Technical Market Report

By: Mike Burk | Sat, Aug 26, 2006
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The good news is:
• New lows declined on both the NYSE and NASDAQ even though prices also declined.

Short term

For the past several months there has been a pattern of prices rising from a mid-month low to a high near the end of the month. That pattern appears to be breaking down.

The chart below covers the period from early April through last Friday. Dashed vertical lines have been drawn on the 1st trading day of each month. The NASDAQ composite(OTC) is shown in red and indicators showing the momentum of the ratio of advancing issues to declining issues (advancing issues / (advancing issues + declining issues)) of both the NYSE and NASDAQ are shown in orange an purple respectively. The particular indicator is not important since many show the same pattern. What is of interest here is the indicators bottomed a little early then turned down last week. At this point it appears unlikely will follow the pattern of rising into the end of the month.

Intermediate term

Peaks in new lows occur near market bottoms.

So far this year there was a peak in new lows on the NYSE in late June and on the NASDAQ in mid July.

The chart below covers this calendar year to date showing the OTC in magenta and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in blue. OTC NL is plotted on an inverted Y axis to make the chart easier to read, increasing new lows move the indicator downward (up is good).

The next chart is similar to the one above except the index is the S&P 500 (SPX) shown in green and the indicator calculated from NYSE new lows (NY NL) is shown in magenta.

The SPX and NY NL hit their lows for the year in June while the OTC and OTC NL hit their lows for the year in July.

Usually the major indices and new low indicators move in unison.

The last time I can recall their getting out of synch was in 1994, also the 2nd year in the Presidential Cycle.

The next chart covers all of 1994 showing the SPX in green NY NL in magenta and OTC NL in blue. NY NL hit its low for the year in late March - early April while OTC NL hit a lower low in late April, another low late June and its lowest low in December. There are similarities to the current period, NY NL approached its high for the year in early September and OTC NL rose sharply through July and August.

The next chart shows the SPX in green and the OTC in magenta with no other indicators for 1994. The SPX hit its low for the year in late March and the OTC in late June so far this year the SPX low was in mid June and the OTC low in mid July.

Seasonality

Next week includes the last four trading days of August and the 1st trading day of September 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.

All of the averages are negative and the 2nd year of the Presidential Cycle has been worse than the overall averages. Since 1930 during the 2nd year of the Presidential cycle the SPX has been up 42% of the time with an average loss of 1.88% and the OTC since 1966 has been up half the time with an average loss of 2.49%. Over all years the indices have been up about 60% of the time while their average return has been negative.

Last 4 days of August and first 1 day of September.
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 Day4 Day3 Day2 Day1 Day1 Totals
1966-2 -1.16% 5 -2.56% 1 -2.71% 2 0.73% 3 1.44% 4 -4.26%
1970-2 0.98% 3 -0.05% 4 1.15% 5 0.64% 1 0.00% 2 2.72%
1974-2 -0.95% 2 0.14% 3 -1.70% 4 1.63% 5 -2.39% 2 -3.27%
1978-2 -0.44% 1 -0.45% 2 0.09% 3 0.19% 4 0.25% 5 -0.36%
1982-2 1.85% 4 -0.32% 5 -0.70% 1 0.77% 2 -0.23% 3 1.37%
Avg 0.06% -0.65% -0.77% 0.79% -0.19% -0.76%
 
1986-2 0.32% 2 0.32% 3 0.19% 4 0.12% 5 -0.71% 2 0.24%
1990-2 0.42% 2 -0.28% 3 -0.81% 4 0.67% 5 0.12% 2 0.11%
1994-2 1.08% 5 0.04% 1 0.43% 2 -0.11% 3 -0.87% 4 0.56%
1998-2 -1.66% 3 -4.63% 4 -2.77% 5 -8.57% 1 5.06% 2 -12.57%
2002-2 -3.16% 2 -2.48% 3 1.63% 4 -1.57% 5 -3.88% 2 -9.46%
Avg -0.60% -1.41% -0.27% -1.89% -0.06% -4.22%
 
OTC summary for Presidential Year 2 1966 - 2002
Averages -0.27% -1.03% -0.52% -0.55% -0.12% -2.49%
% Winners 50% 30% 50% 70% 40% 50%
MDD 8/31/1998 16.63% -- 9/3/2002 9.19% -- 8/30/1966 6.30%
 
OTC summary for all years 1963 - 2005
Averages -0.18% -0.14% -0.18% 0.18% 0.05% -0.27%
% Winners 51% 56% 60% 79% 60% 60%
MDD 8/31/1998 16.63% -- 9/3/2002 9.19% -- 9/4/2001 7.41%
 
SPX Presidential Year 2
Year Day4 Day3 Day2 Day1 Day1 Totals
1930-2 1.45% 2 0.76% 3 -0.05% 4 1.14% 5 0.05% 2 3.35%
1934-2 -0.53% 2 -0.86% 3 -1.08% 4 -0.11% 5 -0.22% 6 -2.80%
1938-2 -1.04% 6 -4.20% 1 1.60% 2 0.17% 3 -1.16% 4 -4.64%
1942-2 0.59% 4 0.23% 5 0.12% 6 0.00% 1 0.00% 2 0.93%
 
1946-2 -3.15% 2 -1.12% 3 0.18% 4 -0.66% 5 -6.73% 2 -11.47%
1950-2 -0.05% 1 0.05% 2 -0.59% 3 -0.05% 4 0.71% 5 0.06%
1954-2 -0.26% 4 0.29% 5 -1.01% 1 -1.71% 2 0.70% 3 -1.99%
1958-2 0.34% 2 0.02% 3 -0.52% 4 0.19% 5 0.52% 2 0.55%
1962-2 -1.28% 2 -0.22% 3 0.03% 4 0.75% 5 -0.95% 2 -1.66%
Avg -0.88% -0.19% -0.38% -0.30% -1.15% -2.90%
 
1966-2 -2.11% 5 -2.46% 1 1.78% 2 1.63% 3 0.78% 4 -0.38%
1970-2 0.11% 3 -0.16% 4 0.96% 5 -0.42% 1 -0.70% 2 -0.20%
1974-2 -1.69% 2 -0.25% 3 -1.09% 4 3.09% 5 -2.26% 2 -2.21%
1978-2 -0.90% 1 -0.55% 2 0.11% 3 -0.20% 4 0.38% 5 -1.16%
1982-2 0.82% 4 -1.21% 5 0.47% 1 1.57% 2 -1.05% 3 0.60%
Avg -0.75% -0.93% 0.45% 1.13% -0.57% -0.67%
 
1986-2 2.03% 2 0.18% 3 -0.18% 4 0.04% 5 -1.74% 2 0.32%
1990-2 -0.03% 2 0.89% 3 -1.69% 4 1.21% 5 0.16% 2 0.54%
1994-2 1.22% 5 0.17% 1 0.32% 2 -0.12% 3 -0.49% 4 1.09%
1998-2 -0.80% 3 -3.84% 4 -1.48% 5 -6.78% 1 3.83% 2 -9.06%
2002-2 -1.39% 2 -1.81% 3 -0.01% 4 -0.19% 5 -4.15% 2 -7.55%
Avg 0.21% -0.88% -0.61% -1.17% -0.48% -2.93%
 
SPX summary for Presidential Year 2 1930 - 2002
Averages -0.35% -0.74% -0.11% -0.02% -0.65% -1.88%
% Winners 37% 42% 47% 47% 42% 42%
MDD 8/31/1998 12.39% -- 9/3/1946 11.10% -- 9/3/2002 7.38%
 
SPX summary for all years 1928 - 2005
Averages -0.09% -0.10% -0.08% 0.15% -0.06% -0.18%
% Winners 45% 58% 51% 64% 67% 63%
MDD 8/31/1998 12.39% -- 9/3/1946 11.10% -- 9/3/2002 7.38%

Conclusion

The rally that began two weeks ago has fizzled and seasonally next week has been treacherous.

I expect the major indices to be lower on Friday September 1 than they were on Friday August 25.

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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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