Technical Market Report

By: Mike Burk | Sun, Jan 9, 2005
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The good news is:
 • There were very few new lows in one of the worst weeks in a long time.

As of last Wednesday the Russell 2000 (R2K) was down for 6 consecutive days. By itself this is a relatively rare statistic. In early January it happened once before in 1991 two months after the October 1990 bottom. Data for the R2K only goes back to 1987.

The chart below covers the period from May 1990 to March 1, 1991. The R2K is shown in red and an indicator that shows the percentage of the past 6 trading days that have been up in blue. The indicator reaches the bottom of the screen when there have been 6 or more consecutive down days and it reaches the top of the screen when there have been 6 or more consecutive up days. During the decline from July to September 1991 there were 4 periods with 6 or more consecutive down days. After the low in October there was a period of 6+ consecutive up days in late November and early December. After the 6 consecutive down days in early January the gulf war started and the market shot up. The decline from 12/31/1990 to 1/9/1991 was 4.1%. The dashed vertical red line marks the 1st trading day of the year and the other dashed vertical lines mark the 1st trading day of the month.

A similar chart below shows the current period. The R2K is currently 6.3% off its all time high in Late December.

The late December / early January period has very strong seasonal tendencies that include an upward bias on low volume. These seasonal tendencies distort most technical indicators so it is difficult to assess their importance. The charts below cover other parts of the year so these are not strict apples to apples comparisons.

Shown in the chart below the most recent occurrence of 6 consecutive down days with the R2K was in July 2002 and the next before that in late April 2002. The occurrence in April marked the beginning of a decline that lasted until October and the second marked the end of the worst part of the decline.

The next earlier occurrence of 6 consecutive down days was September 2001 when the 9/11 attack extended the decline to 10 consecutive down days. Prior to September 11th there had been 6+ consecutive down days in June 2001 marking the beginning of the decline that ended with the September 2001 lows.

A notable difference between the first two and the last two charts is the period they cover. In the first two the 6 consecutive down days occurred in early January a period that is normally strong. The last two end in October, showing a period that is normally weak.

New lows picked up a little last week, the high was 24 on the NASDAQ on Thursday and 15 on the NYSE Thursday and Friday. A rule of thumb is more than 40 on the NYSE and 70 on the NASDAQ for several consecutive days is a warning of difficult times ahead.

The two charts below show the NASDAQ composite in red a new high indicator (NH) in green and a new low indicator (NL) in blue. The indicators are a 10% trend (19 day EMA) of NASDAQ new highs and new lows. The NL is plotted on an inverted Y axis so diminishing new lows move the indicator upward (up is good and down is bad).

The first chart shows the period ending last Friday. There were a minimal number of new lows as of the first of the year (the dashed vertical red line). After the first of the year new lows picked up modestly while new highs declined sharply.

The next chart shows the same indicators in 1991 (the only other time the R2K declined for 6 consecutive days in January). So far the patterns are quite similar.

It is often said that the first 5 days of January set the trend for the month and January sets the trend for the year. The tables below explore that idea.

From 1/4/1928 to 12/31/2004
The number following the year is its position in the presidential cycle.
There are three columns of asterisks:
An asterisk in the first column means the first 5 days of January were down.
An asterisk in the second column means the month of January was down.
An asterisk in the last column means the year was down.
Avg is an average of the previous 5 years or 5 periods.

  Jan Year      
1928-4 0.1% 38.7%      
1929-1 3.7% -11.9% *   *
1930-2 7.6% -28.5% *   *
1931-3 1.5% -47.1%      
1932-4 0.9% -15.1% *   *
1933-1 1.6% 46.6%      
1934-2 10.5% -5.9% *   *
Avg 4.42% -10.01%      
1935-3 -4.3% 41.4%   *  
1936-4 6.8% 27.9%      
1937-1 4.8% -38.6%      
1938-2 1.6% 25.2%      
1939-3 -6.0% -5.5% * * *
Avg 0.58% 10.09%      
1940-4 -4.6% -15.3%   * *
1941-1 -3.9% -17.9%   * *
1942-2 -0.9% 12.4%   *  
1943-3 6.4% 19.4%      
1944-4 1.6% 13.8%      
Avg -0.27% 2.50%      
1945-1 1.1% 30.7%      
1946-2 7.7% -11.9% *   *
1947-3 3.0% .0%      
1948-4 -4.2% -.7%   * *
1949-1 1.8% 10.3%      
Avg 1.86% 7.12%      
1950-2 2.3% 21.8%      
1951-3 4.3% 16.5%      
1952-4 1.4% 11.8%      
1953-1 -0.6% -6.6% * * *
1954-2 4.5% 45.0%      
Avg 2.40% 17.68%      
1955-3 -0.3% 26.4% * *  
1956-4 -3.0% 2.6% * *  
1957-1 -3.2% -14.3% * * *
1958-2 3.4% 38.1%      
1959-3 0.0% 8.5%      
Avg -0.63% 12.25%      
1960-4 -7.2% -3.0% * * *
1961-1 7.3% 23.1%      
1962-2 -3.0% -11.8% * * *
1963-3 5.6% 18.9%      
1964-4 2.1% 13.0%      
Avg 0.98% 8.04%      
1965-1 4.0% 9.1%      
1966-2 0.8% -13.1%      
1967-3 7.8% 20.1%      
1968-4 -4.0% 7.7%   *  
1969-1 -0.9% -11.4% * * *
Avg 1.51% 2.47%      
1970-2 -8.6% .1%   *  
1971-3 5.2% 10.8%      
1972-4 2.2% 15.6%      
1973-1 -2.6% -17.4%   * *
1974-2 -1.1% -29.7% * * *
Avg -0.97% -4.11%      
1975-3 9.6% 31.5%      
1976-4 11.0% 19.1%      
1977-1 -4.6% -11.5% * * *
1978-2 -4.9% 1.1% * *  
1979-3 3.3% 12.3%      
Avg 2.87% 10.51%      
1980-4 7.9% 25.8%      
1981-1 -5.0% -9.7% * * *
1982-2 -1.9% 14.8% * *  
1983-3 5.0% 17.3%      
1984-4 -0.4% 1.4%   *  
Avg 1.14% 9.90%      
1985-1 8.6% 26.3% *    
1986-2 1.0% 14.6% *    
1987-3 11.2% 2.0%      
1988-4 0.4% 12.4%      
1989-1 8.0% 27.3%      
Avg 5.87% 16.53%      
1990-2 -8.5% -6.6%   *  
1991-3 5.4% 26.3% *    
1992-4 -2.0% 4.5%   *  
1993-1 0.8% 7.1% *    
1994-2 3.5% -1.5%      
Avg -0.19% 5.95%      
1995-3 2.5% 34.1%      
1996-4 2.5% 20.3%      
1997-1 6.7% 31.0%      
1998-2 0.5% 26.7% *    
1999-3 4.2% 19.5%      
Avg 3.27% 26.32%      
2000-4 -4.2% -10.1% * * *
2001-1 6.4% -13.0% *   *
2002-2 -2.1% -23.4% * * *
2003-3 -5.9% 26.4%   *  
2004-4 2.0% .0%      
Avg -0.73% -5.04%      
     
Averages 1.5% 7.7%  (for entire database)
Win% 64% 65%  (for entire database)

The database covers 77 years.
Over that period the first 5 days of January have been down 25 times, 32%.
Of those 25 the whole month of January has been down 15 times, 60%.
Of those 25 the whole year has been down 16 times, 64%.

Over the 77 years the month of January has been down 27 times, 35%.
Of those 27 the whole year has been down 14 times, 52%.
Of the 15 times the first 5 days of January and the whole month of January have been down, the whole year has been down 11 times, 73%.
In 6 years the first 5 days of January were down while the month of January was up. In 4 of those years the whole year was up and 2 (1929 & 2001) the whole year was down.

Presidential year 1
  Jan Totals      
1929-1 3.7% -11.9% *   *
1933-1 1.6% 46.6%      
1937-1 4.8% -38.6%      
1941-1 -3.9% -17.9%   * *
1945-1 1.1% 30.7%      
1949-1 1.8% 10.3%      
1953-1 -0.6% -6.6% * * *
1957-1 -3.2% -14.3% * * *
1961-1 7.3% 23.1%      
Avg 1.27% 8.64%      
1965-1 4.0% 9.1%      
1969-1 -0.9% -11.4% * * *
1973-1 -2.6% -17.4%   * *
1977-1 -4.6% -11.5% * * *
1981-1 -5.0% -9.7% * * *
Avg -1.83% -8.18%      
1985-1 8.6% 26.3% *    
1989-1 8.0% 27.3%      
1993-1 0.8% 7.1% *    
1997-1 6.7% 31.0%      
2001-1 6.4% -13.0% * *  
Avg 6.11% 15.72%      
     
Averages 1.8% 3.1%  
Win% 63% 47%  

The database covers 24 first presidential years.
In those 24 examples the first 5 days of January have been down 9 times, 37%.
Of those 9 the Month of January has been down 5 times, 56%.
Of those 9 the whole year has been down 7 times, 78%.

Every time the month of January has been down (7 occurrences) the whole year has been down, 100%.

In 4 years the first 5 days of January were down while the month of January was up. In 2 of those years (1985 & 1993) the whole year was up and the other 2 (1929 & 2001) it was down.

The first 5 days of January have a modest record of predicting the outcome of the month and a better record of predicting the outcome of the year. The month of January has a modest record for predicting the outcome of the year overall, but a very good record in the first year of the presidential cycle.

Six consecutive down days in early January on the NASDAQ occurred in 1991, 1978, 1969, 1968. The 1991 occurrence marked the beginning of a major rally the other three marked the beginning of minor rallies preceding significant declines.

I expect the major indices to be higher on Friday January 14 than they were on Friday January 7.

My weekly forecasts got off to a bad start last week, my optimistic forecast based on expected seasonal strength failed to deliver.

Gordon Harms produces a Power Point on current market conditions for our local FastTrack users group you can download the Power Point for the January 5 meeting at: http://www.guaranteed-profits.com


 

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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