Technical Market Report

By: Mike Burk | Sat, Jul 29, 2006
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The good news is:
• After next week the market has a slightly positive seasonal bias for a couple weeks.

Short term

The chart below shows the NASDAQ composite (OTC) in red and indicator showing momentum of the volume of NASDAQ advancing issues or upside volume (UV) in purple. Including this one, the last three highs in the indicator have been progressively higher indicating more prolonged buying thrusts. The indicator is now as high as at has been at any time since early April so it is likely the current up move is near its end.

Intermediate term

New lows give us the best bottom indicator because they diminish quickly following a significant low.

The chart below shows the OTC in red and a 10% trend (19 day EMA) of NASDAQ new lows in blue (OTC NL). OTC NL is plotted on an inverted Y axis so increasing new lows move the indicator downward. The indicator has been moving downward for the past 3 months with breaks at the seasonally strong end of month - beginning of month periods. It will be very encouraging if the indicator can continue moving upward next week.

Seasonality

Next week includes the last trading day of July and the first four trading days of August during the 2nd year of the Presidential Cycle.

The tables below show daily returns for the OTC from 1966 - 2002 and S&P 500 (SPX) from 1930 - 2002 during the 2nd year of the Presidential Cycle. There are summaries for both the 2nd year of the Presidential Cycle and all years combined beginning with 1963 for the OTC and 1928 for the SPX.

During the 2nd year of the Presidential Cycle the coming week has had an average negative return of over 2% as measured by the OTC and a modest negative return as measured by SPX. Measuring the week over all years since 1928 the SPX has had a very modest positive bias while the OTC since 1963 has been slightly negative and both have been up about 50% of the time. All of the largest drawdowns for the period have occurred since 1990.

Last 1 day of July and first 4 days of August.
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 Day1 Day2 Day3 Day4 Totals
1966-2 -0.21% 5 0.00% 1 1.26% 2 -0.09% 3 0.39% 4 -1.17%
1970-2 -0.22% 5 -0.83% 1 1.25% 2 0.17% 3 0.07% 4 -2.07%
1974-2 -1.84% 3 -0.51% 4 -0.33% 5 0.39% 1 1.23% 2 -1.06%
1978-2 0.39% 1 0.39% 2 1.06% 3 0.67% 4 0.53% 5 3.05%
1982-2 -0.15% 5 0.61% 1 0.24% 2 -0.84% 3 -0.85% 4 -1.46%
Avg -0.41% -0.07% -0.40% 0.06% 0.28% -0.54%
 
1986-2 0.15% 4 -0.19% 5 -1.08% 1 0.02% 2 -0.55% 3 -1.65%
1990-2 -0.26% 2 -0.53% 3 -1.61% 4 -2.67% 5 -4.17% 1 9.24%
1994-2 1.37% 5 0.37% 1 0.01% 2 -0.15% 3 -0.49% 4 1.09%
1998-2 -2.46% 5 -1.14% 1 3.54% 2 0.15% 3 2.29% 4 -4.70%
2002-2 -1.19% 3 -3.63% 4 -2.51% 5 -3.36% 1 4.44% 2 -6.24%
Avg -0.48% -1.02% -1.75% -1.20% 0.30% -4.15%
 
OTC summary for Presidential Year 2 1966 - 2002
Averages -0.44% -0.55% -1.08% -0.57% 0.29% -2.35%
% Winners 30% 30% 10% 50% 60% 20%
MDD 8/5/2002 10.28% -- 8/6/1990 8.95% -- 8/4/1998 6.98%
 
OTC summary for all years 1963 - 2005
Averages 0.04% -0.06% -0.16% -0.17% 0.11% -0.24%
% Winners 56% 55% 37% 47% 67% 49%
MDD 8/5/2002 10.28% -- 8/6/1990 8.95% -- 8/4/1998 6.98%
 
SPX Presidential Year 2
  Day1 Day1 Day2 Day3 Day4 Totals
1930-2 0.62% 4 -0.47% 5 0.57% 6 1.37% 1 0.00% 2 2.08%
1934-2 0.12% 2 3.11% 3 0.67% 4 -1.22% 5 -2.02% 6 0.65%
1938-2 0.57% 6 -1.21% 1 1.31% 2 -0.89% 3 0.65% 4 0.43%
1942-2 0.71% 5 0.00% 6 0.12% 1 0.23% 2 -0.94% 3 -0.35%
 
1946-2 1.13% 3 0.28% 4 0.06% 5 -0.61% 1 0.28% 2 0.57%
1950-2 0.85% 1 1.01% 2 -0.39% 3 0.22% 4 0.83% 5 2.53%
1954-2 0.62% 5 0.36% 1 0.19% 2 -0.10% 3 -0.42% 4 0.26%
1958-2 0.21% 4 0.64% 5 0.95% 1 0.40% 2 -0.61% 3 0.79%
1962-2 0.69% 2 -0.82% 3 0.40% 4 0.24% 5 -0.64% 1 0.13%
Avg 0.70% 0.29% 0.16% -0.13% -0.22% 0.80%
 
1966-2 -0.20% 5 -1.54% 1 0.02% 2 1.00% 3 0.94% 4 0.21%
1970-2 -0.03% 5 -1.32% 1 0.22% 2 -0.01% 3 -0.13% 4 -1.27%
1974-2 -1.48% 3 -0.71% 4 -0.20% 5 0.89% 1 1.55% 2 0.05%
1978-2 0.68% 1 0.02% 2 2.25% 3 0.57% 4 0.40% 5 3.87%
1982-2 -0.58% 5 1.76% 1 1.06% 2 -1.57% 3 -0.92% 4 -2.37%
Avg -0.32% -0.36% 0.25% 0.18% 0.37% 0.10%
 
1986-2 -0.20% 4 -0.51% 5 0.46% 1 0.44% 2 -0.08% 3 0.11%
1990-2 0.17% 2 -0.18% 3 -1.14% 4 -1.88% 5 -3.02% 1 6.05%
1994-2 0.88% 5 0.60% 1 0.10% 2 0.20% 3 -0.66% 4 0.92%
1998-2 -1.94% 5 -0.74% 1 3.63% 2 0.87% 3 0.76% 4 -4.68%
2002-2 0.98% 3 -2.96% 4 -2.31% 5 -3.43% 1 2.99% 2 -4.72%
Avg -0.02% -0.76% -1.34% -0.76% 0.00% -2.89%
 
SPX summary for Presidential Year 2 1930 - 2002
Averages 0.20% -0.14% -0.11% -0.24% -0.08% -0.37%
% Winners 68% 37% 58% 47% 37% 63%
MDD 8/5/2002 8.45% -- 8/4/1998 6.19% -- 8/6/1990 6.10%
 
SPX summary for all years 1928 - 2005
Averages 0.13% 0.07% 0.00% 0.10% -0.14% 0.18%
% Winners 65% 55% 49% 51% 47% 53%
MDD 8/5/2002 8.45% -- 8/4/1998 6.19% -- 8/6/1990 6.10%

August

During the 2nd year of the Presidential Cycle, August has been interesting. The table below shows returns for August during the 2nd year of the Presidential cycle for the SPX, OTC and Russell 2000 (R2K). The indices have all been up over 60% of the time yet the average returns are all negative. August has usually been up, but, when it has been down it has been down sharply. The worst Augusts have followed weak Julys. With one trading day left in July the blue chip indices have been flat for the month while the small cap indices have been down.

August of Presidential Year 2
  SPX OTC R2K
1930-2 1.2%    
1934-2 2.2%    
1938-2 -1.6%    
1942-2 0.7%    
1946-2 -7.6%    
Avg -0.99%    
 
1950-2 2.2%    
1954-2 -3.7%    
1958-2 0.5%    
1962-2 2.4%    
1966-2 -6.3% -9.9%  
Avg -0.99%    
 
1970-2 5.8% 1.0%  
1974-2 -8.4% -10.4%  
1978-2 2.6% 6.5%  
1982-2 9.7% 5.5% 6.9%
1986-2 7.7% 3.3% 3.2%
Avg 3.48% 1.17%  
 
1990-2 -9.3% -12.5% -13.2%
1994-2 3.1% 5.6% 5.0%
1998-2 -13.9% -19.0% -18.2%
2002-2 3.6% 2.7% 0.4%
Avg -4.13% -5.8% -6.5%
 
Averages -0.5% -2.7% -2.7%
Win% 63% 60% 67%

The charts below show the average performance of August for all years combined and for just the 2nd year of the Presidential Cycle. The number of trading days in the month varies, but averages 21. The charts have been calculated by averaging the returns of the 1st 11 trading days and the last 10. There is a dashed vertical line drawn after the 1st trading day and at 5 trading day intervals after that. A solid vertical line has been drawn at the 11th trading day, the breakpoint.

In the 1st chart the OTC average for all years since 1963 has been drawn in red while the average for just the 2nd year of the Presidential Cycle over the same period has been drawn in blue.

In the next chart the SPX average for all years since 1928 has been drawn in green while the average for the just the 2nd year of the Presidential Cycle over the same period has been drawn in blue.

You can learn more about the Presidential Cycle at: http://alphaim.net/newsletter.html. Select Alpha Research Reports - The 4 year Presidential Cycle.

Conclusion

Diminishing new lows and a pop in prices last week are encouraging, however, the seasonal record for next week has not been good.

I expect the major indices to be lower on Friday August 4 than they were on Friday July 28.

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.

The major indices were all up last week making my seasonally based negative forecast a loss.

 


 

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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