Technical Market Report

By: Mike Burk | Sun, Apr 30, 2006
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The good news is:
• The Dow Jones Industrial Average (DJIA) hit a multi-year high last week.

Short term

Prior to the bizarre period that ran from 1999 - 2002 major market tops were usually signaled by an increasing number of new lows, a decreasing number of new highs and a new cycle high in the DJIA that was not confirmed by breadth indicators or the broad market indices.

All of those conditions are in place now.

The first two charts show the current period and July 1990. They show the DJIA in red, a 10% trend (19 day EMA) of NYSE new highs (NH) in green and a 10% trend of NYSE new lows (NL) on an inverted Y axis in magenta. The scaling is a little unusual in that both NH and NL use their lowest value as the lowest level on the chart while the highest high value of either is used as a common high value for both. If you did not follow that explanation, don't worry.

Using this scaling method, the DJIA would rise through the falling new low indicator at market bottoms and major market tops.

Last week the DJIA rose to a new high while new lows increased from already high levels.

The next chart is similar to the one above except it covers 100 trading days prior to the late July 1990 top.

There are several similarities to the charts. The value of NL is 32% on both, the value of NH on the current chart is 58% while it was stronger at 81% on the 1990 chart.

Intermediate term

When the market rises, volume of advancing issues (UV) usually rises and volume of declining issues (DV) usually falls. The next two charts show the NASDAQ composite (OTC) in red, a 4% trend of NASDAQ UV in green and a 4% trend of NASDAQ DV on an inverted Y axis in blue. The DV Y axis is inverted so declining DV moves the indicator upward for easy reading.

The chart covers the period from late October through last Friday with dashed vertical lines on the 1st trading day of each month and a red dashed vertical line on the 1st trading day of the year.

Prior to the 1st of the year the indicators followed a typical pattern of rising and falling simultaneously with prices. Since the 1st of the year they have diverged, both UV and DV have been increasing. This is an unusual occurrence which was last seen in early 2000.

The chart below ends in April 2000 and shows the same indicators as the previous chart. The lines in the chart below are a little more orderly, but the overall pattern is very similar.

Seasonality

Next week includes the first 5 trading days of May during the 2nd year of the Presidential cycle.

The tables below show daily returns during the first 5 trading days of May during the 2nd year of the Presidential Cycle with summaries for both the 2nd year and all years combined.

The first 5 trading days of May are usually up, but not during the 2nd year of the Presidential cycle.

First 5 days of May.
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
Year Day1 Day2 Day3 Day4 Day5 Totals
1966-2 0.51% 1 -0.11% 2 -1.06% 3 -0.23% 4 -2.00% 5 -2.90%
1970-2 -0.29% 5 0.05% 1 -2.00% 2 0.26% 3 0.01% 4 -1.97%
1974-2 0.89% 3 0.39% 4 -0.57% 5 -0.18% 1 -0.74% 2 -0.22%
1978-2 0.68% 1 0.14% 2 0.08% 3 0.23% 4 0.68% 5 1.80%
1982-2 0.15% 1 0.53% 2 -0.04% 3 0.75% 4 0.46% 5 1.85%
Avg 0.39% 0.20% -0.72% 0.17% -0.32% -0.29%
 
1986-2 -0.41% 4 0.40% 5 0.74% 1 0.07% 2 -0.25% 3 0.55%
1990-2 0.42% 2 0.41% 3 0.44% 4 0.75% 5 0.61% 1 2.63%
1994-2 0.93% 1 -0.18% 2 0.13% 3 0.03% 4 -1.04% 5 -0.12%
1998-2 0.27% 5 0.20% 1 -0.66% 2 -0.44% 3 -1.16% 4 -1.79%
2002-2 -0.63% 3 -1.95% 4 -1.93% 5 -2.00% 1 -0.30% 2 -6.81%
Avg 0.12% -0.22% -0.26% -0.32% -0.43% -1.11%
 
OTC summary for Presidential Year 2 1966 - 2002
Averages 0.25% -0.01% -0.49% -0.08% -0.37% -0.70%
% Winners 70% 70% 40% 60% 40% 40%
MDD 5/7/2002 6.64% -- 5/6/1966 3.38% -- 5/7/1998 2.24%
 
OTC summary for all years 1963 - 2005
Averages 0.27% 0.21% 0.16% 0.04% 0.01% 0.68%
% Winners 62% 72% 67% 56% 56% 65%
MDD 5/7/2002 6.64% -- 5/3/2000 3.96% -- 5/6/1966 3.38%
 
SPX Presidential Year 2
Year Day1 Day2 Day3 Day4 Day5 Totals
1930-2 -2.00% 4 -2.00% 5 -2.00% 6 0.61% 1 2.00% 2 -3.39%
1934-2 0.00% 2 -2.00% 3 0.39% 4 0.29% 5 -1.55% 6 -2.87%
1938-2 -1.13% 1 2.00% 2 1.62% 3 -0.40% 4 2.00% 5 4.09%
1942-2 0.65% 5 0.52% 6 0.26% 1 0.39% 2 -0.13% 3 1.69%
 
1946-2 -0.27% 3 -0.48% 4 -0.86% 5 -0.27% 6 -0.81% 1 -2.69%
1950-2 0.83% 1 -0.60% 2 0.88% 3 -0.82% 4 0.55% 5 0.84%
1954-2 -0.18% 1 0.25% 2 0.04% 3 0.78% 4 0.49% 5 1.38%
1958-2 0.23% 4 0.34% 5 0.23% 1 0.50% 2 -0.18% 3 1.12%
1962-2 0.71% 2 0.44% 3 0.82% 4 -0.44% 5 -0.33% 1 1.20%
Avg 0.26% -0.01% 0.22% -0.05% -0.06% 0.37%
 
1966-2 -0.18% 1 -1.16% 2 -0.51% 3 -1.63% 4 -0.10% 5 -3.58%
1970-2 -0.10% 5 -2.00% 1 -0.97% 2 1.11% 3 0.45% 4 -1.51%
1974-2 2.00% 3 -0.14% 4 -0.87% 5 -0.19% 1 0.37% 2 1.18%
1978-2 0.87% 1 -0.43% 2 -1.02% 3 -0.34% 4 0.63% 5 -0.30%
1982-2 0.32% 1 0.56% 2 0.18% 3 0.86% 4 0.67% 5 2.58%
Avg 0.58% -0.63% -0.64% -0.04% 0.40% -0.33%
 
1986-2 -0.15% 4 -0.16% 5 1.25% 1 -0.21% 2 -0.49% 3 0.25%
1990-2 0.44% 2 0.67% 3 0.33% 4 0.84% 5 0.63% 1 2.91%
1994-2 0.47% 1 0.00% 2 -0.29% 3 -0.08% 4 -0.79% 5 -0.68%
1998-2 0.83% 5 0.10% 1 -0.58% 2 -0.96% 3 -0.89% 4 -1.50%
2002-2 0.89% 3 -0.17% 4 -1.03% 5 -1.93% 1 -0.30% 2 -2.55%
Avg 0.49% 0.09% -0.06% -0.47% -0.37% -0.32%
 
SPX summary for Presidential Year 2 1930 - 2002
Averages 0.22% -0.22% -0.11% -0.10% 0.12% -0.10%
% Winners 58% 47% 53% 42% 47% 53%
MDD 5/3/1930 5.88% -- 5/6/1966 3.54% -- 5/7/2002 3.40%
 
SPX summary for all years 1928 - 2005
Averages 0.09% 0.17% 0.27% -0.03% 0.06% 0.55%
% Winners 54% 70% 68% 44% 46% 68%
MDD 5/3/1930 5.88% -- 5/4/2000 3.86% -- 5/6/1966 3.54%

May

The charts below show an average month of May during the 2nd year of the Presidential cycle and all years combined.

The average month has 21 trading days, but they vary from 20 to 22 trading days. The charts have been constructed by averaging the daily percentage return for the first 11 trading days and the last 10. Dashed vertical lines are drawn after the 1st trading day and then after each additional 5 trading days, the solid black line marks the 11th trading day. The legend shows the lowest low from the open in percentage terms followed by the highest high and close is the difference between the value at the beginning of the month and the end of the month.

In the 1st chart the OTC average for all years combined is shown in red while the average for only the 2nd year of the presidential cycle is shown in blue. The chart uses data from 1963 - 2005.

In the next chart the S&P 500 (SPX) average for all years combined is shown in green while the average for only the 2nd year of the presidential cycle is shown in blue. The chart uses data from 1928 - 2005.

You can see a report on the presidential cycle at: http://alphaim.net/newsletter.html. Click on Alpha Research Reports.

Conclusion

Risk is high. The condition of the indicators is consistent with a market top. Seasonally, May during the 2nd year of the Presidential Cycle is on average down. I expect the major indices to be lower on Friday May 5 than they were on Thursday April 28.

Last week the DJIA and NYSE composite were up slightly while nearly everything else was down. I am calling last weeks negative forecast a tie.

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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