Short term
The sell off that appears to have ended early last week was extreme.
The chart below covers the past 4 years showing the NASDAQ composite (OTC) in red and an oscillator of NASDAQ volume of advancing issues - volume of declining issues in blue. Red vertical dashed lines are drawn on the 1st trading day of each year.
This oscillator is at its lowest level since July of 2002. The market usually rallies, at least briefly, from extremes like these.
Intermediate term
The next chart covers the past year showing the Russell 2000 (R2K) in red and the percentage of the component issues in the R2K that are above their 50 day EMA's in green. There are dashed, vertical, grey lines drawn on the 1st trading day of each month with a red line on the 1st. trading day of the year. Dashed horizontal lines are drawn at 25%, 50% and 75% levels.
The market has usually rallied when the indicator has dropped below 25% as it did in the past week or so.
The indicator often drops below 25% at or near bottoms, but, it is unusual for it to drop below 25% near a high or top as it did in the past week or so. The most recent example of the indicator falling below 25% near a high or top was in 1998 shown in the chart below.
1998 like the current year was the 2nd year in the Presidential Cycle.
Seasonality
Next week includes the last two trading days of May and the first two trading days of June during the 2nd year of the Presidential cycle.
The tables below show daily returns for the OTC from 1966 - 2002 and S&P 500 (SPX) from 1930 - 2002 during the 2nd year of the Presidential Cycle. There are summaries for both the 2nd year of the Presidential Cycle and all years combined.
Seasonally the period has been strong, the averages are all positive as well as the percentage of years that have been up. The OTC has been up 100% of the time on the 2nd trading day of June during the 2nd year of the Presidential Cycle, it will be interesting to see if the streak holds.
June
The charts below show the average performance for the month of June. The 1st chart shows the average performance of the OTC over all years since 1963 in red and the average performance during the 2nd year of the Presidential cycle during the same period in blue.
There are usually 21 trading days in a month, but the number varies so the charts are constructed by using the 1st 11 trading days and the last 10. Dashed vertical lines have been drawn after the 1st trading day and then after each 5 trading days. The solid vertical line has been drawn on the 11th trading day, the break point.
The next chart is similar to the one above except it uses SPX data from 1928. The average of all years combined is shown in green while the 2nd year of the Presidential Cycle is shown in blue.
On average June shows modest gains but not during the 2nd year of the Presidential cycle.
You can get more information about the Presidential Cycle at: http://alphaim.net/newsletter.html select Alpha Research Reports
Conclusion
The market is oversold going into a brief, but seasonally strong period.
I expect the major indices to be higher on Friday June 2 than they were on Friday May 26.
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Mike Burk
YTD W10/L4/T7
Disclaimer: Mike Burk is an employee and principle 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. 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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