Stock Market Oversold - Rally Expected Next Week
Stock-Markets / US Stock Markets Jan 05, 2008 - 06:19 PM GMTBy: Mike_Burk
The good news is: The market is oversold and likely to rally from here.
Short Term - The Russell 2000 (R2K) rose for 6 consecutive days through December 26 then fell for 6 consecutive days as of last Friday. This is pretty unusual, having occurred only 6 other times since 1979.
The first chart covers the past 6 months showing the R2K in magenta and an indicator showing the percentage of the previous 6 trading days that were up in black. Dashed vertical lines have been drawn on the 1st trading day of the month. The indicator hits the top of the chart when there have been 6 consecutive up days and it hits the bottom of the chart when there have been 6 consecutive down days.
The next chart shows the most recent occurrence of the pattern back in January 2000. Like now the R2K was underperforming the other indices at the time. All of the major indices hit their highs for the year about 6 weeks later. 2000 like the current year was the 4th year of the Presidential Cycle with a lame duck President.
The next most recent occurrence was in October 1995.
Unlike the later occurrences June 1992 did not mark a low.
Same with the occurrence in October 1989.
July - August 1983
The occurrence in December 1982 was a minor correction in a rising market.
Intermediate Term
During the holiday season the market usually migrates upward on low volume distorting most of the breadth indicators positively.
The chart below covers the past year showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in red. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good). OTC NL is higher than it has been at other low points in the index, but moving downward.
The next chart is similar to the one above except it shows the S&P 500 in blue and the indicator has been calculated from NYSE new lows (NY NL). The pattern of higher highs for NY NL is more pronounced than it is for OTC NL.
The pattern of rising new low indicator is a positive, however, the high number of new lows on Friday (539 on the NYSE and 429 on the NASDAQ) suggest another retest of the lows is likely.
Seasonality
Next week is the week prior to the 2nd Friday in January during the 4th year of the Presidential Cycle.
The tables show the daily change of the OTC and SPX during the week prior to the 2nd Friday in January during the 4th year of the Presidential Cycle. OTC data covers the period from 1964 - 2004 and SPX data from 1956 - 2004. There are summaries for both the 4th year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.
Historically the SPX has been up about half of the time with modest gains. The OTC however, has been quite strong, up 82% of the time during the 4th year of the Presidential Cycle with an average again over 2%.
Report for the week before the 2nd Friday of Jan
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1964-4 | 0.14% |
0.41% |
0.38% |
0.19% |
0.14% |
1.26% |
| 1968-4 | 0.80% |
-0.06% |
-0.20% |
0.29% |
0.38% |
1.22% |
| 1972-4 | 0.04% |
0.47% |
0.22% |
-0.41% |
0.27% |
0.60% |
| 1976-4 | 0.90% |
1.92% |
0.90% |
0.81% |
0.81% |
5.33% |
| 1980-4 | 0.41% |
1.39% |
0.61% |
1.00% |
0.49% |
3.89% |
| 1984-4 | -0.22% |
0.13% |
0.02% |
-0.02% |
-0.27% |
-0.36% |
| Avg | 0.38% |
0.77% |
0.31% |
0.34% |
0.34% |
2.14% |
| 1988-4 | -0.67% |
-1.26% |
0.21% |
0.47% |
1.77% |
0.52% |
| 1992-4 | 0.89% |
0.73% |
1.33% |
1.55% |
-0.66% |
3.85% |
| 1996-4 | -0.11% |
-3.25% |
-0.86% |
2.13% |
-0.31% |
-2.40% |
| 2000-4 | 4.30% |
-3.17% |
-1.82% |
2.78% |
2.71% |
4.81% |
| 2004-4 | 2.03% |
0.49% |
0.99% |
1.09% |
-0.63% |
3.95% |
| Avg | 1.29% |
-1.29% |
-0.03% |
1.60% |
0.57% |
2.15% |
| OTC summary for Presidential Year 4 1964 - 2004 | ||||||
| Avg | 0.77% |
-0.20% |
0.16% |
0.90% |
0.43% |
2.06% |
| Win% | 73% |
64% |
73% |
82% |
64% |
82% |
| OTC summary for all years 1963 - 2007 | ||||||
| Avg | 0.44% |
-0.08% |
-0.06% |
0.48% |
0.34% |
1.11% |
| Win% | 71% |
53% |
47% |
73% |
73% |
67% |
| SPX Presidential Year 4 | ||||||
| Year | Mon |
Tue |
Wed |
Thur |
Fri |
Totals |
| 1956-4 | -1.40% |
-0.79% |
0.50% |
0.83% |
-0.18% |
-1.03% |
| 1960-4 | -1.23% |
-0.61% |
-0.56% |
0.55% |
-0.03% |
-1.89% |
| 1964-4 | 0.23% |
0.03% |
0.41% |
0.37% |
-0.05% |
0.98% |
| 1968-4 | 0.71% |
-0.12% |
0.02% |
0.10% |
0.10% |
0.81% |
| 1972-4 | -0.14% |
0.32% |
-0.06% |
-0.58% |
0.39% |
-0.07% |
| 1976-4 | 1.85% |
1.03% |
0.45% |
0.67% |
0.39% |
4.39% |
| 1980-4 | 0.27% |
2.00% |
0.09% |
0.77% |
0.03% |
3.17% |
| 1984-4 | -0.22% |
-0.56% |
-0.10% |
-0.02% |
-0.44% |
-1.34% |
| Avg | 0.49% |
0.53% |
0.08% |
0.19% |
0.10% |
1.39% |
| 1988-4 | 1.68% |
-0.84% |
0.16% |
0.03% |
2.51% |
3.54% |
| 1992-4 | -0.33% |
-0.13% |
0.17% |
-0.12% |
-0.60% |
-1.01% |
| 1996-4 | 0.28% |
-1.46% |
-1.80% |
0.70% |
-0.15% |
-2.42% |
| 2000-4 | 1.12% |
-1.30% |
-0.44% |
1.21% |
1.07% |
1.66% |
| 2004-4 | 1.24% |
0.13% |
0.24% |
0.50% |
-0.89% |
1.21% |
| Avg | 0.80% |
-0.72% |
-0.33% |
0.47% |
0.39% |
0.60% |
| SPX summary for Presidential Year 4 1956 - 2004 | ||||||
| Avg | 0.31% |
-0.18% |
-0.07% |
0.39% |
0.17% |
0.61% |
| Win% | 62% |
38% |
62% |
77% |
46% |
54% |
| SPX summary for all years 1953 - 2007 | ||||||
| Avg | 0.13% |
-0.18% |
-0.27% |
0.24% |
0.13% |
0.06% |
| Win% | 58% |
39% |
40% |
70% |
56% |
53% |
Conclusion
The market is very oversold and likely to rally. I expect the major indices to be higher on Friday January 11 than they were on Friday January 4.
By Mike Burk
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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 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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