Technical Market Report

By: Mike Burk | Sat, Jan 2, 2010
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The good news is:
• All of the major indices closed at recovery highs early last week.

The negatives

Right now there not very many.

The NASDAQ Advance - Decline Line (OTC ADL) is a running total of advancing issues - declining issues and it has a decidedly negative bias. You would not have been aware of the negative bias looking at a chart covering the period from last March through mid October. Since mid October the negative bias has returned and that was around the time that insider selling exceeded insider buying by 32 to 1 (it is usually 3 or 4 to 1).

The chart below covers the past year showing the NASDAQ composite (OTC) in blue and the OTC ADL in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

Volume has been pathetic.

In a "normal" advancing market volume increases as prices rise and declines when prices fall with spikes during sharp declines. In the past 9 months we have experienced one of the sharpest increases in prices ever on falling volume.

The chart below covers about 7.5 years showing the OTC in blue and a 5% trend (39 day EMA) of NASDAQ total volume in orange. Dashed vertical lines have been drawn on the 1st trading day of each year.

The right edge of the chart has been obscured because the chart is so compressed so I have drawn an arrow to show the current level of the indicator.

The annual low point of volume often occurs at the end of the year. We are seeing the lowest volume in 3 years on the NASDAQ.

It is worse on the NYSE.

The chart below is similar to the one above except it shows the S&P 500 (SPX) in red and a 5% trend of NSYE total volume in black.

NYSE volume is at its lowest point in over 7 years.

The Positives

Peaks in new highs usually occur well ahead of peaks in prices.

The chart below covers the past year showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green. OTC NH hit a yearly high early last week. Dashed vertical lines have been drawn on the 1st trading day of each month.

The chart below covers the past 7.5 years offering a longer term perspective on OTC NH.

New highs bounce around with prices, but nothing really bad happens until new lows begin to increase.

The chart below covers the past year showing the SPX in red and a 40% trend (4 day EMA) of (NYSE new highs / (new highs + new lows)) (NY HL Ratio) in blue. 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.

NY HL Ratio is at 98.9%, near its all time high. There is little reason for concern as long as the indicator remains above 50%.

The chart below is similar to the one above but it covers the past 5 years offering a longer term perspective on NY HL Ratio. Dashed vertical lines have been drawn on the 1st trading day of each year.

The secondaries lead both up and down and in the last 2 weeks of last year they have gone from being the laggards to the leaders.

The chart below covers the past 2 months showing the SPX in red, the OTC in blue the S&P mid cap in black and the Russell 2000 (R2K) in green. The indices have been plotted on log scales to show their relative performance.

Seasonality

Next week includes the first 5 trading days of the 2nd year of the Presidential Cycle.

The tables below show the return on a percentage basis for the first 5 trading days of the 2nd 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 2nd year of the Presidential Cycle and all years combined.

On average, returns for the 1st 5 trading days of the year have been positive for all segments of the market, but stronger for the small caps than the blue chips.

Report includes the first 5 days of January.
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
  Day1 Day2 Day3 Day4 Day5 Totals
1966-2 0.70% 1 0.73% 2 0.38% 3 0.12% 4 0.02% 5 1.95%
 
1970-2 0.71% 5 1.01% 1 0.04% 2 -0.54% 3 0.24% 4 1.46%
1974-2 0.37% 3 1.78% 4 -0.08% 5 0.39% 1 -0.44% 2 2.02%
1978-2 -1.00% 2 -0.33% 3 -0.43% 4 -1.50% 5 -1.44% 1 -4.70%
1982-2 -0.16% 1 -1.64% 2 -0.61% 3 -0.07% 4 0.54% 5 -1.94%
1986-2 0.18% 4 0.22% 5 0.08% 1 1.15% 2 -0.25% 3 1.39%
Avg 0.02% 0.21% -0.20% -0.11% -0.27% -0.36%
 
1990-2 0.99% 2 0.34% 3 -0.33% 4 -0.25% 5 0.11% 1 0.86%
1994-2 -0.78% 1 0.46% 2 0.49% 3 0.30% 4 0.32% 5 0.79%
1998-2 0.71% 5 0.80% 1 -0.88% 2 -1.16% 3 -0.40% 4 -0.94%
2002-2 1.48% 3 3.29% 4 0.74% 5 -1.08% 1 0.92% 2 5.34%
2006-2 1.74% 2 0.88% 3 0.59% 4 1.26% 5 0.57% 1 5.04%
Avg 0.83% 1.15% 0.12% -0.19% 0.30% 2.22%
 
OTC summary for Presidential Year 2 1966 - 2006
Averages 0.45% 0.69% 0.00% -0.13% 0.02% 1.02%
% Winners 73% 82% 55% 45% 64% 73%
MDD 1/9/1978 4.62% -- 1/7/1982 2.46% -- 1/8/1998 2.42%
 
OTC summary for all years 1963 - 2009
Averages 0.13% 0.64% 0.27% -0.12% 0.12% 1.05%
% Winners 58% 70% 63% 63% 59% 67%
MDD 1/6/2000 9.78% -- 1/8/2001 8.44% -- 1/8/2008 7.98%
 
SPX Presidential Year 2
  Day1 Day2 Day3 Day4 Day5 Totals
1930-2 -1.26% 4 0.24% 5 1.18% 6 0.09% 1 -0.88% 2 -0.64%
1934-2 0.10% 2 -1.38% 3 -0.30% 4 -1.31% 5 -0.41% 6 -3.30%
1938-2 -0.28% 1 4.47% 2 -0.64% 3 4.58% 4 -0.88% 5 7.25%
1942-2 2.30% 5 0.90% 6 1.34% 1 -0.44% 2 -0.55% 3 3.55%
1946-2 -0.63% 3 0.12% 4 -0.23% 5 0.41% 6 0.06% 1 -0.29%
Avg 0.04% 0.87% 0.27% 0.67% -0.53% 1.31%
 
1950-2 -0.60% 2 1.14% 3 0.47% 4 0.30% 5 0.65% 6 1.96%
1954-2 0.56% 1 0.60% 2 0.16% 3 -0.32% 4 -0.52% 5 0.49%
1958-2 0.85% 4 1.34% 5 -0.46% 1 0.79% 2 -0.02% 3 2.49%
1962-2 -0.82% 2 0.24% 3 -0.69% 4 -1.39% 5 -0.78% 1 -3.44%
1966-2 -0.27% 1 0.09% 2 0.64% 3 0.23% 4 0.09% 5 0.77%
Avg -0.06% 0.68% 0.02% -0.08% -0.12% 0.45%
 
1970-2 1.02% 5 0.49% 1 -0.68% 2 -0.20% 3 0.05% 4 0.68%
1974-2 0.13% 3 2.17% 4 -0.90% 5 -0.84% 1 -1.99% 2 -1.43%
1978-2 -1.35% 2 -0.32% 3 -0.83% 4 -1.21% 5 -1.07% 1 -4.78%
1982-2 0.16% 1 -2.19% 2 -0.72% 3 -0.21% 4 0.52% 5 -2.45%
1986-2 -0.80% 4 0.62% 5 -0.11% 1 1.50% 2 -2.73% 3 -1.52%
Avg -0.17% 0.15% -0.65% -0.19% -1.04% -1.90%
 
1990-2 1.78% 2 -0.26% 3 -0.86% 4 -0.98% 5 0.45% 1 0.14%
1994-2 -0.22% 1 0.31% 2 0.14% 3 -0.09% 4 0.60% 5 0.74%
1998-2 0.47% 5 0.21% 1 -1.07% 2 -0.27% 3 -0.83% 4 -1.48%
2002-2 0.57% 3 0.92% 4 0.62% 5 -0.65% 1 -0.36% 2 1.10%
2006-2 1.64% 2 0.37% 3 0.00% 4 0.94% 5 0.37% 1 3.32%
Avg 0.85% 0.31% -0.23% -0.21% 0.05% 0.76%
 
SPX summary for Presidential Year 2 1930 - 2006
Averages 0.17% 0.50% -0.15% 0.05% -0.41% 0.16%
% Winners 55% 80% 40% 40% 40% 55%
MDD 1/9/1978 4.69% -- 1/8/1974 3.69% -- 1/8/1962 3.40%
 
SPX summary for all years 1928 - 2009
Averages 0.04% 0.53% 0.00% 0.09% -0.14% 0.51%
% Winners 46% 75% 49% 55% 45% 65%
MDD 1/5/1932 7.02% -- 1/8/1988 6.77% -- 1/8/2008 5.32%

January

Since 1963 the OTC has been up 65% of the time in January with an average return of 3.0% making it the best month of the year measured by average return and 2nd to April for consistency. During the 2nd year of the Presidential Cycle January has been up 55% of the time with an average return of 0.1% putting it about in the middle for average returns and consistency.

The average month has 21 trading days. The chart below has been calculated by averaging the daily percentage change of the OTC for each of the 1st 11 trading days and each of the last 10. In months when there were more than 21 trading days some of the days in the middle were not counted. In months when there were less than 21 trading days some of the days in the middle of the month were counted twice. Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that. The line is solid on the 11th trading day, the dividing point.

The blue line shows the average of all years since 1963 while the green line shows the average during the 2nd year of the Presidential Cycle.

Since 1928 the SPX has been up 65% of the time in January with an average return of 1.2% making it second to December for average returns and consistency of returns. During the 2nd year of the Presidential Cycle January has been up 65% of the time making it 2nd to December by that measure while the average return has been 0.8% making it 4th behind October, December and November.

The chart below is similar to the one above except it shows the SPX average for all years since 1928 in red and the average for the 2nd year of the Presidential Cycle in green.

Since 1979 the R2K has been up 58% of the time in January with an average return of 1.8% making it 3rd behind December and April for average returns and about mid pack for consistency of returns. During the 2nd year of the Presidential Cycle January has been up 43% of the time with an average return of -0.3% putting it mid pack by both measures.

The chart below is similar to those above except it shows the R2K average for all years since 1979 in green and the average for the 2nd year of the Presidential Cycle in black.

Conclusion

There are no intermediate term danger signs. The markets overbought condition was relived a little last week and the coming week has been seasonally strong.

I expect the major averages to be higher on Friday January 8 than they were on Thursday December 31.

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 seasonal patterns was a miss.

Over the past year my weekly forecasts were slightly better than you might get from a coin toss. Without checking, I think it is my best annual record ever. The year to date results are listed at the end of every letter and, for last year, were YTD W24/L18/T8. The forecast is considered a win when the Dow Jones Industrial Average, SPX, OTC, R2K and S&P mid cap all move in the direction of the forecast, a loss when they all move against the forecast (like last week) and a tie when, at least, one of the indices moves in the opposite direction of the others.

In his latest newsletter, Jerry Minton confesses that his predictive abilities are deeply flawed. His outlook for 2010 is presented anyway as part of the annual fortune- telling ritual of the investment management business. Read it at: http://alphaim.net/

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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