Technical Market Report

By: Mike Burk | Sat, Oct 1, 2005
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The good news is:
 • Last week nearly every short and intermediate term indicator turned upward.

Short term

There is a conflict between two of the important short term indicators.

The NASDAQ new low indicator (OTC NL) is a 10% trend (19 day EMA) of NASDAQ new lows. OTC NL is plotted on an inverted Y axis so that then new lows are increasing the indicator moves downward and when new lows are decreasing the indicator moves upward (up is good). OTC NL is the best indicator I know of for identifying market bottoms. OTC NL often gives false positives so it is prudent to wait until the indicator has been moving upward for 5 consecutive days before assuming a change in trend.

The NASDAQ new high indicator ( OTC NH) is a 10% trend of NASDAQ new highs. OTC NH is a good short term trend indicator.

In the chart below the NASDAQ composite (OTC) is shown in red, OTC NH in green and OTC NL in blue.

The conflict that I mentioned above is OTC NH has turned sharply upward while OTC NL is still moving downward.

Intermediate term

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

The chart below shows the OTC in red, OTC AD SI calculated from NASDAQ advancing issues - declining issues, OTC HL SI calculated from NASDAQ new highs - new lows and OTC UD SI calculated from NASDAQ upside - downside volume. Last week all of the NASADAQ SI's went flat or turned modestly upward.

Seasonality

The table below shows daily returns for the first 5 trading days of October during the 1 st year of the Presidential cycle. Data for S&P500 (SPX) covers the period from 1929 and for OTC from 1965. There are summaries for all years 1963 - 2004 for the OTC and 1928 - 2004 for the S&P500.

The 1930's were a rough period for stocks lowering the average returns and % winners for the SPX both overall and in the 1 st year of the presidential cycle. Since the mid 1940's however, the market has been very strong during the 1 st week of October during the 1 st year of the presidential cycle.

First 5 days of October.
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.
MDD = Maximum Draw Down

OTC presidential Year 1
  Day1 Day2 Day3 Day4 Day5 Totals
1965-1 -0.06% 5 -0.17% 1 0.30% 2 0.09% 3 0.21% 4 0.38%
1969-1 0.42% 3 -0.61% 4 0.36% 5 -0.13% 1 0.38% 2 0.42%
1973-1 -0.21% 1 0.71% 2 0.33% 3 -0.55% 4 0.94% 5 1.22%
1977-1 0.31% 1 -0.35% 2 0.01% 3 0.49% 4 0.31% 5 0.76%
1981-1 0.59% 4 1.81% 5 0.84% 1 -0.02% 2 1.57% 3 4.78%
Avg 0.21% 0.28% 0.37% -0.02% 0.68% 1.51%
 
1985-1 0.51% 2 -0.22% 3 0.09% 4 -0.34% 5 -0.77% 1 -0.72%
1989-1 0.48% 1 0.44% 2 0.43% 3 0.28% 4 0.62% 5 2.25%
1993-1 0.06% 5 0.21% 1 -0.34% 2 0.33% 3 -0.30% 4 -0.04%
1997-1 0.27% 3 0.72% 4 0.79% 5 0.35% 1 0.89% 2 3.02%
2001-1 -1.22% 1 0.80% 2 2.00% 3 1.04% 4 0.50% 5 3.12%
Avg 0.02% 0.39% 0.60% 0.33% 0.19% 1.53%
 
OTC summary for presidential year 1 1965 - 2001
Averages 0.11% 0.33% 0.48% 0.15% 0.43% 1.52%
% Winners 70% 60% 90% 60% 80% 80%
MDD 10/7/1985 1.23% -- 10/1/2001 1.22% -- 10/2/1969 .61%
 
OTC summary for all years 1963 - 2004
Averages 0.03% 0.00% 0.00% 0.14% 0.01% 0.17%
% Winners 54% 57% 60% 64% 62% 64%
MDD 10/7/1998 13.65% -- 10/6/2000 8.49% -- 10/7/2002 7.77%
 
SPX Presidential Year 1
Day1 Day2 Day3 Day4 Day5 Totals
1929-1 -0.60% 2 0.73% 3 -4.14% 4 -1.04% 5 4.64% 6 -0.40%
1933-1 -2.14% 1 0.52% 2 2.00% 3 -1.26% 4 -1.08% 5 -1.96%
1937-1 -0.29% 5 0.29% 6 -1.24% 1 -2.00% 2 2.41% 3 -0.82%
1941-1 -0.29% 3 -0.29% 4 -0.10% 5 0.00% 6 -0.10% 1 -0.79%
 
1945-1 1.05% 1 0.00% 2 -0.18% 3 0.00% 4 0.49% 5 1.36%
1949-1 -0.39% 6 0.52% 1 0.96% 2 0.19% 3 0.38% 4 1.66%
1953-1 0.60% 4 0.43% 5 -0.47% 1 -0.38% 2 0.81% 3 0.99%
1957-1 0.80% 2 0.80% 3 0.09% 4 -0.81% 5 -1.33% 1 -0.45%
1961-1 0.06% 1 -0.06% 2 0.67% 3 0.88% 4 0.30% 5 1.85%
Avg 0.43% 0.34% 0.22% -0.03% 0.13% 1.08%
 
1965-1 -0.07% 5 0.20% 1 0.61% 2 -0.10% 3 -0.08% 4 0.57%
1969-1 -0.64% 3 0.78% 4 -0.05% 5 0.18% 1 -0.29% 2 -0.03%
1973-1 -0.20% 1 0.54% 2 -0.01% 3 -0.34% 4 1.33% 5 1.31%
1977-1 0.22% 1 -0.73% 2 -0.36% 3 0.39% 4 -0.08% 5 -0.58%
1981-1 0.77% 4 1.95% 5 0.13% 1 -0.10% 2 1.61% 3 4.36%
Avg 0.02% 0.55% 0.06% 0.01% 0.50% 1.13%
 
1985-1 1.64% 2 -0.55% 3 0.16% 4 -0.62% 5 -0.74% 1 -0.10%
1989-1 0.49% 1 1.09% 2 0.63% 3 0.01% 4 0.51% 5 2.73%
1993-1 0.51% 5 0.01% 1 -0.03% 2 -0.10% 3 -0.34% 4 0.06%
1997-1 0.86% 3 0.53% 4 0.47% 5 0.79% 1 1.07% 2 3.73%
2001-1 -0.23% 1 1.23% 2 1.99% 3 -0.25% 4 0.16% 5 2.91%
Avg 0.66% 0.46% 0.65% -0.03% 0.13% 1.87%
 
SPX summary for presidential year 1 1929 - 2001
Averages 0.11% 0.42% 0.06% -0.24% 0.51% 0.86%
% Winners 53% 74% 53% 32% 58% 58%
MDD 10/4/1929 5.13% -- 10/5/1937 3.21% -- 10/6/1933 2.33%
 
SPX summary for all years 1928 - 2004
Averages 0.12% 0.23% 0.10% 0.02% 0.20% 0.66%
% Winners 51% 69% 53% 55% 55% 61%
MDD 10/7/2002 7.39% -- 10/5/1931 5.43% -- 10/4/1929 5.13%

October

The charts below show the average daily change during the month of October. Vertical lines are drawn after the 1 st day and then after 5 trading days. The solid vertical line near the center of the chart represents the 11 th trading day. An average month has 21 trading days, but varies from 19 to 23 trading days. These charts plot the average return for each of the first 11 trading days and the last 10 trading days so in years when there were more than 21 trading days some days in the middle of the month are omitted and when there were less than 21 trading days, days in the middle are double counted.

The 1 st chart shows the SPX with data from 1928 to 2004. An average of all years is shown in maroon while the white line represents only the 1 st year of the presidential cycle. The line representing all years includes both the crash of 1929 and the crash of 1987 while the line representing the 1 st year of the presidential cycle includes only the crash of 1929.

The next chart uses OTC data from 1963 - 2004. All years combined are shown in yellow while the 1 st year of the presidential cycle is shown in white. As measured by the OTC during the 1 st year of the presidential cycle October has been second only to January as the strongest month of the year.

The last chart uses Russell 2000 (R2K) data from 1987 - 2004. All years combined are shown in yellow while the 1 st year of the presidential cycle is shown in white.

Conclusion

Measured by breadth indicators the picture is confusing. Most of the short and intermediate term indicators have turned upward while the most important bottom indicator, the new low indicator is still moving downward. For the past 50 years or so, early October has had a very strong positive bias during the 1 st year of the presidential cycle. It appears the seasonal bias is trumping the technical indicators.

I expect the major indices to be higher on Friday October 7 than they were on Friday September 30.

Last weeks negative forecast was a miss, I underestimated the effect of seasonal strength at the end of the month.

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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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