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September 12, 2009

Technical Market Report
by Mike Burk

The good news is:
• Several months ago I pointed out the astonishing rate, on an annualized basis, at which the major indices had advanced since the March lows. At that time I said "something has to give", it hasn't. The current rate of advance, on an annualized basis, over the slightly more than 6 months of this rally has been:

Russell 2000 (R2K) 190%
S&P mid cap (Mid) 174%
NASDAQ composite (OTC) 162%
S&P 500 (SPX) 132%
Dow Jones Industrial Average (DJIA) 111%

Short Term

Over the past 6 months we have witnessed one of the most powerful market rallies ever. This spectacular rally has, oddly, been accompanied by a remarkable decline in volume.

All of the charts cover the period of this rally since March 9 through last Friday (130 trading days).

The first chart shows the OTC in blue and a 5% trend (39 day EMA) of NASDAQ total volume in orange. Dashed vertical lines have been drawn on the 1st trading day of each month.

The next chart shows the SPX in red and a 5% trend of NYSE total volume in black.

The next chart shows the SPX in red and a 5% trend of the total volume of the component issues of the SPX in magenta.

The next chart shows the Mid in red and a 5% trend of the total volume of the component issues of the Mid in magenta.

One of the most spectacular rallies in history has been accompanied by declining volume.

Intermediate term

The lack of new highs has been almost as remarkable as the decline in volume. As the OTC reached a new recovery high on Thursday there were 107 new highs on the NASDAQ, 8 less than the 115 recorded on July 30 and 12 less than the 119 recorded on July 23. These are the 3 instances where NASDAQ new highs have exceeded 100 this year.

The chart below shows the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green. OTC NH did not confirm the new high in the index.

The next chart shows the OTC in blue and a 40% trend (4 day EMA) of the ratio of NASDAQ new highs to new lows (OTC NH / (OTC NH + NH NL)) in blue. Dashed vertical lines have been drawn on the 1st trading day of each month and dashed horizontal lines have been drawn at 10% levels of the indicator. The horizontal line is solid at the neutral, 50% level of the indicator.

Because there were virtually no new lows the indicator returned to a near record high last week.

Risk is limited as long as this indicator remains above the 50% level.

Seasonality

Next week includes the 4 trading days prior to the 3rd Friday of September during the 1st year of the Presidential Cycle.

The tables show the daily return on a percentage basis for the 5 trading days prior to the 3rd Friday of September during the 1st year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and SPX data from 1953 - 2008. There are summaries for both the 1st year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.

The average returns over all periods have been modestly positive.

Report for the week before the 3rd Friday of Sepember.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.

OTC Presidential Year 1
Year	Mon	Tue	Wed	Thur	Fri	Totals
1965-1	0.51%	0.32%	-0.19%	0.38%	0.70%	1.72%

1969-1	0.25%	1.42%	0.67%	0.26%	0.18%	2.79%
1973-1	0.19%	0.03%	1.51%	0.79%	0.64%	3.16%
1977-1	-0.31%	-0.14%	0.15%	0.36%	-0.23%	-0.17%
1981-1	-0.10%	-0.03%	-0.92%	-1.12%	-0.78%	-2.95%
1985-1	-0.64%	-1.51%	-0.01%	0.91%	0.27%	-0.98%
Avg	-0.12%	-0.05%	0.28%	0.24%	0.02%	0.37%

1989-1	-0.19%	0.31%	-0.01%	-0.65%	-0.26%	-0.79%
1993-1	-0.54%	-1.04%	0.94%	0.03%	0.04%	-0.55%
1997-1	-0.87%	2.06%	-0.13%	0.22%	0.61%	1.90%
2001-1	5.35%	0.15%	-2.50%	-0.23%	2.61%	5.38%
2005-1	0.34%	-0.51%	-1.03%	-0.15%	0.66%	-0.69%
Avg	0.82%	0.19%	-0.55%	-0.15%	0.73%	1.05%

OTC summary for Presidential Year 1 1965 - 2005
Avg	0.36%	0.10%	-0.14%	0.07%	0.40%	0.80%
Win%	45%	55%	36%	64%	73%	45%

OTC summary for all years 1963 - 2008
Avg	-0.02%	0.14%	-0.07%	0.18%	0.38%	0.61%
Win%	43%	52%	56%	63%	72%	61%

SPX Presidential Year 1
Year	Mon	Tue	Wed	Thur	Fri	Totals
1953-1	-1.86%	0.84%	0.48%	0.26%	-0.52%	-0.80%
1957-1	-0.49%	0.13%	0.11%	-0.65%	-1.60%	-2.49%
1961-1	-0.88%	1.01%	0.07%	-0.71%	0.18%	-0.33%
1965-1	0.29%	-0.39%	0.55%	0.56%	0.03%	1.04%

1969-1	0.55%	0.08%	-0.34%	0.29%	0.31%	0.89%
1973-1	-0.28%	-0.36%	2.03%	0.83%	0.41%	2.63%
1977-1	-0.35%	0.06%	0.48%	0.26%	-0.33%	0.12%
1981-1	-0.78%	-0.74%	-0.75%	-1.45%	-0.76%	-4.48%
1985-1	-0.02%	-0.83%	0.19%	0.92%	-0.73%	-0.46%
Avg	-0.18%	-0.36%	0.32%	0.17%	-0.22%	-0.26%

1989-1	-0.32%	0.30%	-0.93%	-0.67%	0.55%	-1.06%
1993-1	0.07%	-0.47%	0.37%	-0.47%	-0.13%	-0.62%
1997-1	-0.45%	2.81%	-0.28%	0.45%	0.34%	2.88%
2001-1	3.90%	0.88%	-0.52%	1.15%	2.19%	7.60%
2005-1	-0.07%	-0.75%	-0.33%	0.05%	0.83%	-0.28%
Avg	0.63%	0.55%	-0.34%	0.10%	0.76%	1.70%

SPX summary for Presidential Year 1 1953 - 2005
Avg	-0.05%	0.18%	0.08%	0.06%	0.06%	0.33%
Win%	29%	57%	57%	64%	57%	43%

SPX summary for all years 1953 - 2008
Avg	0.04%	0.10%	0.01%	0.15%	0.19%	0.49%
Win%	50%	54%	60%	59%	59%	61%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth has stabilized for two weeks at the lowest level seen in a long time.

Conclusion

This has been a remarkable rally, no leadership, no new highs and no volume all it does is go up.

I expect the major indices to be higher on Friday September 18 than they were on Friday September 11.

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 weeks negative forecast was a miss.

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.