% 3 | 0.09% 5 | -1.62% |
| 1967-3 | -1.99% 1 | 1.11% 2 | 1.62% 3 | 1.02% 5 | 1.76% |
| 1971-3 | -1.13% 1 | -1.45% 2 | 0.09% 3 | 1.24% 5 | -1.26% |
| 1975-3 | 0.23% 1 | 0.33% 2 | 0.49% 3 | 0.31% 5 | 1.36% |
| 1979-3 | 0.65% 1 | -0.34% 2 | -0.44% 3 | 0.70% 5 | 0.57% |
| 1983-3 | 0.63% 1 | 0.53% 2 | 0.05% 3 | 0.28% 5 | 1.49% |
| Avg | -0.32% | 0.04% | 0.36% | 0.71% | 0.78% |
| 1987-3 | 0.20% 1 | 1.13% 2 | 0.35% 3 | -0.41% 5 | 1.27% |
| 1991-3 | -0.68% 1 | -0.12% 2 | 0.11% 3 | 0.21% 5 | -0.48% |
| 1995-3 | -1.48% 1 | -0.44% 2 | -0.37% 3 | 0.88% 5 | -1.41% |
| 1999-3 | 0.69% 1 | -1.46% 2 | 2.32% 3 | 0.80% 5 | 2.35% |
| 2003-3 | 2.81% 1 | -0.21% 2 | 0.53% 3 | 0.36% 5 | 3.49% |
| Avg | 0.31% | -0.22% | 0.59% | 0.37% | 1.04% |
| OTC summary for Presidential Year 3 1963 - 2003 | |||||
| Averages | -0.11% | -0.22% | 0.52% | 0.50% | 0.68% |
| %Winners | 55% | 36% | 82% | 91% | 64% |
| MDD 11/26/1963 2.67% -- 11/23/1971 2.56% -- 11/22/1995 2.28% | |||||
| OTC summary for all years 1963 - 2006 | |||||
| Averages | -0.23% | -0.18% | 0.31% | 0.54% | 0.44% |
| %Winners | 45% | 53% | 77% | 84% | 66% |
| SPX Presidential Year 3 | |||||
| Day4 | Day3 | Day2 | Day1 | Totals | |
| 1955-3 | -0.70% 1 | 0.97% 2 | 0.13% 3 | -0.09% 5 | 0.31% |
| 1959-3 | 0.19% 1 | 0.47% 2 | 0.16% 3 | 0.45% 5 | 1.28% |
| 1963-3 | -2.81% 5 | 3.98% 2 | -0.18% 3 | 1.36% 5 | 2.35% |
| 1967-3 | -1.26% 1 | 1.58% 2 | 0.59% 3 | 0.27% 5 | 1.18% |
| 1971-3 | -0.90% 1 | -0.69% 2 | 0.19% 3 | 1.78% 5 | 0.38% |
| 1975-3 | 0.19% 1 | 1.13% 2 | 0.25% 3 | 0.33% 5 | 1.90% |
| 1979-3 | 0.42% 1 | -0.52% 2 | 0.19% 3 | 0.75% 5 | 0.85% |
| 1983-3 | 0.58% 1 | 0.48% 2 | 0.07% 3 | 0.13% 5 | 1.26% |
| Avg | -0.19% | 0.39% | 0.26% | 0.65% | 1.11% |
| 1987-3 | 0.41% 1 | 1.40% 2 | -0.93% 3 | -1.54% 5 | -0.66% |
| 1991-3 | -0.21% 1 | 0.70% 2 | -0.37% 3 | -0.35% 5 | -0.24% |
| 1995-3 | -0.54% 1 | 0.57% 2 | -0.31% 3 | 0.26% 5 | -0.01% |
| 1999-3 | -0.08% 1 | -1.14% 2 | 0.88% 3 | -0.04% 5 | -0.37% |
| 2003-3 | 1.62% 1 | 0.17% 2 | 0.43% 3 | -0.02% 5 | 2.20% |
| Avg | 0.24% | 0.34% | -0.06% | -0.34% | 0.18% |
| SPX summary for Presidential Year 3 1955 - 2003 | |||||
| Averages | -0.24% | 0.70% | 0.09% | 0.25% | 0.80% |
| %Winners | 46% | 77% | 69% | 62% | 69% |
| MDD 11/22/1963 2.81% -- 11/27/1987 2.46% -- 11/23/1951 1.93% | |||||
| SPX summary for all years 1952 - 2006 | |||||
| Averages | -0.23% | 0.11% | 0.36% | 0.40% | 0.63% |
| %Winners | 44% | 60% | 80% | 78% | 69% |
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 going into a seasonally strong period.
I expect the major indices to be higher on Friday November 23 than they were on Friday November 16.
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.
Last week the blue chip indices were up a little while the small and mid cap indices were down a little. I am calling last week's negative forecast a tie.
