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Stocks Overbought Entering Seasonally Weak Week

Stock-Markets / Seasonal Trends Mar 15, 2009 - 01:12 AM GMT

By: Mike_Burk

Stock-Markets The good news is: New lows disappeared last week.


Short Term

Following the October 9, 2008 low:
The Russell 2000 (R2K) rose 14.4% in 2 days.
The NASDAQ composite (OTC) rose 12.1% in 2 days.
The S&P 500 (SPX) rose 11.6% in 2 days.
The Dow Jones Industrial Average rose 11.1% in 2 days.

Following the October 27, 2008 low:
The R2K rose 21.8% in 6 days.
The OTC rose 18.2% in 6 days.
The SPX rose 18.5% in 6 days.
The DJIA rose 17.7% in 6 days.

Following the November 20 low:
The R2K rose 22.8% in 6 days and hit a high January 6, 2009 up 33.6%.
The OTC rose 16.7% in 6 days and hit a high January 6, 2009 up 25.5%.
The SPX rose 19.1% in 6 days and hit a high January 6, 2009 up 24.2%.
The DJIA rose 16.9% in 6 days and hit a high January 6, 2009 up 19.4%.

In the 4 trading days since last Monday's low:
The R2K is up 14.5%.
The OTC us up 12.8%.
The SPX is up 11.8%.
The DJIA is up 10.3%.

So far, from a price perspective, this rally does not look much different from the others of the last 6 months.

Intermediate term

On the day prior to the October 27 OTC low there were 788 new lows on the NASDAQ. After 6 consecutive up days there were 53 new lows.

On the November 20 OTC low there were 1158 new lows on the NASDAQ. Five trading days later there were 29 new lows.

On Friday March 6 there were 567 new lows on the NASDAQ; last Friday there were 26.

The 567 new lows on March 6 suggests a high likelihood of a retest of last Monday's low, however this rally is likely to continue until new lows begin increasing.

The chart below covers the past 6 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in black. OTC NL has been plotted on an inverted Y axis so decreasing new lows moves the indicator upward (up is good). Dashed vertical lines have been drawn on the 1st trading day of each month.

The indicator began moving sharply upward last week.

The chart below is similar to the one above except is shows the SPX in red and NY NL calculated from NYSE new lows in blue.

Seasonality

Next week includes the week prior to the 3rd Friday of March during the 1st year of the Presidential Cycle.

The tables show the daily return on a percentage basis for the week prior to the 3rd Friday of March during the 1st year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and SPX data from 1953 - 2008. There are summaries for both the 1st 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.

During the 1st year of the Presidential Cycle, next week has had negative returns for over 20 years. The other years have not been much better.

Report for the week before the 3rd Friday of Mar
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.

OTC Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1965-1 0.62% 0.08% 0.14% 0.04% -0.27% 0.62%
1969-1 -0.44% -0.22% 0.01% 0.47% 0.60% 0.43%
1973-1 -0.11% 0.19% 0.01% 0.41% -1.13% -0.63%
1977-1 0.12% 0.21% 0.20% -0.17% 0.02% 0.39%
1981-1 0.63% -0.12% 0.40% 0.22% 0.90% 2.02%
1985-1 -0.41% 0.08% -1.14% -0.27% 0.18% -1.56%
Avg -0.04% 0.03% -0.11% 0.13% 0.12% 0.13%
1989-1 0.16% -0.14% 0.24% 0.62% -1.79% -0.90%
1993-1 0.35% 0.04% -1.16% 0.00% -0.68% -1.45%
1997-1 -1.05% -0.75% -1.60% 0.78% -0.41% -3.03%
2001-1 -6.30% 4.75% -2.12% -1.59% -2.57% -7.83%
2005-1 0.46% -0.78% -0.94% 0.03% -0.43% -1.66%
Avg -1.28% 0.62% -1.12% -0.03% -1.18% -2.97%
OTC summary for Presidential Year 1 1965 - 2005
Avg -0.54% 0.30% -0.54% 0.05% -0.51% -1.24%
Win% 55% 55% 55% 73% 36% 36%
OTC summary for all years 1963 - 2008
Avg -0.15% -0.03% -0.01% 0.17% -0.06% -0.09%
Win% 52% 54% 63% 72% 52% 54%
SPX Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1953-1 0.15% 0.42% -0.34% -0.08% -0.15% 0.00%
1957-1 -0.66% -0.07% 0.66% 0.07% -0.05% -0.04%
1961-1 0.28% -0.44% 0.30% 1.01% 0.61% 1.76%
1965-1 0.03% -0.13% -0.13% -0.24% 0.03% -0.42%
1969-1 0.26% 0.24% 0.73% 0.64% -0.21% 1.66%
1973-1 0.06% 0.54% 0.44% -0.75% -0.51% -0.21%
1977-1 0.77% 0.55% 0.19% -0.09% -0.22% 1.20%
1981-1 1.18% -0.56% 0.22% -0.57% 0.46% 0.74%
1985-1 -0.17% 0.49% -0.82% -0.20% -0.74% -1.44%
Avg 0.42% 0.25% 0.15% -0.19% -0.24% 0.39%
1989-1 0.83% -0.06% 0.52% 0.93% -2.25% -0.03%
1993-1 0.36% -0.01% -0.68% 0.80% -0.38% 0.08%
1997-1 0.32% -0.76% -0.49% -0.40% 0.19% -1.14%
2001-1 -4.32% 1.48% -2.58% 0.59% -1.96% -6.79%
2005-1 0.56% -0.75% -0.81% 0.18% -0.05% -0.87%
Avg -0.45% -0.02% -0.81% 0.42% -0.89% -1.75%
SPX summary for Presidential Year 1 1953 - 2005
Avg -0.02% 0.07% -0.20% 0.14% -0.37% -0.39%
Win% 79% 43% 50% 50% 29% 43%
SPX summary for all years 1953 - 2008
Avg 0.02% 0.15% 0.13% 0.21% 0.04% 0.54%
Win% 64% 57% 59% 59% 59% 61%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth is falling sharply.

Conclusion

The market is overbought from last week's rally going into a seasonally weak week. I expect the major indices to be lower on Friday March 20 than they were on Friday March 13.

Thank you,

By Mike Burk
To subscribe to this report : http://alphaim.net/signup.html

Gordon Harms produces a Power Point for our local timing group. You can get a copy of that at: http://www.stockmarket-ta.com/ .

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.

Mike Burk Archive

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