Technical Stock Market Report

The good news is:  The secondaries outperformed the blue chips and there was no build-up of new lows, last week. The negatives:  New highs have been deteriorating since May.

As the major indices trended to higher highs they did it with progressively fewer issues leading the way.

The chart below covers the past 6 months showing the S&P 500 (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.

The NY NH rally was cut short last week and it remains closer to its low for the year than its high.

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

The rally in OTC NH was also cut short at a low level last week.

The next chart is similar to those above, but, with these differences:

New highs were only calculated on the component issues of the Russell 2000 (R2K) and they were calculated over just the previous 30 trading days (6 weeks).

The R2K, in red, was up last week and is only 0.4% off its all time high, but new highs among its component issues are not supporting the performance of the index.  The index was near its low 6 weeks ago.  Considering the strong rally of the past month, this is a surprising failure.

The Positives

New lows have remained dormant. 

The chart below covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by (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 fell slightly to a still, very strong, 88%.  There are trading systems that impose a NO SELL filter when variations of this indicator are above 80%.

The next chart 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 fell a little to a still, very strong, 78%.

Seasonality

Next week includes the last trading day of September and the first 4 trading days of October during the 1st year of the Presidential Cycle. 

The tables below show the daily percentage return for the last trading day of September and the first 4 trading days of October during the 1st year of the Presidential Cycle.

OTC data covers the period from 1963 - 2012 while SPX data runs from 1928 - 2012.  There are summaries for both the 1st year of the Presidential Cycle and all years combined.

Average returns for the coming week have been positive by all measures.

Money Supply (M2)

The money supply chart was provided by Gordon Harms.

Money supply growth declined last week.

October

Since 1963, over all years, the OTC in October has been up 54% of the time with an average gain of 0.7%.  During the 1st year of the Presidential Cycle October has been up 50% time with an average gain of 2.0% (helped considerably by an 11.7% gain in 1969 and a 12.8% gain in 2001).  The best October ever for the OTC was 1974 (+17.2%), the worst 1987 (-27.2%).

The average month has 21 trading days.  The chart below has been calculated by averaging the daily percentage change of the OTC for each of the 1st 11 trading days and each of the last 10.  In months when there were more than 21 trading days some of the days in the middle were not counted.  In months when there were less than 21 trading days some of the days in the middle of the month were counted twice.  Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that.  The line is solid on the 11th trading day, the dividing point.

In the chart below the blue line shows the average of the OTC in October over all years since 1963 while the green line shows the average during the 1st year of the Presidential Cycle over the same period.

Since 1928 the SPX has been up 57% of the time in October with an average gain of 0.4%.  During the 1st year of the Presidential Cycle the SPX has been up 48% of the time with an average loss of -1.4%.  The best October ever for the SPX was 1974 +16.3% the worst 1987 -21.8%.

The chart below is similar to the one above except it shows the average daily performance over all years for the SPX in October in red and the performance during the 1st year of the Presidential Cycle in green. 

Since 1979 the Russell 2000 (R2K) has been up 53% of the time in October with an average loss of -0.6%.  During the 1st year of the Presidential Cycle the R2K has been up 63% of the time with an average loss of -0.1%.  The best October ever for the R2K, 2011 +15.0%, the worst 1987 (-30.7%)

The chart below is similar to those above except it shows the daily performance over all years of the R2K in October in magenta and the performance during the 1st year of the Presidential Cycle in green.

Since 1885 the DJIA has been up 55% of the time in October with an average gain of 0.3%.  During the 1st year of the Presidential Cycle the DJIA has been up 53% of the time in October with an average loss of -0.6%.  The best October ever for the DJIA, 1885 +12.3%, the worst 1987 -23.2%.

The chart below is similar to those above except it shows the daily performance over all years of the DJIA in October in cyan and the performance during the 1st year of the Presidential Cycle in green.

Conclusion

The blue chip indices took a hit last week and most of the breadth indicators have turned downward.   However, end of month - beginning of month seasonality is positive so the market is likely to give us a bounce next week.

I expect the major averages to be higher on Friday October 4 than they were on Friday September 27. 

The blue chip indices were down while the secondaries were up last week so I am calling last week’s negative forecast a tie.

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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.