Technical Market Report

By: Mike Burk | Sat, Aug 29, 2009
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The good news is:
• All of the major indices closed at multi month highs on Thursday.

Short Term

You expect new highs to be expanding when the major indices are hitting new highs. Recently, as the major indices have been hitting multi month highs, new highs have been flagging.

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new highs in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

Although the indicator has been rising from its mid month low it is still well below its high reached on the 1st of the month, meanwhile the OTC closed at a multi month high on Friday.

The next chart is similar to the one above except it shows the S&P 500 (SPX) in red and the indicator has been calculated from NYSE new highs.

The pattern is similar.

Intermediate term

In the past month or so we have seen some very rare technical patterns. Last month the OTC was up for 12 consecutive days for the 1st time since 1992. Last week the 40% trend of the ratio of NYSE new highs to new lows (NY NH / (NY NH + NY NL) hit 98.8%, the highest level since January 2004 when it hit 99.7%

The chart below covers the past 6 months showing the SPX in red and a 40% trend (4 day EMA) of the ratio of NYSE new highs to new lows mentioned above. 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.

There has not been a great number of new highs (a high of 118 on Monday and a low of 69 on Thursday), but, there have been no new lows (a high of 2 on Wednesday and a low of 0 on Monday, Thursday and Friday).

The next chart covers the year between August 2003 and 2004, the last time the indicator exceeded 98%.

In late January 2004 the indicator hit 99.7% which also marked a multi month high for the SPX. During that period new lows were non existent as they are now, but, new highs were in the 400 to 500 range. The January 2004 high for the SPX was not exceeded for another 10 months.

High numbers of new highs relative to new lows usually suggests limited risk. However, extreme numbers, like we are seeing now, have occurred when the market has been, intermediate term, overbought.

Seasonality

Next week includes the last trading day of August and the 1st 4 trading days of September during the 1st year of the Presidential Cycle.

The tables show the daily return on a percentage basis for the last trading day of August and the 1st 4 trading days of September 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 average over all years has been modestly positive however during the 1st year of the Presidential Cycle the OTC has averaged a modest gain while the SPX since 1929 has averaged a modest loss.

Report for the last day of August and first 4 days of September.
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
  Day1 Day1 Day2 Day3 Day4 Totals
1965-1 0.20% 2 0.22% 3 0.27% 4 0.74% 5 0.48% 2 1.91%
 
1969-1 0.97% 5 0.32% 2 0.09% 3 -0.16% 4 -0.48% 5 0.73%
1973-1 0.85% 5 0.60% 2 0.50% 3 0.31% 4 0.62% 5 2.88%
1977-1 -0.01% 3 0.30% 4 0.43% 5 -0.05% 2 0.38% 3 1.05%
1981-1 -0.91% 1 -0.30% 2 0.11% 3 -1.74% 4 -1.23% 5 -4.06%
1985-1 0.13% 5 -0.39% 2 -0.33% 3 -0.10% 4 0.31% 5 -0.38%
Avg 0.21% 0.11% 0.16% -0.35% -0.08% 0.04%
 
1989-1 0.23% 4 0.43% 5 0.02% 2 -0.46% 3 0.09% 4 0.30%
1993-1 0.74% 2 0.45% 3 0.34% 4 0.14% 5 -1.38% 2 0.28%
1997-1 0.38% 5 1.94% 2 0.01% 3 0.40% 4 0.69% 5 3.41%
2001-1 0.77% 5 -1.92% 2 -0.66% 3 -3.03% 4 -1.05% 5 -5.90%
2005-1 1.05% 3 -0.19% 4 -0.32% 5 1.20% 2 0.24% 3 1.98%
Avg 0.63% 0.14% -0.12% -0.35% -0.28% 0.01%
 
OTC summary for Presidential Year 1 1965 - 2005
Averages 0.40% 0.13% 0.04% -0.25% -0.12% 0.20%
% Winners 82% 64% 73% 45% 64% 73%
MDD 9/7/2001 6.52% -- 9/4/1981 4.01% -- 9/7/1993 1.38%
 
OTC summary for all years 1963 - 2008
Averages 0.16% 0.07% 0.09% -0.10% 0.15% 0.37%
% Winners 76% 60% 65% 59% 59% 61%
MDD 8/31/1998 8.57% -- 9/7/2001 6.52% -- 9/5/2008 6.46%
 
SPX Presidential Year 1
  Day1 Day1 Day2 Day3 Day4 Totals
1929-1 1.34% 5 0.35% 2 -0.31% 3 -2.21% 4 2.61% 5 1.78%
1933-1 -0.09% 4 1.26% 5 -3.47% 2 0.09% 3 -1.38% 4 -3.59%
1937-1 -0.50% 2 -2.68% 3 -1.60% 4 0.65% 5 0.78% 6 -3.35%
1941-1 0.19% 6 0.39% 2 -0.68% 3 -0.29% 4 -0.29% 5 -0.68%
1945-1 1.04% 5 0.00% 2 0.13% 3 1.35% 4 -0.06% 5 2.46%
Avg 0.40% -0.14% -1.19% -0.08% 0.33% -0.68%
 
1949-1 0.07% 3 0.59% 4 -0.13% 5 -0.07% 2 0.65% 3 1.12%
1953-1 -1.77% 1 0.43% 2 0.60% 3 -0.21% 4 0.26% 5 -0.70%
1957-1 1.71% 5 0.49% 2 -0.86% 3 -0.51% 4 -0.31% 5 0.51%
1961-1 0.38% 4 0.18% 5 -0.34% 2 0.74% 3 -0.16% 4 0.80%
1965-1 -0.05% 2 0.00% 3 0.55% 4 0.47% 5 0.34% 2 1.31%
Avg 0.07% 0.34% -0.04% 0.08% 0.16% 0.61%
 
1969-1 0.65% 5 0.03% 2 -0.59% 3 -0.82% 4 -0.59% 5 -1.32%
1973-1 0.36% 5 0.25% 2 0.12% 3 0.49% 4 -0.37% 5 0.85%
1977-1 0.40% 3 0.06% 4 0.64% 5 0.27% 2 0.31% 3 1.68%
1981-1 -1.04% 1 0.19% 2 0.38% 3 -1.82% 4 -0.97% 5 -3.26%
1985-1 -0.16% 5 -0.38% 2 -0.29% 3 -0.05% 4 0.52% 5 -0.36%
Avg 0.04% 0.03% 0.05% -0.39% -0.22% -0.48%
 
1989-1 0.23% 4 0.65% 5 -0.33% 2 -0.94% 3 -0.25% 4 -0.65%
1993-1 0.36% 2 -0.09% 3 -0.40% 4 0.01% 5 -0.61% 2 -0.73%
1997-1 -0.46% 5 3.13% 2 0.03% 3 0.33% 4 -0.20% 5 2.82%
2001-1 0.40% 5 -0.06% 2 -0.11% 3 -2.24% 4 -1.86% 5 -3.86%
2005-1 0.99% 3 0.10% 4 -0.29% 5 1.26% 2 0.24% 3 2.30%
Avg 0.30% 0.75% -0.22% -0.32% -0.54% -0.02%
 
SPX summary for Presidential Year 1 1929 - 2005
Averages 0.20% 0.24% -0.35% -0.18% -0.07% -0.14%
% Winners 65% 70% 35% 50% 40% 50%
MDD 9/7/1933 4.72% -- 9/2/1937 4.71% -- 9/7/2001 4.22%
 
SPX summary for all years 1928 - 2008
Averages 0.14% -0.04% 0.14% 0.21% -0.10% 0.34%
% Winners 63% 67% 55% 56% 43% 59%
MDD 9/4/1946 7.76% -- 8/31/1998 6.78% -- 9/4/1931 5.74%

September

Over all years since 1963, the OTC, in September, has been up 61% of the time with an average loss of 0.4%. September is the only month with an average loss. The average loss was helped considerably by a 13.3% loss in 2000, a 15.4% loss in 2001 and a 11.4% loss in 2008. During the 1st year of the Presidential Cycle the OTC has been up 73% of the time with an average loss of 0.8% (helped considerably by a 15.4% loss in 2001) making it second to February as the worst month of the year based on average return.

The chart below shows the average September over all years in blue and the average during the 1st year of the Presidential Cycle in green. The averages for all years and the 1st year of the Presidential Cycle are close for the 1st half of the month then go in opposite directions for the 2nd half.

On average there are 21 trading days in a month. The chart has been calculated by averaging the daily gain of each of the 1st 11 trading days and the last 10. When there have been more than 21 trading days in the month some of the days in the middle were omitted. When there have been more than 21 trading days in the month some of the days in the middle have been counted twice. Dashed vertical lines have been drawn on the 1st trading day of the month and at 5 trading day intervals after that. A solid vertical line has been drawn on the 11th trading day, the dividing point.

Over all years since 1928, the SPX, in September, has been up 44% of the time with an average loss of 1.2%, making it the worst month of the year. During the 1st year of the Presidential Cycle the SPX has been up only 30% of the time with an average loss of 2.3%, also the worst month of year in the 1st year of the Presidential Cycle.

The chart below is similar to the one above except it shows the average performance for the SPX in September. The average for all years is shown in red and the average for the 1st year of the Presidential Cycle is shown in green.

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth continued to fall last week and has fallen below the linear regression trend line.

Conclusion

The market is overbought any way you want to measure it and new highs are deteriorating. It is likely to take a while for the momentum to bleed off, on the other hand there is unlikely to be much upside either.

I expect the major indices to be lower on Friday September 4 than they were on Friday August 28.

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Last week all of the major indices moved less than 1%. Most of them were up slightly for the week, but the Russell 2000 was down slightly so I am calling last week's positive forecast a tie.

Thank you,

 


 

Author: Mike Burk

Mike Burk

Mike Burk independently publishes a weekly newsletter on the stock market from a technical perspective.

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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