Technical Stock Market Report

January 31, 2015

The good news is:  Seasonality is for the next few weeks extraordinarily strong.

The negatives:  The pattern of weak NASDAQ data and strong NYSE data continued last week.  It’s the bonds.  About half of the issues traded on the NYSE are fixed income and with 10 year treasuries yields dropping well under 2%, fixed income funds are populating the soaring NYSE new high list.  New lows are also soaring, there were over 100 on the NYSE each of the last 3 days of last week.  There were also threatening levels of new lows on the NASDAQ.

The first chart covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.  Dashed vertical lines have been drawn on the 1st trading day of each month.

OTC NH declined all month.

The next chart covers the past 6 months showing the OTC in blue and a 40% trend of NASDAQ new highs divided by new highs + new lows (OTC HL Ratio), in red.  Dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the neutral 50% level.

OTC HL Ratio fell below the neutral line last week.

The positivesWhile NASDAQ breadth data has been lousy, fixed income saturated NYSE breadth data has been great.

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

NY HL Ratio fell last week, but closed the week at a comfortable 70%.

The next chart is similar to the first one except is shows the SPX in red and NY NH, in green has been calculated from NYSE data.

NY NH is at its highest level in over a year.  It’s the bonds.

Money Supply (M2)

The money supply chart was provided by Gordon Harms.

M2 growth rose a bit last week.

February

Since 1963, over all years, the OTC in February has been up 56% of the time with an average gain of 0.5%.  During the 3rd year of the Presidential Cycle February has been up 69% time with an average gain of 2.3%.  The best February ever for the OTC was 2000 (+19.2%), the worst 2001 (-22.4%).

The average month has 21 trading days.  The chart below has been calculated by averaging the daily percentage change for each of the 1st 11 trading days and each of the last 10.  In months when there were more than 21 trading days some of the days in the middle were not counted.  In months when there were less than 21 trading days some of the days in the middle of the month were counted twice.  Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that.  The line is solid on the 11th trading day, the dividing point.

In the chart below the blue line shows the average daily performance of the OTC in February over all years since 1963 in blue, while the gray line shows the average during the 3rd year of the Presidential Cycle over the same period.

Since 1928 the SPX has been up 53% of the time in February with an average loss of -0.1%.  During the 3rd year of the Presidential Cycle the SPX has been up 62% of the time with an average gain of 1.3%.  The best February for the SPX was 1931 (+11.4%) the worst 1933 (-18.4%).

The chart below is similar to the one above except it shows the average daily average performance over all years since 1928 for the SPX in February in red and the average daily performance during the 3rd year of the Presidential Cycle, over the same period, in gray.

Since 1979 the Russell 2000 (R2K) has been up 58% of the time in February with an average gain of 1.1%.  During the 3rd year of the Presidential Cycle the R2K has been up 56% of the time with an average gain of 2.1%.  The best February for the R2K 2000 (+16.4%), the worst 2009 (-12.3%)

The chart below is similar to those above except it shows the average daily performance of the R2K, over all years since 1979, in February in magenta and the average daily performance during the 1st year of the Presidential Cycle in gray.

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 52% of the time in February with an average loss of -0.2%.  During the 3rd year of the Presidential Cycle the DJIA has been up 69% of the time in February with an average gain of 1.6%.  The best February for the DJIA 1931 (+13.2%), the worst 1933 (-15.6%)

The chart below is similar to those above except it shows the average daily performance over all years for the DJIA in February in black and the average performance during the 1st year of the Presidential Cycle in gray.

Conclusion

The OTC was down in January for only the 2nd time in its history, during the 3rd year of the Presidential Cycle, since 1963.  The other down 3rd year January was 2003 when it went on to finish the year up 50%.

The breadth indicators took a turn for the worse last week with new lows reaching threatening levels on both exchanges.

I expect the major averages to be lower on Friday February 6 than they were on Friday January 30.

Last weeks positive forecast was a miss.

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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.

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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