Technical Market Report

By: Mike Burk | Sun, Oct 1, 2006
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The good news is:
•The Dow Jones Industrial Average (DJIA) hit a new high for the year last week coming within 5 points (0.004%) of its all time high hit in early 2000.

Short term

The chart below is an update of the one I showed last week. It covers the past year showing the NASDAQ composite (OTC) in magenta and momentum of NASDAQ downside volume in green. Dashed vertical grey lines have been drawn on the 1st trading day of each month the line is red showing the 1st trading day of the year. The indicator is plotted on an inverted Y axis to make it easy to read; increasing down volume moves the indicator downward (up is good). The indicator continued to move downward in spite of the rally last week.

The next chart is similar to the one above except the indicator is momentum of NASDAQ new lows. The indicator usually lags, last April it continued downward while the index moved up to its final top, similar to what appears to be happening now.

Intermediate term

Small capitalization issues lead both up and down.

The chart below shows the OTC in red and an indicator showing relative strength of the Russell 2000 to the S&P 500 (SPX) in black.

During the rally of the past week the indicator moved downward, opposite of prices.

Seasonality

Next week is the first week of October during the 2nd year of the Presidential Cycle.

The tables below show daily returns for the first 5 trading days of October. OTC data covers the period from 1966 - 2002 and S&P 500 (SPX) data 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 coming week has been up 60% or more of the time by all measures.

The OTC for the 2nd year of the Presidential Cycle has a negative average because of a 14.37% loss in 1998. Otherwise all of the averages are positive. The past three Presidential Cycles have had negative returns during the 2nd year.

First 5 days of October.
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
1966-2 0.00% 1 -1.66% 2 -0.63% 3 -1.54% 4 -0.88% 5 -4.72%
1970-2 0.29% 4 0.89% 5 1.56% 1 0.69% 2 0.30% 3 3.73%
1974-2 -0.34% 2 0.34% 3 -1.44% 4 0.53% 5 2.56% 1 1.65%
1978-2 0.31% 1 -0.14% 2 -0.01% 3 0.33% 4 0.34% 5 0.83%
1982-2 0.56% 5 -0.36% 1 0.40% 2 1.70% 3 1.88% 4 4.18%
Avg 0.16% -0.19% -0.02% 0.34% 0.84% 1.13%
 
1986-2 0.45% 3 0.01% 4 0.05% 5 0.13% 1 -0.23% 2 0.40%
1990-2 2.94% 1 0.49% 2 -1.39% 3 -0.44% 4 -0.72% 5 0.88%
1994-2 -0.45% 1 -1.78% 2 -0.14% 3 -0.28% 4 0.78% 5 -1.87%
1998-2 -4.81% 4 0.17% 5 -4.85% 1 -1.68% 2 -3.20% 3 -14.37%
2002-2 3.55% 2 -2.18% 3 -1.83% 4 -2.20% 5 -1.80% 1 -4.45%
Avg 0.34% -0.66% -1.63% -0.90% -1.04% -3.88%
 
OTC summary for Presidential Year 2 1966 - 2002
Averages 0.25% -0.42% -0.83% -0.28% -0.10% -1.37%
% Winners 60% 50% 30% 50% 50% 60%
MDD 10/7/1998 13.65% -- 10/7/2002 7.77% -- 10/7/1966 4.64%
 
OTC summary for all years 1963 - 2005
Averages 0.03% -0.02% 0.05% 0.11% 0.02% 0.19%
% Winners 55% 56% 58% 63% 63% 63%
MDD 10/7/1998 13.65% -- 10/6/2000 8.49% -- 10/7/2002 7.77%
 
SPX Presidential Year 2
  Day1 Day2 Day3 Day4 Day5 Totals
1930-2 4.46% 3 -1.24% 4 1.25% 5 -0.98% 6 -3.22% 1 0.28%
1934-2 -2.97% 1 0.34% 2 -0.34% 3 -0.11% 4 2.04% 5 -1.04%
1938-2 1.80% 6 0.48% 1 -0.32% 2 3.04% 3 -0.31% 4 4.69%
1942-2 0.79% 4 1.46% 5 0.33% 6 0.55% 1 0.00% 2 3.13%
 
1946-2 -0.27% 2 0.80% 3 -0.40% 4 -1.13% 5 -0.74% 6 -1.74%
1950-2 1.23% 1 -0.15% 2 1.73% 3 -0.55% 4 1.16% 5 3.42%
1954-2 -0.06% 5 0.56% 1 0.49% 2 0.40% 3 -0.21% 4 1.17%
1958-2 -0.16% 3 0.38% 4 0.40% 5 0.62% 1 0.57% 2 1.81%
1962-2 -1.39% 1 1.10% 2 0.11% 3 0.96% 4 0.65% 5 1.43%
Avg -0.13% 0.54% 0.47% 0.06% 0.28% 1.22%
 
1966-2 -2.17% 1 0.27% 2 -0.55% 3 -0.86% 4 -1.15% 5 -4.45%
1970-2 0.13% 4 1.00% 5 1.54% 1 0.44% 2 0.05% 3 3.15%
1974-2 -0.24% 2 -0.02% 3 -1.74% 4 0.10% 5 4.19% 1 2.30%
1978-2 0.41% 1 -0.35% 2 0.45% 3 0.20% 4 0.24% 5 0.95%
1982-2 1.26% 5 -0.38% 1 0.39% 2 3.27% 3 2.25% 4 6.79%
Avg -0.12% 0.10% 0.02% 0.63% 1.11% 1.75%
 
1986-2 0.99% 3 0.14% 4 -0.09% 5 0.46% 1 -0.16% 2 1.33%
1990-2 2.90% 1 0.09% 2 -1.21% 3 0.41% 4 -0.38% 5 1.82%
1994-2 -0.21% 1 -1.55% 2 -0.24% 3 -0.26% 4 0.61% 5 -1.64%
1998-2 -3.01% 4 1.64% 5 -1.40% 1 -0.40% 2 -1.41% 3 -4.58%
2002-2 4.00% 2 -2.36% 3 -1.08% 4 -2.24% 5 -1.91% 1 -3.59%
Avg 0.93% -0.41% -0.80% -0.41% -0.65% -1.33%
 
SPX summary for Presidential Year 2 1930 - 2002
Averages 0.40% 0.12% -0.04% 0.21% 0.12% 0.80%
% Winners 53% 63% 47% 58% 47% 68%
MDD 10/7/2002 7.39% -- 10/7/1998 4.55% -- 10/7/1966 4.39%
 
SPX summary for all years 1928 - 2005
Averages 0.12% 0.21% 0.13% -0.16% 0.34% 0.63%
% Winners 50% 68% 52% 54% 55% 63%
MDD 10/5/1932 9.33% -- 10/5/1931 9.17% -- 10/7/2002 7.39%

October

It is often noted that October is the month of "crashes".
October 87 was the worst single month in OTC history, down 27.9%.
October 78 was the only other October with a double digit decline, down 16.6%.
Over all years the OTC has been up 57% of the time with an average gain of 0.8%.
The best Octobers of all occur during the 2nd year of the Presidential Cycle; up 70% of the time with an average gain of 3.1%.

On average the low for the Presidential Cycle occurs in October of the 2nd year.

The average month has 21 trading days, but they vary from 19 to 23. The charts below have been constructed by averaging the return for each of the first 11 trading days and each of the last 10. A dashed vertical line has been drawn after the 1st trading day of the month and after each additional 5 trading days. The solid vertical line has been drawn at the break point, the eleventh trading day.

The magenta line shows the average of the OTC over all years since 1963 while the blue line shows the average of the OTC during the 2nd year of the Presidential Cycle.

The next chart is similar to the one above except all daily percentage changes that exceeded 2% were recorded as 2% to eliminate the effect of the October 87 crash. 1987 was in the 3rd year of the Presidential Cycle so it has been averaged with 43 other years and barely shows.

The worst month for the SPX was October 87 with a decline of 23.1% followed by October 1929 with a decline of 19.4%. 1930 and 1932 have included the only other Octobers with double digit declines. 1930 (-12.8%) is the only one that occurred during the 2nd year of the Presidential Cycle.

The next chart shows the average performance of the SPX since 1928. The green line shows the average performance over all years and the blue line shows the average performance during the 2nd year of the Presidential Cycle.

The next chart is similar to the 2nd OTC chart where all daily moves (of the SPX) greater than 2% have been counted as 2% eliminating the crash effect.

For more information about the Presidential Cycle go to: http://alphaim.net/research/Pres_Cycle/index.html.

Conclusion

Most short and intermediate term indicators are moving downward.

I expect the major indices to be lower on Friday October 6 than they were on Friday September 29.

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 deteriorating indicators and negative seasonality 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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