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Technical Market Report

The good news is:
• Last week most of the major indices had one of their best weeks of the past year.

Short Term

The market is overbought.

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 5% trend (39 day EMA) of NASDAQ volume of advancing issues (OTC UV) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

In early January OTC UV hit its lowest level of the past 4 years. As of Friday’s close the indicator is at an all time high.

Bear market rallies are known to be violent.

Intermediate Term

New lows have disappeared.

On Tuesday January 22 there were 1114 new lows on the NYSE and 877 on the NASDAQ. Last Friday there were 17 new lows on the NYSE and 50 on the NASDAQ.

The rapid decline in the number of new lows implies risk is limited for the next few weeks, however, the extreme number of new lows at the January 22 low implies a retest of the price lows in the next few months.

The chart below covers the past 9 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in red. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward.

After hitting its lowest level since 1998 OTC NL is moving sharply upward.

Seasonality

Next week includes the 2nd through 5th trading days of February during the 4th year of the Presidential Cycle.

The tables show the daily change of the OTC and S&P 500 (SPX) for the 1st 6 trading days of February during the 4th year of the Presidential Cycle. OTC data covers the period from 1964 - 2004 and SPX data from 1928 - 2004. There are summaries for both the 4th year of the Presidential Cycle and all years combined.

The 1st trading day of February which was last Friday has been by far the strongest day of the period by all measures. After the 1st day of the month the OTC has been modestly positive and the SPX has been modestly negative.

First 6 trading days of February.
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 4
  Day1 Day2 Day3 Day4 Day5 Day6 Totals
1964-4 0.25% 1 0.16% 2 0.00% 3 0.14% 4 0.35% 5 0.08% 1 0.98%
1968-4 -0.47% 4 0.12% 5 -0.20% 1 -0.26% 2 0.10% 3 0.21% 4 -0.51%
1972-4 0.60% 2 0.74% 3 0.16% 4 0.48% 5 -0.08% 1 0.17% 2 2.07%
 
1976-4 0.26% 1 0.11% 2 1.22% 3 -0.49% 4 -0.87% 5 0.66% 1 0.91%
1980-4 0.34% 5 -0.17% 1 0.11% 2 0.49% 3 0.48% 4 0.90% 5 2.15%
1984-4 -0.75% 3 -0.10% 4 -0.81% 5 -2.03% 1 -0.32% 2 -1.49% 3 -5.50%
1988-4 0.45% 1 0.29% 2 -1.00% 3 0.28% 4 0.32% 5 -0.36% 1 -0.03%
Avg 0.18% 0.17% -0.06% -0.26% -0.10% -0.02% -0.08%
 
1992-4 0.52% 1 1.21% 2 0.95% 3 0.11% 4 -0.43% 5 -0.13% 1 2.23%
1996-4 0.92% 4 0.24% 5 1.04% 1 0.54% 2 -0.39% 3 0.77% 4 3.12%
2000-4 2.83% 2 0.54% 3 3.36% 4 0.79% 5 1.83% 1 2.45% 2 11.81%
2004-4 -0.15% 1 0.15% 2 -2.52% 3 0.27% 4 2.20% 5 -0.17% 1 -0.21%
Avg 1.02% 0.43% 0.57% 0.34% 0.64% 0.58% 3.59%
 
OTC summary for Presidential Year 4 1964 - 2004
Averages 0.48% 0.28% 0.19% 0.02% 0.27% 0.26% 1.50%
% Winners 75% 75% 50% 67% 50% 58% 67%
MDD 2/8/1984 5.39% -- 2/4/2004 2.52% -- 2/6/1976 1.36%
 
OTC summary for all years 1963 - 2007
Averages 0.20% -0.07% 0.17% 0.05% 0.04% 0.09% 0.47%
% Winners 67% 69% 59% 60% 62% 53% 63%
MDD 2/8/2001 7.93% -- 2/7/2002 7.86% -- 2/5/1999 5.44%
 
SPX Presidential Year 4
  Day1 Day2 Day3 Day4 Day5 Day6 Totals
1928-4 -0.23% 3 0.57% 4 -1.30% 5 0.17% 6 0.11% 1 -0.06% 2 -0.73%
1932-4 4.31% 1 -2.19% 2 0.50% 3 -0.62% 4 -3.23% 5 -0.77% 6 -2.00%
1936-4 -0.07% 6 0.98% 1 -0.14% 2 -0.35% 3 0.14% 4 -0.49% 5 0.08%
1940-4 0.00% 4 0.08% 5 0.17% 6 -0.33% 1 0.83% 2 0.66% 3 1.41%
1944-4 -0.17% 2 -0.25% 3 -0.85% 4 -0.85% 5 0.26% 6 -0.60% 1 -2.47%
1948-4 0.14% 1 -0.61% 2 -1.85% 3 -1.05% 4 -0.07% 5 0.70% 6 -2.73%
Avg 0.84% -0.40% -0.43% -0.64% -0.42% -0.10% -1.14%
 
1952-4 0.66% 5 0.45% 6 -1.19% 1 -0.04% 2 0.29% 3 -0.29% 4 -0.11%
1956-4 0.48% 3 0.43% 4 1.27% 5 0.07% 1 -0.47% 2 -0.99% 3 0.79%
1960-4 0.63% 1 1.54% 2 -0.88% 3 -0.09% 4 -0.52% 5 -1.18% 1 -0.50%
1964-4 -0.09% 1 -0.12% 2 -0.17% 3 0.23% 4 0.32% 5 -0.17% 1 0.01%
1968-4 0.35% 4 -0.31% 5 -0.43% 1 0.03% 2 0.17% 3 -1.26% 4 -1.45%
Avg 0.41% 0.40% -0.28% 0.04% -0.04% -0.78% -0.25%
 
1972-4 0.07% 2 0.64% 3 -0.04% 4 0.21% 5 -0.31% 1 0.19% 2 0.77%
1976-4 0.01% 1 0.31% 2 0.72% 3 -1.49% 4 -0.93% 5 0.16% 1 -1.22%
1980-4 0.84% 5 -0.65% 1 0.25% 2 0.92% 3 0.48% 4 1.44% 5 3.29%
1984-4 -0.41% 3 0.38% 4 -1.50% 5 -1.76% 1 0.42% 2 -1.82% 3 -4.69%
1988-4 -0.79% 1 0.21% 2 -1.31% 3 0.00% 4 -0.50% 5 -0.74% 1 -3.13%
Avg -0.06% 0.18% -0.38% -0.42% -0.17% -0.15% -1.00%
 
1992-4 0.18% 1 1.05% 2 0.00% 3 0.00% 4 -0.66% 5 0.65% 1 1.22%
1996-4 0.38% 4 -0.41% 5 0.88% 1 0.76% 2 0.56% 3 0.94% 4 3.12%
2000-4 1.06% 2 -0.01% 3 1.13% 4 -0.04% 5 -0.10% 1 1.32% 2 3.36%
2004-4 0.37% 1 0.07% 2 -0.84% 3 0.18% 4 1.26% 5 -0.26% 1 0.78%
2008-4 1.22% 5 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 1.22%
Avg 0.64% 0.14% 0.23% 0.18% 0.21% 0.53% 1.94%
 
SPX summary for Presidential Year 4 1928 - 2008
Averages 0.43% 0.10% -0.27% -0.19% -0.09% -0.12% -0.14%
% Winners 67% 57% 33% 38% 52% 38% 52%
MDD 2/6/1932 6.20% -- 2/8/1984 4.63% -- 2/6/1948 3.54%
 
SPX summary for all years 1928 - 2007
Averages 0.16% 0.06% -0.11% 0.03% -0.06% -0.17% -0.09%
% Winners 63% 59% 48% 51% 49% 42% 57%
MDD 2/4/1933 7.06% -- 2/6/1932 6.20% -- 2/3/1938 5.05%

Money supply (M2)

This chart has been provided by Gordon Harms.

February

Over all years February has been an average month for the OTC, up 53% of the time with an average gain of 0.3%. During the 4th year of the Presidential Cycle February is tied with August for the highest average return at 2.3%. Average returns for both February and August were helped by 15.9% and 14.1% respective returns in 2000 a year that ended down 39.3% for the OTC.

The charts show the average performance for the indices over the month of February. Average performance for all years is shown in blue while average performance for the 4th year of the Presidential Cycle is shown in green.

The average month has 21 trading days and the chart has been constructed by averaging the performance of the first 11 trading days and the last 10 trading days. A solid line has been drawn at the dividing point, the eleventh day. This methodology usually offers a pretty accurate picture of the average month, however, February usually has 19 trading days so two days in the middle of the month have been counted twice.

The 1st chart shows the OTC using data from 1963 - 2008.

Over all years since 1928 February has been 2nd to September as the worst month of the year for the SPX, up 53% of the time with an average return of -0.3%. During the 4th year of the Presidential Cycle February’s returns have been similar to other years while April and May have had greater average losses.

The next chart shows the SPX using data from 1928 -2008.

Conclusion

There was a buying frenzy last week which is unlikely to continue, but, for now, everything is pointing upward.

I expect the major indices to be higher on Friday February 8 than they were on Friday February 1.

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