The blue chips have been outperforming the secondaries which is usually a negative. May, after the first few days, has historically been good for the secondaries, but not the blue chips. The market has been doing a good job of following the typical seasonal pattern recently and, if that continues, there will be a shift to strength to the secondaries in the next few weeks.

Intermediate term
On Tuesday the NASDAQ AD line (OTC ADL) completed its first string of 4 consecutive down days since last August.

The chart below covers the past year and a half showing the NASDAQ composite (OTC) in orange and an indicator showing the percentage of the past 4 trading days that the OTC ADL was up in purple. Dashed vertical lines have been drawn on the 1st trading day of each month and the lines are red on the 1st trading day of the year.

You do not have to look at this chart very closely. There is a lot of open space on the bottom then the market is moving upward and a lot of open space at the top when the market is moving downward.

The indicator usually makes its first excursion to the bottom of the chart well ahead of the beginning of a down move and it made its 1st one last Tuesday.

It makes sense that the number of new highs increases in a rising market.

The chart below covers the past year showing the OTC in orange and an indicator that is a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.

The indicator hit a marginal new high in late February and was well below its February high when the OTC hit a multi year high on Friday.

There is room for a lot more deterioration, but, the pattern does not indicate a robust market.

Seasonality

Next week includes the 5 trading days ahead of the 2nd Friday of May during the 3rd year of the Presidential Cycle.

The tables below show the week ahead of the 2nd Friday in May for the OTC from 1963 - 2003 and the S&P500 (SPX) from 1955 – 2003 during the 3rd year of the Presidential Cycle. The market traded 6 days a week prior to 1953 so that data has been ignored.

There are summaries for both the 3rd year of the Presidential Cycle and all years combined.

Over all years both the OTC and SPX have, on average, had a negative return. During the 3rd year of the Presidential Cycle the OTC has been much stronger than the SPX. The OTC has been up 73% of the time with a positive average return of 0.43% while the SPX has been up only 38% of the time with an average negative return of -0.20%.

Report for the week before the 2nd Friday of May
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.

Mutual Fund

Compliance issues demand that I not mention the mutual fund that I manage by name or symbol in this letter.

To see a current chart of the fund go to: http://finance.yahoo.com/q/bc?s=APHAX&t=3m

For information about the fund go to: http://www.thealphafunds.com/index.htm . The fund now has service class shares available.

Conclusion

For the past 10 years or more the Federal Reserve Bank has had a history of inflating the money supply in response to national or international economic problems. The result has been a series of asset bubbles, first the stock market, then the housing market and now the stock market again. Money supply growth has been well above trend for the past 6 months and is currently running at nearly 11%. Under these conditions an "irrationally exuberant" stock market is not surprising, but it does make analysis difficult.

I expect the major indices to be lower on Friday May 11 than they were on Friday May 4.

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

By Mike Burk

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

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