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October 24, 2009

Technical Market Report
by Mike Burk

The good news is:
• We are approaching the seasonally strongest time of the year.

Short Term

Last week I showed a chart that defined a rhythm that has been apparent over the last few months.

Last weeks chart was calculated from the component issues of the Russell 2000 (R2K). The chart below is similar to the one shown last week except it shows the S&P 500 (SPX) and the indicator has been calculated from the component issues of the SPX.

The chart covers the past 160 trading days (from the March low) showing the SPX in red and an indicator that is the difference in momentum of new lows subtracted from the momentum of new highs of the component issues of the SPX. New highs and new lows have been calculated over the trailing 3 weeks for the calculation of this indicator rather than the trailing 52 weeks as reported by the exchanges. Dashed vertical lines have been drawn on the 1st trading day of each month.

The indicator has been in decline for the past 6 trading days and, if it follows its recent pattern, should bottom late next week conveniently coinciding with one of the seasonally strongest periods of the year.

Intermediate term

All of the major indices were down last week, but, there was no significant increase in the number of new lows.

The chart below is an update of one I have been showing regularly showing. The NASDAQ composite (OTC) is shown in blue and an indicator showing a 40% trend of the ratio of NASDAQ new highs to new highs + new lows.

OTC HL Ratio = (OTC NH / (OTC NH + NL)

Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.

As long as the indicator (currently at 88%) remains above the 50% level, nothing really bad is likely to happen.

NYSE data problems

I read an article by Justin Mamis in the early 1990's where he pointed out the number of fixed income issues on the NYSE was rapidly increasing and changing the character of breadth indicators derived from NYSE data. I have read comments recently suggesting 50% - 60% of the issues on the NYSE are fixed income. On their web site the NYSE identifies about 1780 equity issues out of a total of about 3160 or about 56%. Fixed income issues accumulate value daily until they go ex dividend usually monthly or quarterly giving breadth issues derived from them a very strong positive bias.

The charts below illustrate the problem.

Both charts cover the past 2 years showing the SPX in red and an Advance - Decline line in blue or black. Advance - Decline lines are running totals of daily declining issues subtracted from advancing issues.

In the 1st chart the Advance - Decline line has been calculated from public data including all issues traded on the exchange.

In the chart above the ADL recently hit a new, all time high.

The next chart is similar to the one above except the ADL has been calculated from equity issues only.

The positive ADL bias on the equity only chart is non existent.

Long term research on NYSE breadth indicators may not be as relevant to current times as we had hoped.

Seasonality

Next week includes the last 5 trading days of October 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 October 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.

The coming week has had a negative bias during the 1st year of the Presidential Cycle and a positive one over all years. On the last trading day of October during the 1st year of the Presidential Cycle the OTC has only been down once.

Last 5 days of October.
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	0.31% 1	-0.56% 2	0.24% 3	-0.26% 4	0.55% 5	0.28%

1969-1	0.35% 1	0.29% 2	0.08% 3	0.06% 4	0.79% 5	1.56%
1973-1	0.16% 4	0.43% 5	-0.62% 1	-1.30% 2	-0.42% 3	-1.75%
1977-1	-1.08% 2	0.03% 3	0.22% 4	0.43% 5	0.03% 1	-0.37%
1981-1	-0.47% 1	0.84% 2	0.59% 3	-0.35% 4	1.12% 5	1.73%
1985-1	-0.38% 5	-0.11% 1	0.67% 2	0.39% 3	0.10% 4	0.68%
Avg	-0.28%	0.29%	0.19%	-0.15%	0.32%	0.37%

1989-1	0.26% 3	-1.02% 4	-1.18% 5	-0.31% 1	0.94% 2	-1.31%
1993-1	-0.38% 1	-0.56% 2	0.84% 3	0.21% 4	0.75% 5	0.86%
1997-1	-7.01% 1	4.24% 2	0.16% 3	-2.02% 4	1.48% 5	-3.16%
2001-1	2.54% 4	-0.37% 5	-3.93% 1	-1.89% 2	1.37% 3	-2.28%
2005-1	-0.30% 2	-0.45% 3	-1.73% 4	1.26% 5	1.46% 1	0.25%
Avg	-0.98%	0.37%	-1.17%	-0.55%	1.20%	-1.13%

OTC summary for Presidential Year 1 1965 - 2005
Averages	-0.55%	0.25%	-0.42%	-0.34%	0.74%	-0.32%
% Winners	45%	45%	64%	45%	91%	55%
MDD 10/27/1997 7.01% -- 10/30/2001 6.09% -- 10/30/1989 2.49%

OTC summary for all years 1963 - 2008
Averages	-0.54%	0.24%	-0.12%	0.26%	0.58%	0.44%
% Winners	38%	43%	61%	54%	72%	54%
MDD 10/28/1987 11.13% -- 10/31/1978 8.29% -- 10/27/1997 7.01%

SPX Presidential Year 1
	Day5	Day4	Day3	Day2	Day1	Totals
1929-1	-0.69% 6	-12.34% 1	-10.16% 2	12.53% 3	5.05% 4	-5.61%
1933-1	-1.97% 4	1.06% 5	-1.36% 6	-3.93% 1	-0.88% 2	-7.09%
1937-1	-2.17% 2	0.17% 3	2.47% 4	2.49% 5	0.08% 6	3.04%
1941-1	-1.23% 1	-0.10% 2	-0.31% 3	0.00% 4	-1.25% 5	-2.89%
1945-1	0.49% 4	0.49% 5	-0.79% 1	0.12% 2	1.65% 3	1.96%
Avg	-1.11%	-2.14%	-2.03%	2.24%	0.93%	-2.12%

1949-1	0.69% 3	0.56% 4	-0.43% 5	0.31% 6	-0.56% 1	0.57%
1953-1	-0.16% 1	-0.21% 2	0.12% 3	1.19% 4	-0.16% 5	0.78%
1957-1	-0.29% 5	-0.42% 1	0.67% 2	0.81% 3	0.10% 4	0.86%
1961-1	0.53% 3	0.18% 4	-0.18% 5	0.12% 1	0.29% 2	0.94%
1965-1	-0.34% 1	0.58% 2	0.34% 3	-0.32% 4	0.23% 5	0.48%
Avg	0.08%	0.14%	0.10%	0.42%	-0.02%	0.73%

1969-1	-0.18% 1	-0.29% 2	-0.87% 3	0.12% 4	0.32% 5	-0.90%
1973-1	0.21% 4	0.80% 5	-0.21% 1	-1.64% 2	-0.95% 3	-1.79%
1977-1	-0.69% 2	1.21% 3	0.26% 4	0.29% 5	-0.29% 1	0.78%
1981-1	-0.37% 1	0.96% 2	0.13% 3	-0.33% 4	2.38% 5	2.77%
1985-1	-0.52% 5	0.13% 1	0.78% 2	0.44% 3	-0.13% 4	0.70%
Avg	-0.31%	0.56%	0.02%	-0.22%	0.26%	0.31%

1989-1	-0.35% 3	-1.33% 4	-0.85% 5	0.00% 1	1.58% 2	-0.95%
1993-1	0.20% 1	0.02% 2	0.07% 3	0.67% 4	0.02% 5	0.98%
1997-1	-6.87% 1	5.05% 2	-0.23% 3	-1.68% 4	1.21% 5	-2.52%
2001-1	1.37% 4	0.41% 5	-2.38% 1	-1.72% 2	0.00% 3	-2.32%
2005-1	-0.24% 2	-0.43% 3	-1.05% 4	1.65% 5	0.72% 1	0.66%
Avg	-1.18%	0.74%	-0.89%	-0.21%	0.71%	-0.83%

SPX summary for Presidential Year 1 1929 - 2005
Averages	-0.63%	-0.18%	-0.70%	0.56%	0.47%	-0.48%
% Winners	30%	65%	40%	65%	60%	60%
MDD 10/29/1929 21.78% -- 10/31/1933 6.96% -- 10/27/1997 6.87%

SPX summary for all years 1928 - 2008
Averages	-0.49%	0.14%	-0.07%	0.39%	0.29%	0.25%
% Winners	36%	60%	53%	57%	59%	54%
MDD 10/29/1929 21.78% -- 10/26/1987 8.28% -- 10/31/1933 6.96%

Conclusion

Cyclically the market should be hitting a short term low late next week, just as we enter a seasonally strong period.

I expect the major indices to be higher on Friday October 30 than they were on Friday October 23.

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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.