Short term
Price movement is often described as two steps forward one step back the corollary would be one step forward two steps back. We can draw a theorem from the previous statement: "The longest string of consecutive up or down days in recent history defines the trend."
The chart below illustrates our theorem. The chart shows the past 9 months with the Russell 2000 (R2K) in red and an indicator showing the percentage of the previous 5 trading days that were up in green. Grey dashed vertical lines are drawn on the 1st trading day of each month a red dashed vertical line has been drawn on the 1st trading day of the year.
In mid to late November the indicator touched the top of the chart for the 1st time after the October low. The indicator touched the top of the chart in early January and again in mid March confirming the positive trend. In mid May the indicator touched the bottom of the chart indicating a reversal of the trend there was a confirmation last Friday.
Intermediate term
Oscillators are derived by subtracting a longer term moving average of a data stream from a shorter term moving average of the same data stream. Oscillators themselves can be difficult to read because they jump around a lot and their tendency is to regress to 0. To make oscillators easier to read we derive other indicators from them.
The chart below shows the NASDAQ composite (OTC) in red and momentum indicators of oscillators calculated from NASDAQ advancing issues - declining issues (AD), new highs - new lows (HL) and upside volume - downside volume (UD).
The momentum indicators have all turned downward after rising sharply during the late May rally.
Seasonality
Next week is the week prior to the 3rd. Friday in June during the 2nd year of the Presidential cycle. Options and futures also expire on Friday.
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.
By percentage of up years next week is a little better than last week, but all of the average returns have been down.
You can get more information about the Presidential Cycle at: http://alphaim.net/newsletter.html select Alpha Research Reports
Report for the week before witching Friday during June The number following the year is the position in the presidential cycle. Daily returns from Monday to Friday. OTC Presidential Year 2 Year Mon Tue Wed Thur Fri Totals 1966-2 0.51% 0.31% 0.20% -0.02% 0.24% 1.24% 1970-2 -1.41% 0.27% 1.66% 0.83% 1.46% 2.80% 1974-2 -1.47% -0.36% -0.73% -1.00% -0.93% -4.49% 1978-2 -0.10% -0.04% 0.22% -0.26% -0.40% -0.58% 1982-2 -0.81% -0.56% 0.15% -0.93% -0.79% -2.94% 1986-2 -0.26% -0.57% -0.26% 0.29% 0.12% -0.68% Avg -0.81% -0.25% 0.21% -0.21% -0.11% -1.18% 1990-2 0.42% 0.81% 0.49% -0.38% 0.10% 1.45% 1994-2 -0.35% 0.58% -0.02% -0.12% -0.76% -0.66% 1998-2 -1.68% 2.17% 1.33% -0.21% 0.49% 2.10% 2002-2 3.23% -0.67% -2.99% -2.14% -1.62% -4.20% Avg 0.40% 0.73% -0.30% -0.71% -0.45% -0.33% OTC summary for Presidential Year 2 1966 - 2002 Avg -0.19% 0.20% 0.01% -0.39% -0.21% -0.60% Win% 30% 50% 60% 20% 50% 40% OTC summary for all years 1963 - 2005 Avg -0.11% 0.07% 0.06% -0.15% 0.02% -0.11% Win% 44% 60% 64% 43% 60% 53% SPX Presidential Year 2 Year Mon Tue Wed Thur Fri Totals 1930-2 -5.69% 0.10% -3.50% 4.68% -2.60% -7.00% 1934-2 -1.27% 1.09% 0.00% -1.47% 1.79% 0.14% 1938-2 -2.56% 1.16% 0.42% 0.93% -0.92% -0.98% 1942-2 0.24% 0.12% 1.67% -0.47% -1.06% 0.50% 1946-2 0.11% -1.38% -0.59% -2.22% 1.11% -2.98% Avg -1.83% 0.22% -0.50% 0.29% -0.34% -2.07% 1950-2 0.73% -0.77% -1.40% -0.26% 0.21% -1.50% 1954-2 0.14% 0.73% 0.73% -0.28% 0.28% 1.60% 1958-2 0.36% -0.53% 0.89% -1.61% 0.54% -0.36% 1962-2 -1.08% -2.56% -1.49% -2.11% 2.87% -4.37% 1966-2 0.45% 0.28% -0.39% -0.30% 0.05% 0.08% Avg 0.12% -0.57% -0.33% -0.91% 0.79% -0.91% 1970-2 0.23% 2.38% -0.20% 0.67% 0.71% 3.79% 1974-2 -1.38% -0.66% -0.68% -0.71% -0.85% -4.28% 1978-2 -0.38% 0.02% -0.09% -1.15% -0.94% -2.53% 1982-2 -1.15% -0.25% -0.75% -1.17% -0.30% -3.61% 1986-2 0.16% -0.72% 0.26% -0.38% 1.44% 0.76% Avg -0.50% 0.16% -0.29% -0.55% 0.01% -1.17% 1990-2 0.81% 1.28% -0.37% -0.55% 0.00% 1.18% 1994-2 0.09% 0.71% -0.38% 0.29% -0.75% -0.04% 1998-2 -1.98% 0.98% 1.79% -0.06% -0.52% 0.21% 2002-2 2.87% 0.09% -1.65% -1.34% -1.70% -1.74% Avg 0.45% 0.77% -0.15% -0.42% -0.74% -0.10% SPX summary for Presidential Year 2 1930 - 2002 Avg -0.49% 0.11% -0.32% -0.39% -0.03% -1.11% Win% 58% 63% 33% 21% 53% 42% SPX summary for all years 1928 - 2005 Avg -0.16% 0.14% 0.05% -0.24% -0.06% -0.27% Win% 53% 62% 51% 43% 57% 51%
Conclusion
The market is oversold and likely to bounce, but, sell the rallies appears to be the most widespread strategy.
I expect the major indices to be lower on Friday June 16 than they were on Friday June 9.
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Gordon Harms produces a power point for our local timing group, you can get a copy of June PPT at: www.stockmarket-ta.com
Mike Burk
YTD W12/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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