Technical Market Report

By: Mike Burk | Sat, Sep 2, 2006
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The good news is:
• New lows declined to non-threatening levels on both the NYSE and NASDAQ.

Short term

Volume peaked in late May and has fallen sharply since. Typically volume picks up after the 1st week of September and prices become more volatile.

The chart below shows the NASDAQ composite (OTC) in magenta and a 5% trend (39 day EMA) of NASDAQ total volume in green. The chart covers the past 13 months so you can see the decline in volume during August 2005 leading up to the low in early September. Grey dashed vertical lines have been drawn on the 1st trading day of each month and the line is red on the 1st trading day of the year. Last year the low in volume coincided with a high in prices.

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).

During the 2nd year of the Presidential Cycle the lows for the year typically occur in early October. Currently most of the major indices are about 7% above their June - July lows. Measured by the OTC 7 of the last 43 Septembers have had declines of 7% or more and 4 of those big declines occurred during the 2nd year of the Presidential Cycle. The weakest performance during the 2nd year of the Presidential Cycle for the OTC was 1990, down 9.7% and 1930 for the SPX, down 13% (after being up in both July and August). If the low for the year is going to occur in October as it typically does, September will be a nasty month.

If it was not September, the level of new lows makes a convincing case that the lows for the year occurred in June and July. It is likely that volume is at a cyclical low changes are coming.

Seasonality

Next week includes the 2nd through 4th trading day of September during the 2nd year of the Presidential Cycle.

The tables below show daily returns for the 1st 5 days of September for 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.

The indices have been up a little more than half of the time and the averages have been modestly positive.

First 5 days 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
  Day1 Day2 Day3 Day4 Day5 Totals
1966 1.44% 4 -0.23% 5 -0.12% 2 -0.40% 3 -0.99% 4 -0.30%
 
1970 0.00% 2 -0.80% 3 0.05% 4 0.98% 5 1.45% 2 1.67%
1974 -2.39% 2 -3.17% 3 2.15% 4 0.80% 5 -2.19% 1 -4.80%
1978 0.25% 5 0.82% 2 0.23% 3 0.23% 4 0.93% 5 2.46%
1982 -0.23% 3 1.24% 4 1.42% 5 -0.64% 2 0.50% 3 2.29%
1986 -0.71% 2 -0.33% 3 0.57% 4 -0.70% 5 -1.47% 1 -2.65%
Avg -0.62% -0.45% 0.89% 0.13% -0.16% -0.20%
 
1990 0.12% 2 0.20% 3 -0.96% 4 0.42% 5 0.35% 1 0.14%
1994 -0.87% 4 0.04% 5 0.03% 2 0.63% 3 0.66% 4 0.49%
1998 5.06% 2 1.12% 3 -1.31% 4 -0.34% 5 6.03% 2 10.56%
2002 -3.88% 2 2.25% 3 -3.20% 4 3.54% 5 0.72% 1 -0.56%
Avg 0.17% 0.72% -1.09% 0.85% 1.55% 2.21%
 
OTC summary for Presidential Year 2
Averages -0.07% 0.10% -0.10% 0.41% 0.54% 0.88%
% Winners 45% 55% 55% 55% 64% 64%
MDD 9/4/1974 5.48% -- 9/5/2002 4.86% -- 9/8/1986 2.63%
 
OTC summary for all years 1963 - 2005
Averages 0.06% 0.12% 0.00% 0.22% 0.00% 0.40%
% Winners 60% 67% 60% 63% 56% 64%
MDD 9/7/2001 6.52% -- 9/8/2000 6.04% -- 9/8/1981 5.60%
 
SPX Presidential Year 2
  Day1 Day2 Day3 Day4 Day5 Totals
1930 0.05% 2 -0.98% 3 -0.71% 4 1.52% 5 1.45% 6 1.33%
1934 -0.22% 6 -0.77% 2 1.66% 3 -2.06% 4 -1.11% 5 -2.50%
1938 -1.16% 4 2.85% 5 0.73% 6 -1.05% 2 1.55% 3 2.93%
1942 0.00% 2 0.12% 3 -0.12% 4 -0.12% 5 0.12% 6 0.00%
1946 -6.73% 2 -0.45% 3 3.43% 4 -0.94% 5 -5.24% 1 -9.93%
Avg -1.61% 0.15% 1.00% -0.53% -0.64% -1.63%
 
1950 0.71% 5 0.70% 2 -0.75% 3 0.27% 4 0.86% 5 1.79%
1954 0.70% 3 0.77% 4 0.76% 5 0.52% 2 0.07% 3 2.82%
1958 0.52% 2 0.38% 3 -0.17% 4 -0.27% 5 0.33% 1 0.80%
1962 -0.95% 2 -0.75% 3 0.41% 4 0.03% 5 0.12% 1 -1.13%
1966 0.78% 4 -0.36% 5 -0.59% 2 -0.81% 3 -0.38% 4 -1.36%
Avg 0.35% 0.15% -0.07% -0.05% 0.20% 0.58%
 
1970 -0.70% 2 0.01% 3 1.40% 4 0.90% 5 0.25% 2 1.86%
1974 -2.26% 2 -2.60% 3 3.17% 4 0.78% 5 -2.38% 1 -3.28%
1978 0.38% 5 0.78% 2 0.85% 3 0.04% 4 1.30% 5 3.35%
1982 -1.05% 3 1.72% 4 2.00% 5 -1.07% 2 0.68% 3 2.27%
1986 -1.74% 2 0.63% 3 1.50% 4 -1.32% 5 -0.93% 1 -1.87%
Avg -1.08% 0.11% 1.78% -0.14% -0.21% 0.47%
 
1990 0.16% 2 0.40% 3 -1.21% 4 0.92% 5 -0.55% 1 -0.27%
1994 -0.49% 4 -0.46% 5 0.18% 2 -0.18% 3 0.46% 4 -0.49%
1998 3.83% 2 -0.38% 3 -0.83% 4 -0.85% 5 5.10% 2 6.87%
2002 -4.15% 2 1.75% 3 -1.60% 4 1.68% 5 1.01% 1 -1.31%
Avg -0.02% 0.26% -0.69% 0.31% 1.20% 1.07%
 
SPX summary for Presidential Year 2 1930 - 2005
Averages -0.59% 0.17% 0.51% -0.10% 0.14% 0.12%
% Winners 45% 55% 55% 45% 65% 55%
MDD 9/9/1946 9.85% -- 9/4/1974 4.80% -- 9/3/2002 4.15%
 
SPX summary for all years 1928 - 2005
Averages -0.05% 0.16% 0.26% -0.08% -0.15% 0.13%
% Winners 67% 56% 57% 44% 51% 58%
MDD 9/9/1946 9.85% -- 9/7/1937 8.42% -- 9/8/1931 7.54%

September

September has the reputation as the worst month of the year and measured by total performance over all years, it is.

Over all years since 1963 the average return for the OTC in September has been -0.3%, the only month with an average negative return, however, September has been up 60% of the time, better than most months.

During the 2nd year of the Presidential Cycle an average September return of -1.4% puts it ahead of May, July and August and it has been up 40% of the time putting it ahead of May, June and July by that measure.

The chart below plots the average daily return of the OTC in September. The average for all years combined is shown in magenta while the average for the 2nd year of the Presidential Cycle is shown in blue.

An average month has 21 trading days and the charts are calculated by averaging the first 11 trading days and the last 10. When there are more than 21 trading days, some days in the middle of the month are skipped and when there are less than 21 trading days some days in the middle of the month are counted twice.

Since 1928 the SPX has had an average loss in September of 1.2%, and it has been up 44% of the time, it is the only month that has been up less than 50% of the time. February and May are tied for the 2nd worst month of the year, each averaging a loss of 0.2%, but both have been up over 50% of the time.

Looking at the 2nd year of the Presidential Cycle, the average return in September has been the worst at -1.3% while the index has been up 42% of the time. June runs a close second for worst return at -1.2% and it has been up only 35% of the time.

The next chart is similar to the one above except it uses SPX data from 1928.

You can find more information about the Presidential Cycle at: http://alphaim.net/research/Pres_Cycle/index.html.

There are links to monthly returns of the major indices with Presidential Year breakdowns near the bottom of the page.

Conclusion

New lows are nearly non existent and seasonally next week has had modest strength.

I expect the major indices to be higher on Friday September 8 than they were on Friday September 1.

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.

My negative forecast last week based on what I saw as a failed rally going into a seasonally challenging week was a miss.

 


 

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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