Technical Market Report

By: Mike Burk | Sat, Mar 27, 2010
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The good news is:
• All of the major indices closed at new recovery highs last week.

The negatives

New highs on both the NYSE and NASDAQ hit their lowest levels since late February on Friday. Last Tuesday, when all of the major indices closed at new recovery highs, new highs on both the NYSE and NASDAQ were well below their recovery highs.

The chart below covers the past year showing the NASDAQ composite (OTC) in blue and an indicator showing momentum of NASDAQ new highs / (new highs + new lows) in orange. Dashed vertical lines have been drawn on the 1st trading day of each month.

The indicator has a pretty good record of peaking at or slightly ahead of short term highs in prices and it has been heading downward for the past week.

NASDAQ 1-Year Chart Showing New Highs and New Highs + New Lows

Summation indices (SI) are running totals of oscillator values.

The chart below covers the past year showing the Russell 2000 (R2K) in red and an SI of new highs and new lows of the component issues of the R2K in green. For this indicator new highs and new lows have been calculated over the past 3 weeks rather than 52 weeks as reported by the exchanges.

Like the chart above, this indicator has turned at or slightly ahead of price turning points and it has been heading downward for the past week.

Russell 2000 1-Year Chart

The chart below is similar to the one above except is shows the S&P 500 (SPX) in red and the indicator has been calculated from the component issues of the SPX. The patterns are similar.

S&P500; 1-Year Chart

Advance decline lines (ADL) are running totals of declining issues subtracted from advancing issues.

The chart below shows the OTC in blue and momentum of the NASDAQ ADL in brown. Although calculated from a different data set this indicator is showing a pattern similar to those above.

NASDAQ Momentum 1-Year Chart

The indicators shown above are all short term.

Oscillators and momentum indicators have a time component and move in one direction only as long as the data gets progressively better or worse. At 6 weeks the recent rally has been extraordinarily long which is good. Breadth data has deteriorated over the past 2 weeks and the secondaries have underperformed the blue chips, but, the indicators shown above, because of their time components show exaggerated that deterioration.

The Positives

Nearly every indicator that matters confirmed the highs last Tuesday.

New highs declined noticeably in the past week, but, there was no significant increase in the number of new lows. As long as new lows remain dormant long side risk will be limited.

The chart below covers the past year showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by new highs + new lows in red. Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.

The value of the indicator has held above 90%, more new index highs are to be expected.

NASDAQ High/Low Ratio 1-Year Chart

Seasonality

Next week includes the last 3 trading days of March and the first 2 trading days of April during the 2nd year of the Presidential Cycle.

The tables below show the return on a percentage basis for the last 3 trading days of March and the first 2 trading days of April during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2009 and SPX data from 1928 - 2009. There are summaries for both the 2nd year of the Presidential Cycle and all years combined.

Next week has been a mixed bag. The indices have been up most of the time, but the average returns have been minimal.

Last 3 days of March and first 2 days of April.
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
  Day3 Day2 Day1 Day1 Day2 Totals
1966-2 0.24% 2 -0.27% 3 -0.83% 4 0.41% 5 0.32% 1 -0.13%
 
1970-2 1.66% 4 0.15% 1 -0.03% 2 0.52% 3 0.17% 4 2.47%
1974-2 -1.11% 3 -1.42% 4 -0.65% 5 -0.40% 1 0.14% 2 -3.44%
1978-2 0.38% 3 0.09% 4 0.02% 5 -0.29% 1 0.29% 2 0.49%
1982-2 0.17% 1 -0.05% 2 0.13% 3 0.95% 4 -0.42% 5 0.78%
1986-2 0.36% 3 0.73% 4 0.38% 1 -0.15% 2 -0.01% 3 1.31%
Avg 0.29% -0.10% -0.03% 0.12% 0.03% 0.32%
 
1990-2 -0.64% 3 -0.29% 4 0.03% 5 -0.54% 1 1.03% 2 -0.41%
1994-2 -2.23% 2 -1.37% 3 -0.19% 4 -2.16% 1 3.24% 2 -2.72%
1998-2 -0.27% 5 -0.27% 1 0.93% 2 0.65% 3 0.29% 4 1.34%
2002-2 0.64% 2 0.14% 3 1.02% 4 0.94% 1 -3.13% 2 -0.39%
2006-2 1.45% 3 0.13% 4 -0.04% 5 -0.13% 1 0.37% 2 1.77%
Avg -0.21% -0.33% 0.35% -0.25% 0.36% -0.08%
 
OTC summary for Presidential Year 2 1966 - 2006
Averages 0.06% -0.22% 0.07% -0.02% 0.21% 0.10%
% Winners 64% 45% 55% 45% 73% 55%
MDD 4/4/1994 5.84% -- 4/1/1974 3.54% -- 4/2/2002 3.13%
 
OTC summary for all years 1963 - 2009
Averages -0.23% -0.11% 0.17% -0.04% 0.18% -0.03%
% Winners 55% 55% 65% 51% 66% 62%
MDD 4/3/2001 15.18% -- 4/4/2000 14.17% -- 3/27/1980 6.15%
 
SPX Presidential Year 2
  Day3 Day2 Day1 Day1 Day2 Totals
1930-2 1.14% 5 0.80% 6 0.36% 1 0.91% 2 -1.02% 3 2.19%
1934-2 0.29% 3 1.63% 4 1.22% 6 0.09% 1 0.74% 2 3.98%
1938-2 -5.83% 2 -1.26% 3 -1.39% 4 4.82% 5 3.93% 6 0.27%
1942-2 0.00% 6 0.12% 1 -0.62% 2 0.50% 3 0.75% 4 0.75%
1946-2 -0.11% 4 0.61% 5 0.22% 6 -0.11% 1 0.06% 2 0.67%
Avg -0.90% 0.38% -0.04% 1.24% 0.89% 1.57%
 
1950-2 -0.51% 3 -0.80% 4 -0.06% 5 0.29% 6 1.10% 1 0.01%
1954-2 0.38% 1 0.11% 2 0.94% 3 0.85% 4 0.15% 5 2.43%
1958-2 -0.31% 4 0.07% 5 -0.24% 1 -0.40% 2 -0.79% 3 -1.66%
1962-2 0.49% 3 -0.04% 4 -0.66% 5 -0.26% 1 -0.81% 2 -1.28%
1966-2 -0.39% 2 -0.55% 3 0.51% 4 0.80% 5 0.91% 1 1.27%
Avg -0.07% -0.24% 0.10% 0.26% 0.11% 0.15%
 
1970-2 0.17% 4 -0.32% 1 0.00% 2 0.49% 3 -0.31% 4 0.02%
1974-2 -1.39% 3 -1.83% 4 -0.89% 5 -0.78% 1 0.11% 2 -4.78%
1978-2 0.16% 3 -0.26% 4 -0.22% 5 -0.84% 1 0.45% 2 -0.71%
1982-2 0.32% 1 -0.03% 2 -0.28% 3 1.63% 4 1.17% 5 2.82%
1986-2 1.10% 3 0.70% 4 -0.03% 1 -1.57% 2 0.24% 3 0.44%
Avg 0.07% -0.35% -0.28% -0.21% 0.33% -0.44%
 
1990-2 0.15% 3 -0.35% 4 -0.25% 5 -0.36% 1 1.46% 2 0.64%
1994-2 -1.63% 2 -1.53% 3 0.05% 4 -1.54% 1 2.13% 2 -2.52%
1998-2 -0.49% 5 -0.17% 1 0.75% 2 0.58% 3 1.07% 4 1.74%
2002-2 0.58% 2 0.53% 3 0.25% 4 -0.07% 1 -0.85% 2 0.44%
2006-2 0.75% 3 -0.20% 4 -0.42% 5 0.23% 1 0.63% 2 0.98%
Avg -0.13% -0.35% 0.08% -0.23% 0.89% 0.26%
 
SPX summary for Presidential Year 2 1930 - 2006
Averages -0.26% -0.14% -0.04% 0.26% 0.56% 0.39%
% Winners 55% 40% 40% 55% 75% 75%
MDD 3/31/1938 8.31% -- 4/1/1974 4.80% -- 4/4/1994 4.58%
 
SPX summary for all years 1928 - 2009
Averages -0.08% -0.05% -0.14% 0.15% 0.20% 0.08%
% Winners 52% 44% 43% 62% 57% 68%
MDD 3/31/1938 8.31% -- 4/2/1932 8.27% -- 3/31/1939 7.89%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth is has continued to deteriorate.

M-2 Money Supply

April

Since 1963 the OTC in April has been up 70% of the time with an average gain of 1.7%. During the 2nd year of the Presidential Cycle April has been up 55% of the time with an average return of -1.5%. A loss of 18.9% in 1970 and 9.4% in 2002 skewed the average.

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

NASDAQ 1963-2010

Since 1928 the SPX has been up 59% of the time in April with an average gain of 1.2%, helped considerably by a 41.5% gain in 1933 (the largest monthly gain ever recorded for that index). During the 2nd year of the Presidential Cycle the SPX has been up 60% of the time with an average gain of 0.3%.

The chart below is similar to the one above except it shows the daily performance over all years for the SPX during March in red and the performance during the 2nd year of the Presidential Cycle in cyan.

SPX 1928-2010

Conclusion

All of the major indices hit new highs last Tuesday, but breadth indicators were weaker than during previous highs. This is just exhaustion following a remarkable 6 week run. There is likely to be some short term weakness, but new highs should be expected longer term.

I expect the major averages to be lower on Friday April 2 than they were on Friday March 26.

Last weeks negative forecast was a miss. 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.

In Alpha's latest newsletter, Jerry Minton looks at the Emerging Markets theme. It reminds him of the Japan Inc. bubble 20 years ago. Sign up for a free subscription at: http://www.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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