The good news is:
· In spite of a pretty rough week for the
major indices there were no new lows to speak of on either the NYSE or NASDAQ.
Short
Term
I have often
stated that the secondaries lead both up and down.
The Russell 2000
(R2K) index of small cap issues led the way up from the early March low and now
appears to be leading the way down.
The first chart
covers the period from the March lows through last Friday showing the major
indices on semi log scales to show their relative performance. Dashed vertical
lines have been drawn on the 1st trading day of each week and
slightly darker lines have been drawn on the 1st trading day of each
month.
The R2K shown in
green led the way up while the Dow Jones Industrial Average (DJIA) shown in
magenta was the laggard. The NASDQ composite (OTC) shown in blue was 2nd
to the R2K followed by the S&P 500 (SPX) shown in red.
The next chart is similar
to the previous one except it covers the last 2 weeks. This chart shows that
the upward leaders have become the downward leaders.
A common topping
pattern you should look for is a return to new highs by the blue chip indices,
but, not the secondaries. If this pattern plays out, it should happen in the
next month.
Intermediate
term
On March 6 there
were 827 new lows on the NYSE and 567 on the NASDAQ. Those numbers are big
enough to suggest a high likelihood of a retest of the March 9 lows.
A ratio of new
highs to new lows (NH / (NH + NL) is one of the best indicators we have for
defining both tops and bottoms and the general health of the market.
I have been
showing updates of the chart below for a couple weeks, it covers the past year
showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs / (new
highs + new lows) in red. Dashed vertical lines have been drawn on the 1st
trading day of each month and dashed horizontal lines have been drawn at 10%
levels of the indicator. The horizontal line is solid at the 50% level.
The indicator took
a hit last week, but is still above the 50% level.
The next chart is
similar to the one above except it shows the SPX in red and the indicator
calculated from NYSE data in dark blue.
The indicator
calculated from NYSE data took a much more severe hit last week and is at 18%,
a level that would suggest caution.
Seasonality
Next week includes
the week prior to the
4th Friday in May during the 1st year of the Presidential
Cycle.
The tables show
the daily return on a percentage basis for the week prior to the 4th
Friday of May during the 1st year of the Presidential Cycle. OTC
data covers the period from 1963 - 2008 and SPX data from 1953 -
2008. Prior to 1953 the market traded 6 days a week so that data has been
ignored. There are summaries for both the 1st year of the
Presidential Cycle and all years combined.
The week has, on
average, shown a modest gain during the 1st year of the Presidential
Cycle and a modest loss over all years.
Report
for the week before the 4th Friday of May.
The
number following the year is the position in the presidential cycle.
Daily
returns from Monday through the 4th Friday.
OTC
Presidential Year 1
Year
Mon Tue Wed
Thur Fri Totals
1965-1
-0.33% -0.73% 0.60% -0.83% -0.36% -1.65%
1969-1
-0.53% -0.40% -0.15% 0.23% 0.54%
-0.31%
1973-1
-2.07% 0.82% 0.49% 2.14%
0.86% 2.24%
1977-1
-0.87% -0.50% -0.50% -0.01% -0.28% -2.16%
1981-1
0.20% -0.38% 0.70% 0.33%
0.40% 1.25%
1985-1
0.95% -0.18% -0.31% -0.30% 0.00%
0.16%
Avg
-0.46% -0.13% 0.05% 0.48%
0.30% 0.24%
1989-1
-0.06% -0.37% 0.30% 0.32%
0.52% 0.72%
1993-1
0.06% 0.05% 1.30% 0.07%
-0.58% 0.90%
1997-1
0.04% 1.69% 0.73% -0.09%
1.25% 3.61%
2001-1
4.85% 0.36% -3.04% 1.72% -1.36%
2.53%
2005-1
0.50% 0.24% -0.56% 1.03%
0.22% 1.43%
Avg
1.08% 0.40% -0.25% 0.61%
0.01% 1.84%
OTC
summary for Presidential Year 1 1965 - 2005
Avg
0.25% 0.06% -0.04% 0.42%
0.11% 0.79%
Win%
55% 45%
55% 64%
55% 73%
OTC
summary for all years 1963 - 2008
Avg
-0.19% -0.21% 0.03% 0.12% 0.14%
-0.11%
Win%
44% 41%
57% 59%
64% 54%
SPX
Presidential Year 1
Year
Mon Tue Wed
Thur Fri Totals
1953-1
-0.36% -0.20% 0.93% 0.52%
-0.12% 0.77%
1957-1
0.25% 0.13% -0.40% 0.02%
0.13% 0.13%
1961-1
-0.62% -0.25% -0.63% -0.38% 0.64% -1.25%
1965-1
-0.74% 0.58% -0.34% -0.52% 0.66%
-0.36%
1969-1
-0.92% -0.89% 0.41% 0.12% -0.01%
-1.27%
1973-1
-1.09% 0.83% 0.47% 2.95%
0.75% 3.91%
1977-1
-1.31% -0.49% -0.92% 0.25% -0.76% -3.23%
1981-1
0.28% -0.34% -0.07% -0.19% -0.32% -0.64%
1985-1
1.23% -0.04% -0.57% -0.51% 0.37%
0.47%
Avg
-0.36% -0.19% -0.13% 0.52% 0.00%
-0.15%
1989-1
0.23% -1.14% 0.26% 0.01%
0.76% 0.12%
1993-1
0.48% 0.19% 1.02% -0.23% -0.49%
0.98%
1997-1
0.42% 1.01% -0.27% -0.44% 1.36%
2.08%
2001-1
1.62% -0.26% -1.55% 0.32% -1.18% -1.06%
2005-1
0.39% 0.02% -0.34% 0.64%
0.10% 0.80%
Avg
0.63% -0.04% -0.18% 0.06% 0.11%
0.58%
SPX
summary for Presidential Year 1 1953 - 2005
Avg
-0.01% -0.06% -0.14% 0.18%
0.13% 0.10%
Win%
57% 43%
36% 57%
57% 57%
SPX
summary for all years 1953 - 2009
Avg
-0.15% -0.14% -0.11% 0.02% 0.11%
-0.28%
Win%
45% 45%
49% 53%
64% 54%
Money
supply (M2)
The chart below
was provided by Gordon Harms.
In spite of heroic
efforts by the Fed, M2 growth has been falling.
Conclusion
I think the market
is likely to consolidate for a week or two with the blue chips holding up
better than the secondaries, followed by a run to new highs by the blue chips,
but not the secondaries.
I expect the major
indices to be lower on Friday May 22 than they were on Friday May 15.
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.
Thank you,
Mike Burk
YTD W7/L9/T1
Disclaimer: Mike
Burk is an employee and principal of Alpha Investment Management (Alpha) a
registered investment advisor. 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
dare provided for information purposes only and should not be construed in any
way as investment advice. Furthermore, the opinions expressed may change
without notice.
You may reproduce
these letters provided you include a citation along with a link to the
subscription page: http://alphaim.net/signup.html