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February 21, 2009

Technical Market Report
by Mike Burk

The good news is:
• We possibly have a successful retest of last November's lows.

Short Term

Most of the broad based indices were down every day last week leaving them over sold and poised for a rally.

The chart below covers the past 6 months showing the Russell 2000 (R2K) in red and an indicator showing the percentage of the last 5 trading days that were up in green. The indicator touches the top of the chart then the trailing 5 trading days have been up and it touches the bottom of the chart then the trailing 5 trading days have been down. Dashed vertical lines have been drawn on the 1st trading day of each month.

The R2K was down 7 consecutive going into the early October low. From there it rallied 14.4% in 2 days. In late October it fell for 5 consecutive days to a new low and then rallied 20.1% in the next 5 days. It declined another 5 consecutive days to a new low in late November before rallying 22.8% in the following 5 days.

Since the early October low there have not been more than 5 consecutive days in either direction.

A rally beginning on Monday is not a sure thing. The market was down for 5 consecutive days prior to the crash on October 19, 1987. Government takeover of some banks this weekend could have triggered a climactic event, fortunately they moved to diffuse those rumors Friday.

Intermediate term

Last October 10 there were 2901 new lows on the NYSE, a record by any measure. On the November 20 retest there were 1894 new lows. On Friday's close, with the Dow Jones Industrial Average (DJIA) at a multiyear low, there were 555 new lows, a significant improvement. The problem is 555 new lows is enough to make a retest of this low (assuming this is the low) very likely.

The chart below covers the past 6 months showing the DJIA in magenta and a 10% trend (19 day EMA) of NYSE new lows (NY NL) in blue. NY NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).

This chart looks pretty good. The non confirmation of the new DJIA low by NY NL is not subtle. The problem is the level of NY NL was so extreme at the early October low that even the 1987 crash would look good by comparison. As long as NY NL is moving downward the market is very risky. The value of the indicator is 146 so there must be less than 146 new lows on the NYSE to turn this indicator upward.

The next chart is similar to the one above, but calculated from NASDAQ data. The NASDAQ composite (OTC) is shown in blue and OTC NL is in black. The value of OTC NL is 137 so there must be less than 137 new lows on the NASDAQ to turn that indicator upward.

Seasonality

Next week includes the last 5 trading days of February during the 1st year of the Presidential Cycle.

The tables show the daily return on a percentage basis for the last 5 trading days of February during the 1st year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and SPX data from 1928 - 2008. There are summaries for both the 1st year of the Presidential Cycle and all years combined.

By all measures, next week has been weak and Monday has been the worst day of the week.

Report for the last 5 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 1
	Day5	Day4	Day3	Day2	Day1	Totals
1965-1	0.21% 5	0.61% 2	0.93% 3	0.54% 4	-0.15% 5	2.15%

1969-1	-1.88% 1	-0.74% 2	-0.90% 3	0.53% 4	-0.82% 5	-3.82%
1973-1	-0.22% 4	-1.08% 5	-0.87% 1	-1.21% 2	0.51% 3	-2.88%
1977-1	-0.25% 2	-0.40% 3	-0.96% 4	0.06% 5	-0.35% 1	-1.89%
1981-1	0.40% 1	0.46% 2	0.03% 3	1.10% 4	0.96% 5	2.94%
1985-1	-0.28% 5	-0.78% 1	0.37% 2	-0.31% 3	0.02% 4	-0.98%
Avg	-0.45%	-0.51%	-0.47%	0.03%	0.06%	-1.32%

1989-1	-0.96% 3	0.14% 4	-0.77% 5	-0.26% 1	0.19% 2	-1.65%
1993-1	-1.69% 1	-0.16% 2	1.70% 3	0.70% 4	0.55% 5	1.11%
1997-1	0.81% 1	0.19% 2	-0.53% 3	-2.08% 4	-0.28% 5	-1.89%
2001-1	-1.05% 4	0.78% 5	2.03% 1	-4.36% 2	-2.54% 3	-5.14%
2005-1	-1.37% 2	0.05% 3	1.01% 4	0.67% 5	-0.66% 1	-0.32%
Avg	-0.85%	0.20%	0.69%	-1.07%	-0.55%	-1.58%

OTC summary for Presidential Year 1 1965 - 2005
Averages	-0.57%	-0.08%	0.18%	-0.42%	-0.23%	-1.12%
% Winners	27%	55%	55%	55%	45%	27%
MDD 2/28/2001 6.79% -- 2/28/1969 3.77% -- 2/27/1973 3.35%

OTC summary for all years 1963 - 2008
Averages	-0.02%	0.12%	0.12%	-0.12%	-0.07%	0.02%
% Winners	54%	57%	54%	59%	50%	54%
MDD 2/28/2001 6.79% -- 2/27/2007 4.64% -- 2/28/1969 3.77%

SPX Presidential Year 1
	Day5	Day4	Day3	Day2	Day1	Totals
1929-1	1.10% 4	0.20% 1	0.16% 2	1.20% 3	1.35% 4	4.01%
1933-1	-4.70% 4	3.87% 5	-5.25% 6	-1.07% 1	2.35% 2	-4.80%
1937-1	-2.12% 2	0.56% 3	-0.39% 4	0.33% 5	0.17% 6	-1.46%
1941-1	0.82% 1	0.91% 2	0.20% 3	-0.70% 4	0.40% 5	1.64%
1945-1	-0.21% 5	-0.28% 6	-0.21% 1	0.78% 2	0.70% 3	0.78%
Avg	-1.02%	1.05%	-1.10%	0.11%	0.99%	0.03%

1949-1	-0.95% 3	-1.23% 4	-0.28% 5	0.49% 6	1.18% 1	-0.80%
1953-1	0.23% 5	0.47% 2	0.62% 3	0.15% 4	-0.19% 5	1.29%
1957-1	-0.34% 4	-0.23% 1	0.16% 2	-0.09% 3	-0.35% 4	-0.85%
1961-1	0.06% 2	0.37% 4	0.40% 5	0.73% 1	0.22% 2	1.79%
1965-1	0.19% 5	0.50% 2	0.61% 3	0.03% 4	0.26% 5	1.59%
Avg	-0.16%	-0.03%	0.30%	0.26%	0.22%	0.60%

1969-1	-1.19% 1	-0.63% 2	0.48% 3	-0.31% 4	-0.01% 5	-1.67%
1973-1	-0.22% 4	-1.12% 5	-0.86% 1	-1.15% 2	0.70% 3	-2.64%
1977-1	0.00% 2	-0.30% 3	-0.59% 4	-0.12% 5	0.34% 1	-0.67%
1981-1	0.61% 1	0.03% 2	0.89% 3	1.23% 4	0.90% 5	3.66%
1985-1	-0.46% 5	-0.07% 1	1.08% 2	-0.25% 3	0.26% 4	0.56%
Avg	-0.25%	-0.42%	0.20%	-0.12%	0.44%	-0.15%

1989-1	-1.71% 3	0.39% 4	-1.68% 5	0.24% 1	0.36% 2	-2.40%
1993-1	0.23% 1	-0.10% 2	1.40% 3	0.33% 4	0.24% 5	2.10%
1997-1	1.06% 1	0.21% 2	-0.78% 3	-1.32% 4	-0.54% 5	-1.35%
2001-1	-0.20% 4	-0.56% 5	1.75% 1	-0.77% 2	-1.43% 3	-1.20%
2005-1	-1.45% 2	0.56% 3	0.79% 4	0.93% 5	-0.64% 1	0.19%
Avg	-0.41%	0.10%	0.29%	-0.12%	-0.40%	-0.53%

SPX summary for Presidential Year 1 1929 - 2005
Averages	-0.46%	0.18%	-0.08%	0.03%	0.31%	-0.01%
% Winners	40%	55%	60%	55%	70%	50%
MDD 2/27/1933 7.21% -- 2/27/1973 3.30% -- 2/24/1989 2.99%

SPX summary for all years 1928 - 2008
Averages	-0.15%	-0.09%	0.06%	-0.03%	0.08%	-0.12%
% Winners	48%	42%	53%	55%	58%	48%
MDD 2/27/1933 7.21% -- 2/26/1934 6.47% -- 2/26/1946 5.14%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth has continued to level off.

Conclusion

The market has been following the average seasonal pattern for February during the 1st year of the Presidential cycle very closely and next week has, on average been very weak. However, over the past 2 weeks most of the major indices have been down nearly 10% and are extremely oversold, a bounce is likely.

I expect the major indices to be higher on Friday February 27 than they were on Friday February 20.

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.

Thank you,

Mike Burk

Mike Burk is an employee and principal of Alpha Investment Management (Alpha) a registered investment advisor. Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy. Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) and the Wall Street Journal (wsj.com). Historical data is from Barron's and ISI price books. The views expressed are provided for information purposes only and should not be construed in any way as investment advice. Furthermore, the opinions expressed may change without notice.