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November 04, 2006

Technical Market Report
by Mike Burk

The good news is:
• While all of the major averages were down last week there was no significant build up of new lows.

Short Term

In one week the market went from over bought to over sold.

The Dow Jones Industrial Average (DJIA) finished a run to 4 consecutive new all time highs on October 28. Since then it has fallen for 6 consecutive days, something it has not done since June 2005.

The chart below covers the past 2 years showing the DJIA in red and an indicator showing the percentage of the previous 6 trading days that have been up in blue. There are dashed red vertical lines drawn on the 1st trading day of each year. Prior to the period showing on this chart the last time the DJIA was down for 6 consecutive days was in 2001.

In the 2 previous occurrences of 6 consecutive down days prior to last week the DJIA consolidated for about a week. Following the 1st consolidation it fell further and following the 2nd consolidation it rose.

It would seem likely that we will not see much movement either way next week.

Intermediate term

The move off last summers low was very strong.

The chart below covers the past 3 years showing the Russell 2000 (R2K) in red with an indicator showing a 10% trend (19 day EMA) of the component issues of the R2K making new 6 week highs in green. Grey dashed vertical lines have been drawn on the 1st trading day of each month the lines are red on the 1st trading day of the year.

In the recent rally the R2K did not quite reach its all time high of last May, but the new high indicator made a higher high in October than it did in May indicating more issues participated in the recent rally than were participating when the index made its all time high last May.

The next chart is similar to the one above except is shows the S&P 500 (SPX) and the new high indicator has been calculated from the component issues of the SPX. Over the past 3 years the indicator peaks have been progressively lower with each higher high, but not by much especially compared to how the indicator looked at the early May high.

Seasonality

In the tables below next week is defined as the week prior to the 2nd Friday in November during the 2nd year of the Presidential Cycle.

OTC data covers the period from 1966 - 2002 and SPX data from 1954 - 2002 during the 2nd year of the Presidential Cycle. There are summaries for both the 2nd year of the Presidential Cycle and all years combined beginning with 1963 for the OTC and 1953 for the SPX. The market traded 6 days a week prior to 1953 so that data is been omitted.

During all periods the market has been up about half of the time with modest gains.

Report for the week before the 2nd Friday during Nov
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.

OTC Presidential Year 2
Year	Mon	Tue	Wed	Thur	Fri	Totals
1966-2	0.77%	0.00%	0.54%	0.65%	0.70%	2.66%

1970-2	0.26%	0.96%	0.86%	-0.34%	-1.33%	0.41%
1974-2	-0.68%	2.12%	0.18%	0.80%	-0.20%	2.23%
1978-2	-0.36%	-1.96%	0.14%	0.79%	0.84%	-0.54%
1982-2	-0.13%	1.52%	0.10%	0.48%	0.47%	2.44%
1986-2	-0.28%	0.37%	-0.03%	-0.88%	0.16%	-0.66%
Avg	-0.24%	0.60%	0.25%	0.17%	-0.01%	0.78%

1990-2	1.28%	-0.07%	-1.10%	-0.13%	1.66%	1.65%
1994-2	-0.49%	0.69%	-0.04%	-0.37%	-0.30%	-0.51%
1998-2	0.24%	0.24%	-0.19%	-0.59%	-0.17%	-0.46%
2002-2	2.63%	0.33%	1.27%	-2.98%	-1.27%	-0.01%
Avg	0.92%	0.30%	-0.01%	-1.02%	-0.02%	0.17%

OTC summary for Presidential Year 2 1966 - 2002
Avg	0.33%	0.47%	0.17%	-0.26%	0.06%	0.72%
Win%	50%	78%	60%	40%	50%	50%

OTC summary for all years 1963 - 2005
Avg	-0.05%	0.17%	0.03%	0.23%	0.01%	0.37%
Win%	44%	61%	56%	63%	60%	53%

SPX Presidential Year 2
Year	Mon	Tue	Wed	Thur	Fri	Totals
1954-2	0.95%	0.39%	0.09%	0.87%	0.21%	2.52%
1958-2	0.59%	0.78%	0.13%	-0.41%	0.49%	1.58%
1962-2	1.04%	0.00%	0.62%	-0.66%	0.79%	1.78%
1966-2	-0.10%	0.00%	0.81%	0.63%	0.06%	1.39%

1970-2	0.53%	0.14%	0.28%	-1.03%	-0.93%	-1.00%
1974-2	-1.08%	2.78%	-0.48%	0.62%	-0.40%	1.43%
1978-2	-1.03%	-1.41%	0.64%	-0.03%	0.37%	-1.46%
1982-2	-1.21%	1.84%	-1.30%	0.43%	-1.57%	-1.82%
1986-2	0.15%	0.39%	-0.18%	-1.47%	0.61%	-0.50%
Avg	-0.53%	0.75%	-0.21%	-0.30%	-0.38%	-0.67%

1990-2	0.88%	-0.94%	-1.80%	0.52%	1.99%	0.65%
1994-2	0.17%	0.56%	-0.05%	-0.23%	-0.43%	0.02%
1998-2	-0.95%	-0.17%	-0.65%	-0.25%	0.67%	-1.34%
2002-2	0.82%	0.78%	0.91%	-2.29%	-0.88%	-0.65%
Avg	0.23%	0.06%	-0.40%	-0.56%	0.34%	-0.33%

SPX summary for Presidential Year 2 1954 - 2002
Avg	0.06%	0.47%	-0.08%	-0.25%	0.08%	0.20%
Win%	62%	73%	54%	38%	62%	54%

SPX summary for all years 1953 - 2005
Avg	-0.06%	0.12%	0.13%	0.19%	0.02%	0.37%
Win%	51%	50%	60%	62%	58%	57%

Conclusion

Last week the rally of the past few months ended going into what seasonally has been the strongest week of the year. I think it is likely that weakness will continue for another week or two.

I expect the major indices to be lower on Friday November 10 than they were on Friday November 3.

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 positive forecast based on the unbroken since 1930 run of seasonal strength was a miss.

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.

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