The good news is:
• Most of the blue chip indices closed at multi month highs on Friday.
The negatives
Last week was similar to the entire month of July in that the blue chips were up and the secondaries were down with a lot of volatility.
The chart below covers the past 6 months showing the S&P 500 (SPX) in red and the Russell 2000 (R2K) in green. The Y axis has been scaled logarithmically to give a clear indication of relative performance. Dashed vertical lines have been drawn on the 1st trading day of each month.
Most of the breadth indicators peaked in early February and since then the SPX has risen at a 10.1% annualized rate and the R2K has fallen at a 6.1% rate. That dichotomy was pronounced in July.
The next chart shows the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.
OTC NH continued to fall last week.
The next chart covers the past 6 months showing the 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 horizontal lines have been drawn at 10% levels of the indicator the line is solid at the neutral 50% level.
OTC HL Ratio appears to be in a down trend and has remained below the neutral level for about 2 weeks.
Advance - Decline lines (ADL) are a running total of the number of declining issues subtracted from advancing issues.
The chart below covers the past 6 months showing the OTC in blue and an ADL calculated from NASDAQ issues (OTC ADL) in green.
OTC ADL typically has a slightly negative bias. That bias has been accentuated since early July.
The positives
About half of the issues traded on the NYSE are fixed income related and, thanks to the Fed's low interest rate policy, those issues have been doing well. Fixed income issues accumulate value daily until they go ex-dividend giving breadth indicators calculated from them an extremely positive bias.
The chart below covers the past 6 months showing the SPX in red and a 40% trend (4 day EMA) of NYSE new highs divided by new highs + new lows (NY HL Ratio) in black.
NY HL Ratio has held well above the neutral level, but appeared to be trending downward until last Friday. Now the trend is unclear.
The next chart covers the past 6 months showing the SPX in red and a 10% trend of NYSE new highs (NY NH) in green.
NY NH held up quite well in July, but failed to confirm the multi month high for the SPX last Friday.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of August during the 4th year of the Presidential Cycle.
The tables below show the daily return on a percentage basis for the 5 trading days prior to the 2nd Friday of August during the 4th year of the Presidential Cycle.
OTC data covers the period from 1963 - 2011 and SPX data covers the period from 1953 - 2011. 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.
Average performance has been positive by all measures, but much stronger during the 4th year of the Presidential Cycle than other years.
Report for the week before the 2nd Friday of August.
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 | 0.10% | 0.17% | 0.72% | 0.47% | 0.12% | 1.58% |
| 1968-4 | -0.97% | 0.40% | 0.00% | 0.42% | -0.08% | -0.23% |
| 1972-4 | 0.02% | -0.27% | 0.11% | 0.07% | 0.64% | 0.57% |
| 1976-4 | -0.34% | 0.61% | -0.09% | 0.09% | -0.09% | 0.19% |
| 1980-4 | -0.35% | 0.37% | 0.54% | 1.03% | 0.37% | 1.95% |
| 1984-4 | 1.23% | -0.07% | -0.43% | 0.93% | 0.84% | 2.50% |
| 1988-4 | -0.01% | -0.88% | -1.49% | 0.16% | -0.04% | -2.27% |
| Avg | 0.11% | -0.05% | -0.27% | 0.46% | 0.34% | 0.59% |
| 1992-4 | -0.10% | -0.27% | -0.13% | 0.02% | 0.38% | -0.10% |
| 1996-4 | -0.39% | 0.75% | 1.08% | -0.32% | -0.02% | 1.11% |
| 2000-4 | 2.00% | -0.37% | 0.13% | -2.43% | 0.78% | 0.11% |
| 2004-4 | -0.13% | 1.92% | -1.45% | -1.68% | 0.27% | -1.07% |
| 2008-4 | -1.10% | 2.81% | 1.21% | -0.95% | 2.48% | 4.45% |
| Avg | 0.05% | 0.97% | 0.17% | -1.07% | 0.78% | 0.90% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Avg | 0.00% | 0.43% | 0.02% | -0.18% | 0.47% | 0.73% |
| Win% | 33% | 58% | 55% | 67% | 67% | 67% |
| OTC summary for all years 1963 - 2011 | ||||||
| Avg | -0.38% | 0.19% | 0.14% | 0.07% | 0.02% | 0.04% |
| Win% | 41% | 55% | 63% | 63% | 47% | 57% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | -1.57% | 0.61% | 0.41% | -0.08% | -0.47% | -1.10% |
| 1960-4 | 0.14% | 0.58% | 0.41% | 0.37% | 0.68% | 2.18% |
| 1964-4 | -0.10% | -0.02% | 0.50% | 0.29% | -0.07% | 0.60% |
| 1968-4 | 0.23% | 0.41% | 0.00% | -0.22% | -0.03% | 0.39% |
| 1972-4 | 0.16% | 0.07% | 0.15% | 0.17% | 0.81% | 1.37% |
| 1976-4 | -0.29% | 0.89% | -0.34% | 0.15% | 0.03% | 0.45% |
| 1980-4 | -0.19% | -0.20% | 0.67% | 1.44% | 0.25% | 1.97% |
| 1984-4 | 0.15% | 0.07% | -0.59% | 2.34% | -0.07% | 1.90% |
| 1988-4 | -0.43% | -1.29% | -1.72% | 0.32% | -0.08% | -3.20% |
| Avg | -0.12% | -0.09% | -0.36% | 0.89% | 0.19% | 0.50% |
| 1992-4 | 0.13% | -0.12% | -0.27% | -0.01% | 0.52% | 0.25% |
| 1996-4 | -0.34% | 0.33% | 0.27% | -0.24% | -0.07% | -0.06% |
| 2000-4 | 1.12% | 0.24% | -0.67% | -0.86% | 0.79% | 0.62% |
| 2004-4 | 0.12% | 1.30% | -0.30% | -1.17% | 0.15% | 0.09% |
| 2008-4 | -0.90% | 2.87% | 0.34% | -1.79% | 2.39% | 2.91% |
| Avg | 0.03% | 0.92% | -0.13% | -0.81% | 0.76% | 0.76% |
| SPX summary for Presidential Year 4 1956 - 2008 | ||||||
| Avg | -0.13% | 0.41% | -0.09% | 0.05% | 0.34% | 0.60% |
| Win% | 50% | 71% | 54% | 50% | 57% | 79% |
| SPX summary for all years 1953 - 2008 | ||||||
| Avg | -0.34% | 0.22% | 0.08% | 0.08% | 0.05% | 0.09% |
| Win% | 39% | 61% | 53% | 49% | 53% | 56% |
Money Supply (M2)
The money supply chart was supplied by Gordon Harms. M2 growth increased last week.
Conclusion
As measured by the S&P 500 August has been, by far, the strongest month of the 4th year of the Presidential Cycle.
I expect the major averages to be higher on Friday August 10 than they were on Friday August 3.
Last week the blue chips were up and the secondaries were down so I am calling last weeks positive forecast a tie.
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Good Luck,
YTD W 8 /L12/T 11
