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November 18, 2006

Technical Market Report
by Mike Burk





The good news is:
• The Dow Jones Industrial Average (DJIA), Wilshire 5000 (WILSH) and Russell 2000 (R2K) all hit an all time highs last week. While the NASDAQ composite (OTC) and S&P 500 hit multi year highs.

Short Term

The market is overbought.

Counting the current period there have been 4 major peaks in the volume of advancing issues on the NASDAQ in the past 3 years.

The chart below covers the past 3 years showing the OTC in magenta and a 5% trend (39 day EMA) of volume of advancing issues on the NASDAQ (OTC UV) in green. Grey vertical dashed lines have been drawn on the 1st trading day of each month; the line is red on the 1st trading day of the year. Prices have been near an intermediate term high each of the 4 times OTC UV has been near its current level.

Taking a closer look at each of the 4 periods beginning with the current period shows UV following prices closely for the past 6 months.

The next chart covers the period from October 2005 through last July and shows the OTC UV peaking about a month before the index high last May.

In late 2004 OTC UV peaked about 2 weeks ahead of the index high near the end of the year. In this case the decline in OTC UV may have been affected by the seasonal fall off in volume. The chart covers the period from July 2004 through April 2005.

The next chart covers the period from August 2003 through May 2004. In January 2004 OTC UV peaked about a week ahead of the index high.

It is too early to say if we are looking at a high in OTC UV, but the current level is in the range of previous highs of the past 3 years.

Intermediate term

Over the past 50 years the annualized return of the SPX, excluding dividends has been about 7%.

From its low in October 2002 the annualized return of the SPX excluding dividends has been about 15%. The chart below shows the SPX from its October 2002 low to the present.

From its low last June the annualized return of the SPX excluding dividends has been 36%. The chart below shows the SPX from its June 13, 2006 low to the present.

Since 1928 the average return for the SPX, exclusive of dividends, during each Presidential Year has been:

Year 1 3.11%
Year 2 4.92%
Year 3 14.68%
Year 4 7.40%

Presidential Year 3 has been the best of the Presidential Years and the best Presidential Year 3 of all was 1995 when the SPX rose 34.11%.

The rise in the SPX from its June lows has been at a rate equivalent to the best Presidential Year 3 rate and a little over twice the average return for the period.

Seasonality

In the tables below next week is defined as the week of the Thanksgiving holiday.

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.

Historically the coming week has up 60% - 70% of the time with positive averages during all periods. The 2nd year of the Presidential Cycle has been a little weaker than average. Wednesday and Friday have been the most consistent winners.

Report for 3 days before Thanksgiving and 1 day after. Day1 = the day after
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 2
  Day4 Day3 Day2 Day1 Totals
1966-2 -0.31% 1 -1.00% 2 -0.42% 3 0.18% 5 -1.54%
1970-2 0.47% 1 0.28% 2 0.31% 3 0.25% 5 1.32%
1974-2 -0.63% 1 1.57% 2 0.24% 3 0.24% 5 1.42%
1978-2 0.72% 1 0.04% 2 0.71% 3 0.69% 5 2.17%
1982-2 -1.58% 1 -0.27% 2 0.76% 3 0.78% 5 -0.32%
Avg -0.26% 0.12% 0.32% 0.43% 0.61%
 
1986-2 0.41% 1 0.24% 2 0.34% 3 0.40% 5 1.38%
1990-2 0.54% 1 -1.26% 2 0.14% 3 0.08% 5 -0.51%
1994-2 -0.91% 1 -2.18% 2 -0.61% 3 0.79% 5 -2.91%
1998-2 2.57% 1 -0.58% 2 0.88% 3 1.65% 5 4.52%
2002-2 0.90% 1 -2.53% 2 3.01% 3 -0.62% 5 0.76%
Avg 0.70% -1.26% 0.75% 0.46% 0.65%
 
OTC summary for Presidential Year 2 1966 - 2002
Averages 0.22% -0.57% 0.54% 0.44% 0.63%
%Winners 60% 40% 80% 90% 60%
MDD 11/23/1994 3.66% -- 11/26/2002 2.53% -- 11/23/1982 1.85%
 
OTC summary for all years 1963 - 2005
Averages -0.24% -0.19% 0.31% 0.55% 0.44%
% Winners 44% 52% 77% 86% 65%
 
SPX Presidential Year 2
  Day4 Day3 Day2 Day1 Totals
1954-2 0.39% 1 1.34% 2 0.56% 3 0.96% 5 3.25%
1958-2 -2.60% 1 -0.60% 2 1.72% 3 1.12% 5 -0.36%
1962-2 -0.57% 1 1.05% 2 0.60% 3 1.20% 5 2.28%
 
1966-2 -1.44% 1 -0.52% 2 0.68% 3 0.80% 5 -0.49%
1970-2 0.62% 1 0.64% 2 0.37% 3 0.99% 5 2.61%
1974-2 -0.10% 1 0.93% 2 0.68% 3 0.04% 5 1.55%
1978-2 0.88% 1 -0.25% 2 0.49% 3 0.32% 5 1.45%
1982-2 -2.04% 1 -0.96% 2 0.71% 3 0.75% 5 -1.54%
Avg -0.42% -0.03% 0.59% 0.58% 0.72%
 
1986-2 0.65% 1 0.29% 2 0.24% 3 0.18% 5 1.36%
1990-2 0.70% 1 -1.26% 2 0.23% 3 -0.29% 5 -0.63%
1994-2 -0.69% 1 -1.79% 2 -0.03% 3 0.52% 5 -1.99%
1998-2 2.12% 1 -0.44% 2 0.33% 3 0.45% 5 2.47%
2002-2 0.25% 1 -2.10% 2 2.80% 3 -0.27% 5 0.68%
Avg 0.61% -1.06% 0.71% 0.12% 0.38%
 
SPX summary for Presidential Year 2 1954 -2002
Averages -0.14% -0.28% 0.72% 0.52% 0.82%
%Winners 54% 38% 92% 85% 62%
MDD 11/25/1958 3.19% -- 11/23/1982 2.98% -- 11/23/1994 2.50%
 
SPX summary for all years 1952 - 2005
Averages -0.24% 0.11% 0.36% 0.41% 0.64%
% Winners 44% 59% 80% 80% 70%

Conclusion

The market is overbought with some of the indicators approaching the highest levels they have reached at any time in the last 3 years. Even if the indicators are at their highs and turn downward, prices should continue moving upward for a few more weeks. Beginning Wednesday there is a strong positive seasonal bias.

I expect the major indices to be higher on Friday November 24 than they were on Friday November 17.

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 based on the deterioration of short term indicators the previous week 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.

Copyright © 2003-2008 Mike Burk

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