Technical Market Report

By: Mike Burk | Sat, Dec 31, 2005
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The good news is:
 • Most of the major indices finished up for the year.

Short term

Since 1965, during the 1st year of the Presidential Cycle, the market as measured by the NASDAQ composite (OTC) has been down 3 times during the last 4 trading days of the year. Following those 3 occurrences the 1st 4 trading days of January have always been up. The month of January has been down 2 out of 3 times and the following year has always been down.

The table below shows the return for the last 4 trading days of the year, the return for the 1st 4 trading days of the following year, the return for the full month of January and the full year.

  Last 4 days Yr 1st 4 days Jan Yr Total
1965 -0.72% 1966 +1.93% +3.8%   -1.5%
1969 -1.71% 1970 +1.22% -4.4%   -13.7%
 
1973 2.01% 1974 +3.92% +2.6%   -35.1%
1977 2.28% 1978 +1.06% -3.0%   +13.3%
1981 0.93% 1982 +0.08% -3.7%   +18.7%
1985 0.62% 1986 +0.62% +2.4%   + 7.5%
1989 1.07% 1990 +2.29% -9.5%   -17.8%
1993 1.65% 1994 +2.05% +3.9%   - 3.2%
1997 0.27% 1998 +4.65% +2.4%   +39.6%
 
2001 -1.78% 2002 +4.42% -2.3% -31.5%
2005 -1.96%        

1965, 1969 and 2001 were down during the last 4 trading days of the year and each time the 1st 4 trading days of the following January were up.

Intermediate term

Summation indices (SI) are running totals of oscillator values. When an oscillator is positive the SI moves up when it is negative the SI moves down. Direction, not value is the important consideration with these indicators.

The chart below covers the past year with dashed vertical lines drawn on the 1st trading day of each month. The OTC is shown in red along with SI's calculated from NASDAQ breadth data. AD = Advancing issues - declining issues, HL = New highs - new lows and UD = Upside volume - downside volume.

Since mid December all of the SI's have been heading downward. It is particularly worrisome that the pattern was unbroken during the seasonally strong late December period.

Seasonality

Next week includes the 1st 4 trading days of the year.

Since 1964 the OTC has been up 45% of the time with an average loss of 0.24%, however during the 2nd year of the Presidential Cycle the OTC has been up 70% of the time with an average gain of 0.66%.

Since 1929 the SPX has been up 62% of the time with an average gain of 0.69%, during the 2nd year of the Presidential Cycle the average gain has been slightly less.

Report includes the first 4 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 Totals
1966-2 0.70% 1 0.73% 2 0.38% 3 0.12% 4 1.93%
1970-2 0.71% 5 1.01% 1 0.04% 2 -0.54% 3 1.22%
1974-2 0.37% 3 1.78% 4 -0.08% 5 0.39% 1 2.46%
1978-2 -1.00% 2 -0.33% 3 -0.43% 4 -1.50% 5 -3.26%
1982-2 -0.16% 1 -1.64% 2 -0.61% 3 -0.07% 4 -2.48%
Avg 0.13% 0.31% -0.14% -0.32% -0.03%
 
1986-2 0.18% 4 0.22% 5 0.08% 1 1.15% 2 1.64%
1990-2 0.99% 2 0.34% 3 -0.33% 4 -0.25% 5 0.75%
1994-2 -0.78% 1 0.46% 2 0.49% 3 0.30% 4 0.47%
1998-2 0.71% 5 0.80% 1 -0.88% 2 -1.16% 3 -0.54%
2002-2 1.48% 3 3.29% 4 0.74% 5 -1.08% 1 4.42%
Avg 0.52% 1.02% 0.02% -0.21% 1.35%
 
OTC Summary for Presidential year 2 1966 - 2002
Averages 0.32% 0.67% -0.06% -0.26% 0.66%
% Winners 70% 80% 50% 40% 70%
MDD 1/6/1978 3.23% -- 1/7/1982 2.46% -- 1/7/1998 2.03%
 
OTC Summary for all years 1964 - 2005
Averages -0.88% 1.50% -0.03% -0.83% -0.24%
% Winners 27% 73% 55% 45% 45%
MDD 1/5/2001 7.99% -- 1/6/2005 3.93% -- 1/7/1981 3.34%
 
SPX Presidential Year 2
  Day1 Day2 Day3 Day4 Totals
1930-2 -1.26% 4 0.24% 5 1.18% 6 0.09% 1 0.25%
1934-2 0.10% 2 -1.38% 3 -0.30% 4 -1.31% 5 -2.89%
1938-2 -0.28% 1 4.47% 2 -0.64% 3 4.58% 4 8.13%
1942-2 2.30% 5 0.90% 6 1.34% 1 -0.44% 2 4.10%
 
1946-2 -0.63% 3 0.12% 4 -0.23% 5 0.41% 6 -0.34%
1950-2 -0.60% 2 1.14% 3 0.47% 4 0.30% 5 1.31%
1954-2 0.56% 1 0.60% 2 0.16% 3 -0.32% 4 1.01%
1958-2 0.85% 4 1.34% 5 -0.46% 1 0.79% 2 2.51%
1962-2 -0.82% 2 0.24% 3 -0.69% 4 -1.39% 5 -2.66%
Avg -0.13% 0.69% -0.15% -0.04% 0.37%
 
1966-2 -0.27% 1 0.09% 2 0.64% 3 0.23% 4 0.68%
1970-2 1.02% 5 0.49% 1 -0.68% 2 -0.20% 3 0.63%
1974-2 0.13% 3 2.17% 4 -0.90% 5 -0.84% 1 0.56%
1978-2 -1.35% 2 -0.32% 3 -0.83% 4 -1.21% 5 -3.71%
1982-2 0.16% 1 -2.19% 2 -0.72% 3 -0.21% 4 -2.97%
Avg -0.06% 0.05% -0.50% -0.45% -0.96%
 
1986-2 -0.80% 4 0.62% 5 -0.11% 1 1.50% 2 1.20%
1990-2 1.78% 2 -0.26% 3 -0.86% 4 -0.98% 5 -0.32%
1994-2 -0.22% 1 0.31% 2 0.14% 3 -0.09% 4 0.14%
1998-2 0.47% 5 0.21% 1 -1.07% 2 -0.27% 3 -0.66%
2002-2 0.57% 3 0.92% 4 0.62% 5 -0.65% 1 1.46%
Avg 0.36% 0.36% -0.26% -0.10% 0.37%
 
SPX summary for Presidential year 2 1930 - 2002
Averages 0.09% 0.51% -0.16% 0.00% 0.44%
% Winners 53% 79% 37% 37% 63%
MDD 1/6/1978 3.66% -- 1/7/1982 3.10% -- 1/5/1934 2.97%
 
SPX summary for all years 1929 - 2005
Averages 0.00% 0.55% 0.03% 0.11% 0.69%
% Winners 45% 75% 49% 54% 62%
MDD 1/5/1932 7.02% -- 1/4/2000 4.76% -- 1/6/1955 4.65%

January

January is usually a good month, up 67% of the time with an average gain of 3.5% as measured by the OTC since 1963. However the 2nd year of the Presidential cycle is the worst of the 4, up 50% of the time with an average loss of 0.7%

The chart below plots the average daily return of the OTC during all years in brown and the 2nd year of the Presidential Cycle in red.

The SPX since 1929 has been up 63% of the time with an average gain of 1.4%. Unlike the OTC, the SPX has managed a modest gain during January of the 2nd year of the Presidential Cycle.

Conclusion

The market is oversold and the 1st 2 days of the 2nd year of the Presidential cycle are usually strong.

I expect the major indices to be higher on Friday January 6 than they were on Friday December 30.

Last weeks positive forecast based on the strong seasonal tendencies of the last few trading days was a miss.

New start

The last line in these reports (currently "YTD W19/L20/T12") is the Year To Date score of my weekly forecasts. When the major indices go in the direction of my forecast I add one to the win (W) column, when they go the other direction I add one to the loss (L) column and when the major indices are mixed, I call it a tie and add one to the (T) column. My record for the year was slightly less than 50% and, unfortunately, worse than last years W25/L20/T6.

The performance of my employer, Alpha Investment Management, fortunately, was a little better. Most of our programs were up over 25% for the year putting us in the top 10% of every category where we were ranked. These are audited results published in Nelson's Worlds Best Money Managers and Money Manager Review. You can explore that further at: http://alphaim.net/newsletter.html.

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.


 

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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