Technical Market Report

By: Mike Burk | Sat, Jan 6, 2007
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The good news is:
• There have been very few new lows on either the NYSE or NASDAQ.

Short Term

Changing volume patterns offer a short term view of what is happening in the market. Unfortunately, volume indicators are easily skewed by seasonal factors.

The chart below covers the last 100 trading days showing the NASDAQ composite (OTC) in magenta and momentum of NASDAQ downside volume (OTC DV) in green. OTC DV is plotted on an inverted Y axis so decreasing downside volume moves the indicator upward (up is good).

OTC DV rose sharply in late December, mostly from the overall seasonally induced decline in volume during that period rather than a strong upward move in prices. Friday OTC DV turned downward.

It will be a few days before we can tell if the downward turn Friday was caused by seasonal factors or the beginning of a period of weakness. Recently the periods of weakness have been lasting 3-4 weeks.

Intermediate term

The secondaries lead both up and down. It may be that they simply have higher betas so the moves are exaggerated.

The next chart covers the past 6 months showing the S&P 500 (SPX) in red, the ratio of the Russell 2000 (R2K) to the SPX (R2K / SPX) in green, a 6% trend (33 day EMA) of the ratio in brown and an 11% trend (22 day EMA) of the ratio in blue.

The ratio peaked in mid November and hit a low (so far) in mid December.

The last time the market hit its low for the year during summer of the 2nd year of the Presidential Cycle was in 1982.

The chart below is similar to the one above except it covers the period from the summer of 1982 to Mid January 1983. The ratio peaked in late November, bottomed in late December and had a sharp move downward on the first trading day of the year before moving upward.

The recent period has been more volatile, but, the patterns are similar. The market was very strong in early 1983.

Seasonality

Seasonally, next week is the week prior to the 2nd Friday in January during the 3rd year in the Presidential Cycle.

In the tables below, OTC data covers the period from 1963 - 2003 and SPX data from 1955 - 2003 during the 3rd year of the Presidential Cycle. There are summaries for both the 3rd year of the Presidential Cycle and all years combined beginning with 1963 for the OTC and 1953 for the S&P 500. Data prior to 1953 has been omitted because the market traded 6 days a week.

The OTC has been up about 80% of the time with an average return of over 2%. The SPX has been up over 75% of the time with an average return of over 1%. This period during the 3rd year of the Presidential Cycle has been stronger than the average for all years.

Report for the week before the 2nd Friday during Jan
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.

OTC Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1963-3 -0.42% -0.03% -0.03% 0.42% -0.93% -1.00%
1967-3 0.76% 0.50% -0.24% 1.72% 0.61% 3.35%
 
1971-3 0.59% 0.36% 1.40% 0.13% 1.07% 3.55%
1975-3 0.83% 0.24% -0.63% 1.41% 2.12% 3.98%
1979-3 -0.11% 0.61% -0.31% 0.39% 0.80% 1.38%
1983-3 3.10% -2.09% 0.86% 0.23% 0.88% 2.98%
1987-3 2.24% 1.34% 1.77% 1.36% 0.82% 7.53%
Avg 1.33% 0.09% 0.62% 0.71% 1.14% 3.88%
 
1991-3 -1.91% -0.34% -0.43% 1.25% -0.03% -1.46%
1995-3 0.32% 0.59% -0.10% -0.01% 0.86% 1.66%
1999-3 1.72% -2.68% -0.17% -1.73% 3.14% 0.28%
2003-3 2.47% 0.72% -2.13% 2.67% 0.64% 4.37%
Avg 0.65% -0.43% -0.71% 0.55% 1.15% 1.21%
 
OTC summary for Presidential year 3 1963 - 2003
Avg 0.87% -0.07% 0.00% 0.71% 0.91% 2.42%
Win% 73% 64% 27% 82% 82% 82%
 
OTC summary for all years 1963 - 2006
Avg 0.44% -0.09% -0.07% 0.47% 0.33% 1.08%
Win% 70% 52% 45% 73% 73% 66%
 
SPX Presidential Year 3
Year Mon Tue Wed Thur Fri Totals
1955-3 1.30% -0.31% -0.28% -0.42% -0.42% -0.13%
1959-3 0.40% -0.13% -1.26% 0.93% 0.67% 0.61%
1963-3 -0.02% 0.97% -0.23% 0.19% 0.22% 1.12%
1967-3 0.77% 0.00% 0.80% 0.53% 0.74% 2.83%
 
1971-3 -0.23% 0.80% -0.17% 0.26% 0.25% 0.91%
1975-3 0.51% -0.07% -1.38% 1.61% 2.02% 2.70%
1979-3 -0.33% 0.54% -0.56% 0.33% 0.84% 0.81%
1983-3 1.10% -0.68% 0.62% -0.65% 0.63% 1.02%
1987-3 2.33% 0.23% 1.01% 0.76% 0.56% 4.90%
Avg 0.68% 0.16% -0.10% 0.46% 0.86% 2.07%
 
1991-3 -1.73% -0.17% -1.08% 0.98% 0.22% -1.79%
1995-3 0.03% 0.18% 0.00% -0.01% 0.94% 1.15%
1999-3 -0.88% -1.93% -0.41% -1.80% 2.57% -2.45%
2003-3 2.25% -0.65% -1.41% 1.94% 0.00% 2.12%
Avg -0.08% -0.64% -0.73% 0.28% 0.93% -0.24%
 
SPX summary for Presidential Year 3 1955 - 2003
Avg 0.42% -0.10% -0.34% 0.36% 0.71% 1.06%
Win% 62% 42% 23% 69% 85% 77%
 
SPX summary for all years 1953 - 2006
Avg 0.13% -0.18% -0.28% 0.24% 0.12% 0.03%
Win% 57% 40% 39% 70% 56% 52%

Conclusion

In the coming week the market has a strong, positive seasonal bias.

I expect the major indices to be higher on Friday January 12 than they were on Friday January 5.

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.

Gordon Harms produces a Power Point for our local timing group meetings. You can get a copy of the one for last weeks meeting at: http://www.stockmarket-ta.com/.

Last week the OTC was up while the other major indices were down so I am calling last weeks positive forecast a tie.

 


 

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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