Short term
Last Monday and Tuesday most of the major indices fell between 3% and 4% leaving them oversold for the short term. From Tuesday's low they rallied for rest of the week recovering most of their losses.
The chart below covers the last 6 months showing the NASDAQ composite (OTC) in blue and a 50% trend (3 day EMA) of the ratio of NASDAQ upside volume to downside volume (OTC UD Ratio) in magenta.
The indicator is nearly as high as it has been at anytime over the past 6 months suggesting there is little room on the upside for the short term.
Intermediate term
The extreme number of new lows that we saw at the price low on August 16 implies there will be a retest of those lows.
The chart below covers the past 6 months with dashed vertical lines drawn on the 1st trading day of each month. The NASDAQ composite (OTC) is shown in blue, a 10% trend (19 day EMA of NASDAQ new highs (OTC NH) is shown in green and a 10% trend of NASDAQ new lows (OTC NL) is shown in red. OTC NL has been plotted on an inverted Y axis to make it easier to read that is, decreasing new lows move the indicator upward (up is good).
OTC NH usually follows prices and when there are prolonged divergences (a week or more), prices are more likely to follow the indicator rather than the other way.
These indicators are giving a conflicting picture. For the past 2 ½ weeks following the price low the indicators which usually move more or less in the same direction as prices have been moving in sharply opposite directions.
The condition illustrated above is unusual, but not unique.
The following charts show the same indicators in the same time frame.
In April of 2000 OTC NL moved sharply upward as the market rallied while OTC NH continued to fall. There was a retest of the April low about 6 weeks later. Following the retest OTC NH began moving upward.
Following the late August 1998 low prices rallied in September, but OTC NH continued to fall rising a little only as the rally peaked. A retest occurred about 5 weeks after the August low. OTC NH began rising about a week following the retest.
In 1990 there were multiple retests where OTC NL rallied with prices but OTC NH continued falling. OTC NH began moving upward following the final price low in October.
Following the 1987 crash OTC NL moved sharply upward as prices rallied while OTC NH continued falling until after the retest in December.
It has been about 2 ½ weeks since August low. Rallies following lows accompanied by extreme numbers of new lows have lasted between one and four weeks before declining into a retest of the old lows.
Seasonality
Next week includes the first 4 trading days of September during the 3rd year of the Presidential Cycle.
The tables show the daily returns for the week during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2003 and S&P 500 (SPX) data from 1928 - 2003. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.
Big wins during the 3rd year of the Presidential Cycle since 1995 have given the OTC an average return of 1.0% during the 1st 4 days of the month. Since 1931 the SPX has had an average return of 0.65% and both the OTC and SPX have been up about 2/3 of the time. Performance over all years has been a little less, but still, on average, positive.
Report for the first 4 trading days of September.
The number following the year represents its position in the
presidential cycle.
The number following the daily return represents the day of the
week;
1 = Monday, 2 = Tuesday etc.
OTC Presidential Year 3
Day1 Day2 Day3 Day4 Totals
1963-3 0.28% 2 0.31% 3 0.34% 4 0.73% 5 1.66%
1967-3 0.98% 5 0.51% 2 0.12% 3 0.30% 4 1.92%
1971-3 0.21% 3 0.29% 4 0.94% 5 0.50% 2 1.93%
1975-3 -1.42% 2 0.24% 3 0.06% 4 -0.45% 5 -1.56%
1979-3 -1.30% 2 -1.66% 3 0.58% 4 0.82% 5 -1.56%
1983-3 0.73% 4 1.12% 5 1.13% 2 -0.16% 3 2.83%
Avg -0.16% 0.10% 0.57% 0.20% 0.71%
1987-3 -0.54% 2 -0.79% 3 -0.13% 4 -0.42% 5 -1.88%
1991-3 -0.91% 2 -0.57% 3 -0.19% 4 0.00% 5 -1.67%
1995-3 -0.06% 5 1.94% 2 0.48% 3 0.65% 4 3.02%
1999-3 0.42% 3 -0.60% 4 3.98% 5 -0.12% 2 3.68%
2003-3 1.71% 2 0.62% 3 0.87% 4 -0.57% 5 2.63%
Avg 0.12% 0.12% 1.00% -0.09% 1.15%
OTC summary for Presidential Year 3 1963 - 2003
Averages 0.01% 0.13% 0.74% 0.12% 1.00%
% Winners 55% 64% 82% 55% 64%
MDD 9/5/1979 2.93% -- 9/4/1987 1.87% -- 9/5/1991 1.66%
OTC summary for all years 1963 - 2006
Averages 0.06% 0.13% -0.04% 0.20% 0.36%
% Winners 60% 68% 59% 61% 57%
MDD 9/7/2001 6.52% -- 9/4/1974 5.48% -- 9/6/2000 5.22%
SPX Presidential Year 3
Day1 Day2 Day3 Day4 Totals
1931-3 0.43% 2 -1.87% 3 -2.27% 4 -0.45% 5 -4.15%
1935-3 -0.97% 2 1.34% 3 0.97% 4 1.57% 5 2.90%
1939-3 1.07% 5 2.04% 6 9.63% 2 -0.87% 3 11.87%
1943-3 0.34% 3 0.00% 4 -0.17% 5 0.17% 6 0.34%
1947-3 0.33% 2 -0.26% 3 -1.24% 4 -0.26% 5 -1.44%
1951-3 0.00% 2 0.60% 3 0.21% 4 0.26% 5 1.07%
1955-3 0.44% 4 0.53% 5 0.60% 2 -0.02% 3 1.54%
1959-3 -1.22% 2 0.08% 3 -1.12% 4 0.48% 5 -1.78%
1963-3 0.22% 2 -0.03% 3 0.50% 4 -0.22% 5 0.47%
Avg -0.05% 0.19% -0.21% 0.05% -0.03%
1967-3 0.04% 5 0.57% 2 0.19% 3 -0.06% 4 0.74%
1971-3 0.04% 3 0.22% 4 1.41% 5 0.46% 2 2.13%
1975-3 -1.61% 2 0.64% 3 0.20% 4 -0.67% 5 -1.44%
1979-3 -1.72% 2 -0.97% 3 0.42% 4 0.76% 5 -1.51%
1983-3 -0.10% 4 0.47% 5 1.75% 2 0.04% 3 2.16%
Avg -0.67% 0.19% 0.79% 0.10% 0.41%
1987-3 -1.94% 2 -0.53% 3 -0.46% 4 -1.10% 5 -4.03%
1991-3 -0.83% 2 -0.56% 3 -0.21% 4 -0.01% 5 -1.61%
1995-3 0.35% 5 0.95% 2 0.18% 3 0.02% 4 1.49%
1999-3 0.81% 3 -0.90% 4 2.90% 5 -0.50% 2 2.30%
2003-3 1.39% 2 0.42% 3 0.17% 4 -0.64% 5 1.33%
Avg -0.04% -0.13% 0.51% -0.45% -0.10%
SPX summary for Presidential Year 3 1931 - 2003
Averages -0.15% 0.14% 0.72% -0.06% 0.65%
% Winners 58% 58% 68% 42% 63%
MDD 9/4/1931 4.53% -- 9/4/1987 3.97% -- 9/5/1979 2.67%
SPX summary for all years 1928 - 2006
Averages -0.05% 0.16% 0.25% -0.09% 0.26%
% Winners 67% 56% 56% 43% 58%
MDD 9/4/1946 7.15% -- 9/4/1974 4.80% -- 9/7/1933 4.72%
September
Since 1885 the Dow Jones Industrial Average has been up 45% of the time with an average loss of 1.1% in September, its worst month of the year. During the 3rd year of the Presidential Cycle it has been up 43% of the time with an average loss of 1.4%. The worst September ever, 1931 down 31.1%.
Since 1928 the SPX has been up 44% of the time with an average loss of 1.1% in September, its worst month. During the 3rd year of the Presidential Cycle it has been up 42% of the time with an average loss of 0.8%. The worst September ever, 1931 down 30.2%.
Since 1963 the OTC has been up 61% of the time with an average loss of 0.2% in September, its worst month. During the 3rd year of the Presidential Cycle it has been up 55% of the time with an average loss of 0.2%. The worst September ever 2001 down 15.4%.
The charts below plot the average daily return in September for the 3rd year of the Presidential Cycle in green and all years combined in various colors. The average month has 21 trading days and the charts have been constructed by averaging the daily return of the first 11 trading days and the last 10. Days in the middle have been excluded when the month had more than 21 trading days and days in the middle have been counted twice when there have been less than 21 trading days. A dashed vertical line has been drawn after the 1st trading day and at intervals of 5 trading days after that. A solid vertical line has been drawn on the 11th. trading day, the break point.
DJIA 1885 to present
DJIA 1950 to present
SPX 1928 to present
SPX 1950 to present
OTC 1963 to Present
Conclusion
The market is a little overbought and a retest of the August lows is likely so it would not surprise me if September's reputation as the worst month for stocks were enhanced this year.
I expect the major indices to be lower on Friday September 7 than they were on Friday August 31.
This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html
Most of the major indices were down last week, but the OTC was up so I am calling last weeks negative forecast a tie.
Mike Burk
YTD W14/L12/T9
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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