Technical Market Report

By: Mike Burk | Sat, Aug 19, 2006
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The good news is:
• Last weeks blast off was reminiscent of August 1982, also a 2nd year in the Presidential cycle and considered by some to mark the beginning of the bull market that ran until 2000.

Short term

Overbought and oversold have been defined in many ways, my favorite is simply counting the number of consecutive days the market has moved in the same direction. Using 3 consecutive days in either direction as a starting point for an overbought or oversold condition, each additional day in the same direction represents a more extreme condition. Last week all of the major indices were up every day leaving the market overbought by this measure.

The chart below covers the past year with dashed vertical lines drawn on the 1st trading day of each month. The NASDAQ composite is shown in red and an indicator showing the percentage of the past 5 trading days that have been up is shown in blue. The indicator touches the top of the screen when all of the previous 5 trading days have been up and the bottom of the screen when they have all been down. The indicator reached the top of the screen Friday for the 3rd time in the past year. In the previous two occurrences the rally lasted for more than 5 trading days and was at or near a high in prices that held for at least a month.

The next chart is similar to the one above, but shows the S&P 500 (SPX).

Intermediate term

You expect new highs expand in up markets and contract in down markets.

There were 78 NASDAQ new highs on August 4 when the index was at 2085.

On Friday the number of NASDAQ new highs declined to 53 from 80 on Thursday with the index at 2163.

The chart below shows the OTC in magenta and a 10% trend (19 day EMA) of NASDAQ new highs in green. After last weeks rally the indicator is still slightly below its early August high. Not the kind of expansion you would expect.

Seasonality

Next week includes the five trading days prior to the 4th Friday or the week following options expiration in 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 1954 - 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 1953 for the SPX. I have shortened the SPX reporting period because prior to 1953 the market traded 6 days a week possibly skewing the data because Friday was not the last trading day of the week.

During the 2nd year of the Presidential Cycle, in the coming week is a surrogate for the entire month, both the OTC & SPX have been up about 60% of the time, but the average return has been negative. Over all years both indexes have been up about 60% of the time but the OTC return has been modestly positive while the SPX return has been modestly negative.

Report for the week after options expiration Friday during Aug
The number following the year is the position in the presidential cycle.
Daily returns from Monday to Friday.

OTC Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1966-2 -0.69% -2.36% 0.00% 1.36% -1.16% -2.85%
 
1970-2 2.41% 0.64% 0.98% -0.05% 1.15% 5.13%
1974-2 -1.11% 0.91% -1.22% -2.05% -1.60% -5.07%
1978-2 -0.70% 0.07% 0.64% 0.41% 0.41% 0.84%
1982-2 1.75% 1.38% 1.57% 1.85% -0.32% 6.23%
1986-2 -0.24% -0.12% 0.56% 0.06% 0.10% 0.35%
Avg 0.42% 0.58% 0.51% 0.04% -0.05% 1.50%
 
1990-2 -1.25% -2.29% -1.27% -3.90% 1.97% -6.74%
1994-2 -0.02% 0.77% 0.50% 0.41% 1.08% 2.74%
1998-2 -0.38% 0.41% -1.66% -4.63% -2.77% -9.03%
2002-2 2.46% -1.29% 2.37% 0.97% -2.97% 1.55%
Avg 0.21% -0.60% -0.02% -1.79% -0.67% -2.87%
 
OTC summary for Presidential Year 2 1966 - 2002
Avg 0.23% -0.19% 0.27% -0.56% -0.41% -0.68%
Win% 30% 60% 67% 60% 50% 60%
 
OTC summary for all years 1963 - 2005
Avg -0.06% -0.04% 0.35% -0.11% 0.06% 0.19%
Win% 42% 54% 66% 53% 56% 60%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 -0.67% -0.42% -0.71% -0.26% 0.29% -1.77%
1958-2 -0.59% 0.17% 0.04% 0.66% 0.21% 0.49%
1962-2 0.61% -0.42% 1.12% -0.13% -0.20% 0.97%
1966-2 -1.73% -0.17% 1.23% -1.28% -2.11% -4.06%
 
1970-2 2.21% 0.16% 0.11% -0.16% 0.96% 3.28%
1974-2 -1.45% 0.51% -1.92% -0.97% -1.72% -5.55%
1978-2 -0.80% 0.40% 0.58% 0.16% -0.17% 0.17%
1982-2 2.73% -0.65% 1.93% 0.82% -1.21% 3.62%
1986-2 0.09% -0.35% 1.32% -0.04% 0.21% 1.23%
Avg 0.56% 0.01% 0.40% -0.04% -0.39% 0.55%
 
1990-2 0.21% -2.02% -1.65% -3.00% 1.45% -5.02%
1994-2 -0.30% 0.48% 0.97% -0.20% 1.22% 2.17%
1998-2 0.64% 0.44% -0.80% -3.84% -1.48% -5.03%
2002-2 2.36% -1.40% 1.27% 1.41% -2.27% 1.37%
Avg 0.73% -0.63% -0.05% -1.41% -0.27% -1.62%
 
SPX summary for Presidential Year 2 1954 - 2002
Avg 0.25% -0.25% 0.27% -0.53% -0.37% -0.62%
Win% 54% 46% 69% 31% 46% 62%
 
SPX summary for all years 1953 - 2005
Avg -0.12% 0.03% 0.18% -0.18% -0.07% -0.17%
Win% 45% 55% 57% 45% 47% 58%

Conclusion

Because of the lack of new highs it is likely the move last week was a bear market rally rather than the beginning of a new bull market.

I expect the major indices to be lower on Friday August 25 than they were on Friday August 18.

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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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