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April 15, 2006

Technical Market Report
by Mike Burk

The good news is:
· The market has been following the typical seasonal pattern for the 2nd year of the Presidential Cycle.

Short term

In the late 1960's Sherman McClellan and his late wife developed the McClellan oscillator (MCO). Since then careers have been made interpreting it and its variations.

In its original form the MCO was calculated by subtracting a 5% trend (39 day EMA) from a 10% trend (19 day EMA) of NYSE advancing - declining issues.

The chart below shows the NASDAQ composite (OTC) in red and an MCO calculated from NASDAQ advancing - declining issues in brown. Last week the MCO reached its lowest level since the October low. When the MCO has reached levels near last week's low, there has been a bounce in prices. It remains to be seen if the bounce amounts to more than the seasonally prompted advance of last Wednesday and Thursday.

Intermediate term

In the late 1980's I found the Dow Jones Industrial Average (DJIA) would often make a run to new cycle highs while new lows were increasing.

The chart below shows the DJIA in red and a 10% trend of NYSE new lows on an inverted Y axis (NY NL) in brown. The indicator is falling sharply (increasing new lows) and the index is only 1.6% off its cycle high.

There were 94 new lows on the NYSE Thursday; otherwise, the number was above 100 all week. Prior to 1998 any number greater than 40 would have been viewed with concern.

During market advances the volume of advancing issues (AV) usually rises while the volume of declining issues (DV) usually declines. Since the beginning of this year we have seen a relatively unusual pattern of AV and DV increasing at the same time.

The chart below covers the period from mid-October through last Thursday. The OTC is shown in red, a 4% trend of NASDAQ AV is shown in green and NASDAQ DV on an inverted Y axis (increasing DV moves the indicator downward) is shown in blue. Vertical dashed black lines market the 1st trading day of each month and a dashed red line marks the 1st trading day of the year.

All of the lines moved up and down together before early January when DV headed downward while AV and prices moved upward. AV has apparently been overwhelming increasing DV to move prices upward.

The next chart shows the same indicators as the previous chart except the time frame is mid-November 1999 through mid-April 2000. The patterns in 2000 were more orderly than we have seen in the past 3 months, but very similar. In March of 2000 the indicators returned to their normal pattern when AV declined while DV increased (moved down on the chart) and prices fell.

Seasonality

Options expire on the 3rd Friday of the month, next Friday.

The tables below show daily returns during the week prior the 3rd Friday in April during the 2nd year of the Presidential Cycle with summaries for both the 2nd year of the Presidential Cycle and all years combined.

Average returns for both the OTC (since 1966) and SPX (since 1930) have been negative over the week while returns for all years combined have been positive.

Report for the week before options expiration during April
The number following the year is the position in the presidential cycle.
Daily returns from Monday to witching Friday.

OTC Presidential Year 2
Year	Mon	Tue	Wed	Thur	Fri	Totals
1966-2	0.68%	-0.25%	-0.45%	0.57%	0.20%	0.75%
1970-2	-0.83%	-1.56%	-0.92%	-1.35%	-1.42%	-6.09%
1974-2	-0.04%	-1.99%	-1.72%	-1.05%	0.23%	-4.57%
1978-2	0.56%	-0.43%	0.19%	1.09%	0.41%	1.82%
1982-2	0.07%	-0.24%	0.21%	0.73%	0.69%	1.47%
Avg	0.09%	-0.89%	-0.54%	0.00%	0.02%	-1.32%

1986-2	0.51%	0.23%	1.55%	0.60%	0.16%	3.05%
1990-2	-1.34%	-0.21%	0.33%	0.12%	-0.73%	-1.84%
1994-2	-1.03%	-1.05%	-1.03%	1.87%	0.53%	-0.71%
1998-2	1.10%	0.89%	0.72%	-1.88%	-0.66%	0.16%
2002-2	-0.14%	3.59%	-0.34%	-0.46%	-0.31%	2.35%
Avg	-0.18%	0.69%	0.25%	0.05%	-0.20%	0.60%

OTC summary for Presidential Year 2 1966 - 2002
Avg	-0.05%	-0.10%	-0.14%	0.02%	-0.09%	-0.36%
Win%	50%	30%	50%	60%	60%	60%

OTC summary for all years 1963 - 2005
Avg	-0.32%	0.26%	0.19%	0.28%	0.06%	0.48%
Win%	52%	55%	67%	63%	60%	70%

SPX Presidential Year 2
Year	Mon	Tue	Wed	Thur	Fri	Totals
1930-2	-1.79%	0.83%	0.20%	-0.78%	-0.12%	-1.66%
1934-2	-1.55%	1.02%	1.29%	0.18%	1.00%	1.93%
1938-2	-1.98%	-2.88%	-0.49%	0.99%	2.85%	-1.51%
1942-2	0.39%	0.26%	-0.26%	-2.57%	-0.53%	-2.71%

1946-2	-0.11%	-0.21%	-1.01%	-0.59%	0.22%	-1.70%
1950-2	-0.72%	0.00%	-0.39%	0.56%	0.56%	0.01%
1954-2	-0.64%	-0.04%	-0.40%	0.14%	0.36%	-0.57%
1958-2	0.52%	-0.30%	0.00%	0.79%	0.51%	1.52%
1962-2	-0.09%	-0.10%	-1.10%	-0.97%	-1.12%	-3.38%
Avg	-0.21%	-0.16%	-0.72%	-0.01%	0.11%	-0.83%

1966-2	-0.45%	-0.01%	0.56%	0.37%	-0.16%	0.31%
1970-2	-0.68%	-0.86%	-0.18%	-0.98%	-0.24%	-2.94%
1974-2	-0.39%	-1.68%	-1.64%	-0.81%	0.68%	-3.85%
1978-2	1.65%	-1.08%	0.46%	0.72%	-0.21%	1.54%
1982-2	-0.09%	-1.08%	0.24%	1.27%	1.24%	1.58%
Avg	0.01%	-0.94%	-0.11%	0.12%	0.26%	-0.67%

1986-2	0.56%	0.19%	1.89%	0.33%	-0.27%	2.70%
1990-2	-1.21%	-0.21%	0.51%	0.27%	-1.14%	-1.79%
1994-2	-0.83%	0.02%	-0.13%	1.53%	-0.25%	0.34%
1998-2	0.08%	0.24%	0.33%	-0.92%	-1.05%	-1.32%
2002-2	-0.76%	2.34%	-0.20%	-0.14%	0.06%	1.30%
Avg	-0.43%	0.52%	0.48%	0.21%	-0.53%	0.25%

SPX summary for Presidential year 2 1930 - 2002
Avg	-0.43%	-0.20%	-0.02%	-0.03%	0.13%	-0.54%
Win%	26%	39%	44%	58%	47%	47%

SPX summary for all years 1928 - 2005
Avg	-0.15%	0.12%	0.06%	0.06%	0.01%	0.09%
Win%	46%	53%	58%	58%	47%	65%

Conclusion

The market sold off through last Tuesday brining many of the short term indicators to their lowest levels since the October low. The rally Wednesday and Thursday off the oversold lows was lackluster, caused by a lack of sellers (indicated by diminished DV) rather than enthusiastic buying. For the past two weeks the blue chips have been stronger than the secondaries, if this pattern continues and the DJIA makes a new high (+1.7%) that will fulfill the pattern for a typical cycle top.

I expect the major indices to be lower on Friday April 21 than they were on Thursday April 13.

Last week all of the major indices were down except the DJIA (up 0.16%) so I am calling last weeks negative forecast a win. 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.

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.