Technical Market Report

By: Mike Burk | Sat, Jun 30, 2007
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The good news is:
• Seasonally the first 4 trading days of July during the 3rd year of the Presidential Cycle have been one of the strongest weeks of the year. Since 1931 the S&P 500 (SPX) has been up 89% of the time with an average gain of over 1.5%.

Short Term

The short term indicators bounced off their lows last week and are mostly in neutral territory right now. Seasonal tendencies of early July especially during the 3rd year of the Presidential Cycle are likely to predominate.

Intermediate term

Downside volume, that is the volume of issues declining in price, follows a consistent pattern through a bottom to bottom price cycle.

At a price bottom everyone inclined to sell has done so and downside volume dries up. After a few months downside volume begins building and finally spikes as prices hit another cycle low.

The chart below covers the past 2 years with dashed vertical lines drawn on the first trading day of the year. The NASDAQ composite (OTC) is shown in orange and a 5% trend (39 day EMA) of NASDAQ downside volume (OTC DV) is shown in brown. OTC DV has been plotted on an inverted Y axis so increasing OTC DV moves the indicator downward (up is good).

For this purpose the indicator is imprecise, but, you can see that it has been in a downtrend since last September and it is near the level where previous market breaks have occurred.

The next chart is similar to the one above except is shows a 5% trend of NASDAQ upside volume (OTC UV) plotted on a conventional Y axis in green.

Price breaks don't happen until the buyers give up and OTC UV declines. There has been a little deterioration in this indicator recently, but, there has been enough buying to hold prices up while OTC DV has been increasing.

Seasonality

Next week includes first 4 trading days of July during the 3rd year of the Presidential Cycle.

The tables show the daily returns for the first 4 trading days of July during the 3rd year of the Presidential Cycle. NASDAQ data covers the period from 1963 - 2003 and SPX data from 1931 - 2003. There are summaries for both the 3rd year of the Presidential Cycle and all years combined. The SPX summary for all years combined begins with 1928.

During the 3rd year of the Presidential Cycle the SPX has been up 89% of the time and had an average gain of 1.57% making it one of the strongest weeks of the entire 4 year Presidential Cycle. The NASDAQ hasn't been too shabby either up 73% of the time with an average gain of 1.19%.

Over all years the SPX has been up 71% of the time with an average return of 0.90% while the OTC has been up 57% of the time with a very modestly negative average return of -0.01%. The OTC had two very bad years in 2001 (down 7.4%) and 2004 (down 4%) pushing its average return down.

First 4 days of July.
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 3
Year Day1 Day2 Day3 Day4 Totals
1963-3 -0.12% 1 -0.30% 2 0.30% 3 0.30% 5 0.18%
 
1967-3 0.49% 1 -0.10% 3 0.17% 4 -0.01% 5 0.55%
1971-3 0.62% 4 0.28% 5 0.42% 2 0.71% 3 2.04%
1975-3 -0.79% 2 -0.80% 3 0.65% 4 -0.70% 1 -1.63%
1979-3 -0.83% 1 0.04% 2 0.55% 4 0.62% 5 0.38%
1983-3 0.90% 5 -1.38% 2 0.63% 3 -0.04% 4 0.11%
Avg 0.08% -0.39% 0.49% 0.12% 0.29%
 
1987-3 -0.05% 3 0.33% 4 -0.18% 1 -0.13% 2 -0.03%
1991-3 1.13% 1 -0.53% 2 -0.93% 3 -0.06% 5 -0.38%
1995-3 0.12% 1 0.78% 3 1.18% 4 1.77% 5 3.84%
1999-3 0.77% 4 1.29% 5 -0.15% 2 0.23% 3 2.13%
2003-3 1.07% 2 2.35% 3 -0.91% 4 3.44% 1 5.95%
Avg 0.61% 0.85% -0.20% 1.05% 2.30%
 
OTC summary for Presidential Year 3 1963 - 2003
Averages 0.30% 0.18% 0.16% 0.56% 1.19%
% Winners 64% 55% 64% 55% 73%
MDD 7/7/1975 1.63% -- 7/5/1991 1.51% -- 7/5/1983 1.38%
 
OTC summary for all years 1963 - 2006
Averages 0.02% -0.16% 0.02% 0.12% -0.01%
% Winners 57% 52% 48% 52% 57%
MDD 7/6/2001 7.24% -- 7/2/2002 7.20% -- 7/7/1970 4.16%
 
SPX Presidential Year 3
Year Day1 Day2 Day3 Day4 Totals
1931-3 1.62% 3 -0.86% 4 2.14% 5 -1.05% 1 1.85%
1935-3 0.49% 1 0.10% 2 0.58% 3 1.16% 5 2.33%
1939-3 1.01% 6 0.27% 1 1.82% 3 -0.09% 4 3.02%
1943-3 0.08% 4 -0.08% 5 0.16% 6 0.00% 2 0.16%
 
1947-3 1.64% 2 -0.13% 3 1.04% 4 0.06% 1 2.61%
1951-3 0.67% 1 0.62% 2 1.93% 4 0.00% 5 3.22%
1955-3 0.39% 5 1.21% 2 3.57% 3 -1.39% 4 3.79%
1959-3 0.86% 3 0.53% 4 0.62% 1 0.60% 2 2.61%
1963-3 -0.74% 1 0.87% 2 0.69% 3 0.40% 5 1.23%
Avg 0.56% 0.62% 1.57% -0.06% 2.69%
 
1967-3 0.30% 1 0.49% 3 -0.04% 4 0.41% 5 1.15%
1971-3 0.08% 4 0.00% 5 -0.02% 2 0.28% 3 0.34%
1975-3 -0.36% 2 -0.71% 3 0.19% 4 -0.87% 1 -1.74%
1979-3 -0.89% 1 0.10% 2 0.33% 4 1.16% 5 0.70%
1983-3 0.48% 5 -1.37% 2 1.13% 3 -0.55% 4 -0.31%
Avg -0.08% -0.30% 0.32% 0.09% 0.03%
 
1987-3 -0.35% 3 0.89% 4 -0.23% 1 0.81% 2 1.12%
1991-3 1.82% 1 -0.12% 2 -1.10% 3 0.20% 5 0.81%
1995-3 0.43% 1 0.03% 3 1.23% 4 0.43% 5 2.12%
1999-3 0.60% 4 0.74% 5 -0.22% 2 0.56% 3 1.68%
2003-3 0.80% 2 1.16% 3 -0.81% 4 1.90% 1 3.06%
Avg 0.66% 0.54% -0.23% 0.78% 1.76%
 
SPX summary for Presidential Year 3 1931 - 2003
Averages 0.47% 0.20% 0.69% 0.21% 1.57%
% Winners 79% 63% 68% 63% 89%
MDD 7/7/1975 1.73% -- 7/7/1955 1.39% -- 7/5/1983 1.37%
 
SPX summary for all years 1928 - 2006
Averages 0.30% 0.25% 0.33% 0.04% 0.90%
% Winners 69% 61% 59% 58% 71%
MDD 7/2/2002 4.30% -- 7/6/2001 3.73% -- 7/7/1986 3.42%

July

The OTC has been up in July 50% of the time with an average loss of 0.2%, however, during the 3rd year of the Presidential Cycle it has been up 64% of the time with an average gain of 1.1%

The average month has 21 trading days. The charts below are constructed by averaging the daily return of the first 11 trading days and the last 10 so some days have been ignored on months with more than 21 trading days and some days have been counted twice on months with less than 21 trading days. A dashed vertical line has been drawn after the 1st trading day and after each successive 5 trading days. The vertical line is solid at 11 trading days, the break point.

The first chart shows the OTC average for all years in orange and the average for the 3rd year of the Presidential Cycle in green.

The SPX has been up in July 58% of the time with an average gain of 1.2%, however, during the 3rd year of the Presidential Cycle it has been up 68% of the time with an average gain of 1.0%.

During all periods most of July's gains have been made in the 1st part of the month.

Mutual Fund

Compliance issues demand that I not mention the mutual fund that I manage by name or symbol in this letter.

To see a current chart of the fund go to: http://finance.yahoo.com/q/bc?s=APHAX&t=6m&l=on&z=m&q=l&c=.

For information about the fund go to: http://www.thealphafunds.com/index.htm. The fund now has service class shares available.

Conclusion

The first 4 trading days of the month combined with a couple pre holiday trading days make next week seasonally one of the strongest of the year.

I expect the major indices to be higher on Friday July 6 than they were on Friday June 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.

Last week the blue chip indices were up slightly while the small cap indices were down slightly 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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