Technical Stock Market Report

The good news is:  The past 2 weeks have followed the script for a bull market pull back pretty closely.  A rapid decline without, so far at least, significantly penetrating the upward sloping trend lines.

The negatives: There was a modest build up of new lows in the past week, but the composition of the list has changed.  Fixed income issues no longer dominate the list.  Emerging market and financial issues have recently dominated the list along with retailers and energy companies.  This is not a welcome development.

Like domestic small caps, emerging markets lead both up and down.  On the bright side, domestic small caps have been holding up pretty well.

The positives:  It is no surprise that new highs have been falling and new lows increasing while prices have been falling.  Although the change in the composition of the new low list is a little troublesome the magnitude of the raw numbers is not.

The next chart below covers the past 6 months showing the NASDAQ composite (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 vertical lines have been drawn on the 1st trading day of each month and dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the neutral 50% level.

The decline of OTC HL Ratio was arrested well above the neutral level.

The next chart is similar to the one above except it shows the S&P 500 (SPX) in red and NY HL Ratio, in blue, has been calculated from NYSE data.

NY HL Ratio has been weaker than OTC HL Ratio and closed a little below the neutral level.

Money Supply (M2)

The money supply chart was provided by Gordon Harms.

Money supply growth has fallen a little below its long term trend.

February

Since 1963, over all years, the OTC in February has been up 55% of the time with an average gain of 0.5%.  During the 2nd year of the Presidential Cycle February has been up 58% time with an average gain of 0.8%.  The best February ever for the OTC was 2000 (+19.2%), the worst 2001 (-22.4%).

The average month has 21 trading days.  The chart below has been calculated by averaging the daily percentage change 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 daily performance of the OTC in February over all years since 1963 in blue, while the green line shows the average during the 2nd year of the Presidential Cycle over the same period.

Since 1928 the SPX has been up 52% of the time in February with an average loss of -0.2%.  During the 2nd year of the Presidential Cycle the SPX has been up 52% of the time with an average gain of 0.2%.  The best February for the SPX was 1931 (+11.4%) the worst 1933 (-18.4%).

The chart below is similar to the one above except it shows the average daily average performance over all years since 1928 for the SPX in February in red and the average daily performance during the 1st year of the Presidential Cycle, over the same period, in green.

Since 1979 the Russell 2000 (R2K) has been up 57% of the time in February with an average gain of 1.0%.  During the 2nd year of the Presidential Cycle the R2K has been up 50% of the time with an average gain of 1.6%.  The best February for the R2K 2000 (+16.4%), the worst 2009 (-12.3%)

The chart below is similar to those above except it shows the average daily performance of the R2K, over all years since 1979, in February in magenta and the average daily performance during the 1st year of the Presidential Cycle in green.

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 51% of the time in February with an average loss of -0.2%.  During the 2nd year of the Presidential Cycle the DJIA has been up 50% of the time in February with an average loss of -0.2%.  The best February for the DJIA 1931 (+13.2%), the worst 1933 (-15.6%)

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

Conclusion

So far, the recent weakness looks like little more than a routine bull market pull back.

I expect the major averages to be higher on Friday February 7 than they were on Friday January 31.

Last weeks positive forecast was a miss.  At the end of the year last year, I said I expected my forecasting accuracy would revert to the mean.  That happened quickly.

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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.