Technical Stock Market Report

January 3, 2015

The good news is:  The next 6 months are, by far, the strongest 6 month period in the 4 year Presidential Cycle.

The negatives:  It is difficult to make a negative case because the market has been following the average seasonal pattern pretty closely.  That pattern has been to drift upward on low volume.

The positivesThe chart below covers the past 6 months showing  the NASDAQ composite (OTC) in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by new highs + new lows (OTC HL Ratio), in red.  Dashed vertical lines have been drawn on the 1st trading day of each month and dashed horizontal lines have been drawn at 10% levels of the indicator, the line is solid at the neutral 50% level.

OTC HL ratio declined a bit last week, but closed the week at a comfortable 73%.

The next chart is similar to the one above except is shows the SPX in red and NY HL Ratio, in blue, has been calculated from NYSE data.

NY HL Ratio also declined, but finished the week at a very strong 82%.

Money Supply (M2)

The money supply chart was provided by Gordon Harms.

M2 growth fell last week.

Presidential Year 3 (PY3)

PY3 is, on average, the strongest of the 4 years in the Presidential Cycle and most of that strength occurs in the 1st 6 months.

Since 1963, over all years, the OTC has been up 73% of the time with an average yearly gain of 13.4%.  During PY3 the OTC has been up 85% time with an average gain of 31.5%.  The best PY3 ever for the OTC was 1999 (+85.6%), the worst 2011 (-1.8%).

The charts below show the average daily return over all years and for PY3.  Dashed vertical lines have been drawn on the 1st trading day of each month.

In the chart below the blue line shows the average of the OTC over all years since 1963 while the grey line shows the average during PY3 over the same period.

Since 1928, over all years, the SPX has been up 67% of the time with an average yearly gain of 7.6%.  During PY3 the SPX has been up 85% of the time with an average yearly gain of 14.1%.  The best PY3 ever for the SPX was 1935 (+41.4%), the worst 1931 (-47.1%).

The chart below is similar to the one above except it shows the average daily performance over all years for the SPX in red and the performance during PY3 in grey.

Since 1979, over all years, the Russell 2000 (R2K)  has been up 71% of the time with an average yearly gain of 11.8%.  During PY3 the R2K has been up 67% time with an average gain of 19.7%.  The best PY3 ever for the R2K was 2003 (+45.4%), the worst 1987 (-10.3%).

The chart below is similar to those above except it shows the daily performance over all years of the R2K in magenta and the performance during PY3 in grey.

Since 1885, over all years, the Dow Jones Industrial Average (DJIA)  has been up 66% of the time with an average yearly gain of 7.2%.  During PY3 the DJIA has been up 81% time with an average yearly gain of 11.3%.  The best PY3 ever for the DJIA was 1915 (+81.7%), the worst 1931 (-52.7%).

The chart below is similar to those above except it shows the daily performance over all years of the DJIA in cyan and the performance during the PY3 in grey.

Conclusion

The market shed its overbought status last week and appears ready to rally into what has been seasonally a very strong week.

I expect the major averages to be higher on Friday January 9 than they were on Friday January 2.

Last weeks positive forecast was a miss.

As usual, you got what you paid for from my weekly forecasts last year.

The final score for the year was: W 19 / L 17 / T 17, about as close to a coin toss as you are going to get.  I start the New Year every year fresh.

The rules are:  To be a win the DJIA, SPX, OTC and R2K must all have moved in the direction I forecast.  It is a loss when they all go opposite my forecast and if they do not all go in the same direction it is recorded as a tie.  Most of my losses this year came from being overly pessimistic.

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Disclaimer: : Charts and figures presented herein are believed to be reliable but I cannot attest to their accuracy.  Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus and the Wall Street Journal (wsj.com).  Historical data is from Barron’s and ISI price books.  The views expressed dare provided for information purposes only and should not be construed in any way as investment advice.  Furthermore, the opinions expressed may change without notice.

You may reproduce these letters provided you include a citation along with a link to the subscription page: http://www.stockmarket-ta.com/signup.html

Mike Burk began developing equity trading systems in the early 1980's.  Through the 1990's he marketed an equity trading system called MIRAT based on breadth indicators, but, primarily new lows.  In the early days of this century he developed the seasonal trading strategies currently used by Alpha Investment Management of Cincinnati.  Mr. Burk has been writing equity market newsletters since the early 1990's.  During the past 10 years the letter observes both breadth and seasonal strategies.
 
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