The good news is:
• The bottom indicators are suggesting there is little risk in the market.
Short Term
After a bottom has been made downside volume (DV) dries up pretty quickly. That has not happened yet, but it is encouraging to see DV falling off faster in the small cap indices than the large cap indices.
The four charts below cover the past 9 months showing an index and a 5% trend (39 day EMA) of Downside volume (DV). DV has been plotted on an inverted Y axis so decreasing DV moves the indicator upward (up is good). Dashed vertical lines have been drawn on the 1st trading day of each month.
The chart below shows the Russell 2000 (R2K) in red and DV calculated from the component issues of the R2K in black. DV has been trending upward nicely since the January low and the indicator hit a higher high last week while the index hit a lower high. DV has not moved upward as quickly after the January low as it did after the August low.
The next chart shows the S&P 500 (SPX) in red and DV calculated from the component issues of the SPX in black. DV has been trending upward but not as sharply as the R2K DV.
The next chart shows the NASDAQ composite (OTC) in blue and DV calculated from data reported by the NASDAQ. The pattern is similar to those above. When the OTC hit a new low last week DV made a higher low not confirming the OTC low.
The next chart shows the SPX in blue and DV calculated from data reported by the NYSE. The pattern is similar to the first (R2K) chart in that DV was higher at the January lows than it was at the August lows.
Like the other charts DV has not moved upward as quickly from the January lows as it did from the August lows.
Intermediate Term
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 (up is good).
Last week OTC NL continued moving upward while the OTC fell on Thursday and Friday. There was a bit of a build up in new lows last week culminating with a high on Friday of 111.
The next chart is similar to the one above except it shows the SPX in blue and the new low indicator has been calculated from new lows reported by the NYSE. The patterns are similar.
The bad news is the extreme number of new lows in mid January implies another retest of the recent lows in the next few months.
Seasonality
Next Monday is Presidents day observed on the 3rd. Monday of February since 1971. Next week is the week following Presidents day and also the week prior to the 4th Friday in 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 week prior to the 4th Friday in February during the 4th year of the Presidential Cycle. OTC data covers the period from 1964 - 2004 and SPX data from 1953 - 2004. There are summaries for both the 4th year of the Presidential Cycle and all years combined. Data prior to 1953 has been omitted because the market traded 6 days a week. President's day fell on the Monday's that show 0's.
The week has had a positive bias during the 4th year of the Presidential Cycle and has been flat the other years.
Report for the week before the 4th Friday of February
The number following the year is the position in the presidential cycle.
Daily returns from Monday through the 4th Friday.
| OTC Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1968-4 | 0.24% | 0.37% | 0.44% | 0.00% | 0.57% | 1.61% |
| 1972-4 | 0.00% | -0.08% | 0.25% | 0.32% | 0.67% | 1.16% |
| 1976-4 | 0.32% | 0.46% | 0.39% | -0.69% | -1.30% | -0.83% |
| 1980-4 | 0.00% | -0.92% | 0.65% | -0.49% | -0.76% | -1.53% |
| 1984-4 | 0.00% | -0.55% | -0.32% | -0.83% | 1.76% | 0.06% |
| Avg | 0.28% | -0.14% | 0.28% | -0.42% | 0.19% | 0.10% |
| 1988-4 | 0.80% | 0.31% | 0.57% | 0.13% | -0.06% | 1.75% |
| 1992-4 | -0.77% | -0.56% | 1.77% | 0.25% | -0.08% | 0.61% |
| 1996-4 | 0.00% | -0.69% | 1.26% | 1.84% | 0.06% | 2.48% |
| 2000-4 | 0.00% | -0.67% | 3.84% | 1.48% | -0.59% | 4.06% |
| 2004-4 | -1.49% | -0.10% | 0.87% | 0.47% | -0.14% | -0.38% |
| Avg | -0.49% | -0.34% | 1.66% | 0.83% | -0.16% | 1.70% |
| OTC summary for Presidential Year 4 1964 - 2004 | ||||||
| Avg | -0.18% | -0.24% | 0.97% | 0.28% | 0.01% | 0.90% |
| Win% | 60% | 30% | 90% | 67% | 40% | 70% |
| OTC summary for all years 1963 - 2007 | ||||||
| Avg | -0.10% | -0.33% | 0.26% | 0.11% | 0.08% | 0.08% |
| Win% | 44% | 39% | 68% | 66% | 52% | 62% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | -0.16% | 0.25% | 0.00% | 0.88% | 0.82% | 1.79% |
| 1960-4 | 0.00% | -0.53% | -0.36% | 0.34% | 0.41% | -0.14% |
| 1964-4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1968-4 | 0.39% | 0.58% | 0.45% | 0.00% | -0.38% | 1.03% |
| 1972-4 | 0.00% | 0.01% | 0.09% | 0.07% | 0.69% | 0.85% |
| 1976-4 | -0.48% | 0.41% | -0.33% | -1.55% | -0.40% | -2.35% |
| 1980-4 | 0.00% | -0.70% | 1.63% | -1.02% | -0.21% | -0.30% |
| 1984-4 | 0.00% | -0.71% | -0.21% | -0.01% | 2.09% | 1.15% |
| Avg | -0.05% | -0.08% | 0.32% | -0.63% | 0.36% | 0.08% |
| 1988-4 | 1.54% | -0.23% | -0.22% | -1.08% | 0.34% | 0.34% |
| 1992-4 | 0.20% | -0.44% | 1.19% | -0.36% | -0.28% | 0.31% |
| 1996-4 | 0.00% | -1.13% | 1.16% | 1.66% | 0.03% | 1.73% |
| 2000-4 | 0.00% | 0.45% | 0.63% | -0.54% | -1.48% | -0.93% |
| 2004-4 | -0.27% | -0.17% | 0.40% | 0.11% | 0.00% | 0.07% |
| Avg | 0.49% | -0.30% | 0.63% | -0.04% | -0.28% | 0.30% |
| SPX summary for Presidential Year 4 1956 - 2004 | ||||||
| Avg | 0.20% | -0.18% | 0.40% | -0.14% | 0.14% | 0.30% |
| Win% | 50% | 42% | 64% | 45% | 58% | 67% |
| SPX summary for all years 1953 - 2007 | ||||||
| Avg | -0.11% | -0.22% | 0.20% | -0.03% | 0.10% | 0.00% |
| Win% | 39% | 42% | 53% | 49% | 59% | 47% |
Conclusion
The rally off the lows of January (early February for the OTC) has been less robust than I would like to see, but new lows suggest an intermediate term bottom is in place.
I expect the major indices to be higher on Friday February 22 than they were on Friday February 15.
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 monthly timing group meetings. You can get a copy of that at: http://www.stockmarket-ta.com/.
