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Technical Market Report for January 5, 2013

By: Mike Burk | Saturday, January 5, 2013

The good news is:
• The S&P 500 (SPX), Russell 2000 (R2K) and S&P Mid Cap (Mid) indices all closed at multi year highs on Friday.


The negatives

For a blast off week like we had last week, volume was weak.

Most indicators involve moving averages of some kind to suppress noise, so, when there is a spectacular reversal, like we saw last week, many of the indicators cannot keep up.

The chart below covers the past 6 months showing the SPX in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

NY NH is far from confirming the new high in the SPX, but, if the number of new highs holds up, NY NH will catch up soon.

The next chart is similar to the one above except it shows the NASADAQ composite (OTC) in blue and OTC NH in green, has been calculated from NASADAQ data.

The NASDAQ chart below looks quite a bit stronger.


The positives

Everything but volume supported the pop in prices last week.

New highs expanded, new lows contracted, advance - decline breadth was strong and the secondaries outperformed the blue chips.

The chart below covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs / (new highs + new lows) (OTC HL Ratio) in red. Dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the neutral 50% level.

OTC HL Ratio finished the week at 87%, its highest level since last September. There are trading systems that impose a no sell filter when variations of this indicator are above 80%.

The chart below is similar to the one above except it shows the SPX in red and NY HL Ratio, in blue, has been calculated from NYSE data.

NY HL Ratio finished the week at an extremely strong 93%.


Seasonality

Next week includes the 5 trading days prior to the 2nd Friday in January during the 1st year of the Presidential Cycle.

The tables below show the daily return on a percentage basis for the 5 trading days prior to the 2nd Friday in January during the 1st year of the Presidential Cycle.

OTC data covers the period from 1963 - 2011 and SPX data covers the period from 1953 - 2011. There are summaries for both the 1st year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.

Average returns for the OTC have been positive while average returns for the SPX have been modestly negative.

Report for the week before the 2nd Friday of January
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday to 2nd Friday.

OTC Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1965-1 0.31% 0.65% 0.55% 0.55% 0.31% 2.37%
1969-1 0.21% -1.10% -0.93% -1.97% -0.25% -4.04%
 
1973-1 0.35% 0.08% -0.02% 0.05% 0.57% 1.03%
1977-1 -0.23% -0.92% -0.40% 0.85% 0.37% -0.33%
1981-1 0.30% -0.05% -3.29% -0.74% 0.90% -2.87%
1985-1 -0.06% -0.02% 0.54% 1.34% 0.60% 2.41%
1989-1 0.14% -0.18% 0.19% 0.44% 0.02% 0.61%
Avg 0.10% -0.22% -0.60% 0.39% 0.49% 0.17%
 
1993-1 0.77% -0.43% 1.08% 1.30% 0.21% 2.92%
1997-1 0.43% 0.86% -0.55% 0.44% 0.44% 1.62%
2001-1 -0.49% 1.89% 3.40% 4.61% -0.53% 8.88%
2005-1 0.40% -0.83% 0.62% -1.05% 0.84% -0.02%
2009-1 -0.26% 1.50% -3.23% 1.12% -2.81% -3.67%
Avg 0.17% 0.60% 0.26% 1.28% -0.37% 1.95%
 
OTC summary for Presidential Year 1 1965 - 2009
Avg 0.16% 0.12% -0.17% 0.58% 0.06% 0.74%
Win% 67% 42% 50% 75% 75% 58%
 
OTC summary for all years 1963 - 2012
Avg 0.38% -0.09% -0.05% 0.48% 0.19% 0.92%
Win% 68% 54% 50% 74% 68% 64%
 
SPX Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1953-1 0.45% -0.68% -0.42% -0.15% -0.95% -1.74%
1957-1 -0.51% -0.37% -0.19% 0.24% -0.19% -1.03%
1961-1 0.56% 0.27% 0.29% 0.30% 0.47% 1.90%
1965-1 0.04% 0.25% 0.27% 0.00% 0.43% 0.98%
1969-1 -1.46% -1.22% -0.41% 0.42% -0.29% -2.97%
Avg -0.18% -0.35% -0.09% 0.20% -0.11% -0.57%
 
1973-1 -0.02% -0.10% -0.25% 0.68% -0.78% -0.47%
1977-1 0.18% -1.03% -0.69% 0.77% -0.18% -0.95%
1981-1 1.20% 0.11% -2.20% -1.50% 0.32% -2.08%
1985-1 0.34% -0.15% 0.73% 1.89% -0.24% 2.57%
1989-1 0.11% -0.21% 0.58% 0.41% 0.25% 1.14%
Avg 0.36% -0.28% -0.37% 0.45% -0.13% 0.04%
 
1993-1 0.44% 0.02% 0.46% 0.67% 0.28% 1.87%
1997-1 -0.05% 0.75% -0.64% 0.86% 0.61% 1.53%
2001-1 -0.19% 0.38% 0.96% 1.03% -0.64% 1.54%
2005-1 0.34% -0.61% 0.40% -0.86% 0.60% -0.13%
2009-1 -0.47% 0.78% -3.00% 0.34% -2.13% -4.48%
Avg 0.02% 0.26% -0.36% 0.41% -0.26% 0.07%
 
SPX summary for Presidential Year 1 1953 - 2009
Avg 0.06% -0.12% -0.28% 0.37% -0.16% -0.15%
Win% 60% 47% 47% 79% 47% 47%
 
SPX summary for all years 1953 - 2012
Avg 0.12% -0.18% -0.24% 0.25% 0.04% -0.01%
Win% 58% 41% 43% 71% 53% 52%


Year 1 of the Presidential Cycle

The Presidential Cycle is made up of 4 years beginning with the year the President is inaugurated.

I identify the cycle as the Presidential Cycle because I believe it is politically motivated. Prior to 1933 gold and silver were the medium of exchange and government had little control over money supply. Gold coins were removed from circulation by executive order in 1933 and redeemability was suspended. Shortly after the confiscation of gold, the currency was devalued to $35 an ounce from $20 (a 40% tax). US citizens could not redeem their gold certificates for gold, but foreigners could so in 1971 Nixon closed the gold window eliminating redeemability entirely and removing any intrinsic value from the currency. With control of the currency politicians are able to manipulate the economy to their advantage. Assuming this hypothesis is correct, it is not surprising the Presidential Cycle has been changing over the past 70 years.

On average there are 21 trading days in a month. In the charts that follow every month is defined as 21 trading days. If a month has more than 21 trading days some of the days in the middle of the month are not counted. If there are less than 21 trading days some of the days in the middle of the month are counted twice.

The charts below start with the shortest and most recent histories. The last chart is of the Dow Jones Industrial Average with data beginning in 1885.

The first chart shows the R2K with data beginning in 1979. The average of all years is shown in green while the average of the 1st year of the Presidential Cycle is shown in red.

The next chart shows the OTC with data beginning in 1963. Until the early 1990's the OTC was a small cap index and its performance was nearly identical to the R2K. In the chart below the average for all years is shown in brown while the average for the 1st year of the Presidential Cycle is shown in red.

The next chart shows the SPX with data beginning in 1928. In the chart below the average for all years is shown in green while the average for the 1st year of the Presidential Cycle is shown in red.

The next chart shows the Dow Jones Industrial Average (DJIA) with data beginning in 1885. In the chart below the average for all years is shown in grey while the average for the 1st year of the Presidential Cycle is shown in red.

I have completed updating an extensive survey of the Presidential Cycle on the Alpha web site. You will find that survey at: http://alphaim.net/research/Pres_Cycle/index.html


Conclusion

The market is overbought, but the breadth indicators are strong and seasonality is ok.

I expect the major averages to be higher on Friday January 11 than they were on Friday January 4.

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.

Good Luck,

YTD W 1 /L 0/T 0

 

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.

Copyright © 2003-2014 Mike Burk