The good news is:
• The secondaries continued to outperform the blue chips.
The negatives
The market has been following the average seasonal pattern quite closely and that pattern has been down for the next 2 weeks.
The first chart shows the S&P 500 (SPX) in red and a 40% trend (4 day EMA) of NYSE new highs divided by new highs + new lows (NY HL Ratio), in blue. Dashed vertical lines have been drawn on the 1st trading day of each month. Dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the 50%, neutral level.
Since the late August low, new lows have declined sharply, however, the indicator has remained in negative territory because there has not been a significant expansion of new highs.
The next chart covers the past 6 months showing the SPX in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH), in green.
NY NH turned up slightly near the end of last week for the first time in over a month. The value of the indicator is 25 so it will take more than 25 new highs to move the indicator upward.
The next chart is similar to the first one except it shows the NASDAQ composite (OTC) in blue and OTC HL Ratio, in red has been calculated from NASDAQ data.
OTC HL Ratio poked above the neutral line last Thursday before falling back to finish the week slightly below it.
The next chart is similar to the second one except is shows the OTC in blue and OTC NH, in green, has been calculated from NASDAQ data.
OTC NH has been showing signs of life this past week, but from a very low level. You can see how the indicator moved sharply upward during rallies prior to about 3 months ago.
The positives
Back in the day, before the government took a strong interest in the equities market and few of the issues traded on the NYSE were fixed income related, a hard bottom occurred when there were more than 400 new lows. The significance of that definition was that a hard bottom was always followed by a retest. On August 24 there were 1336 new lows on the NYSE and 772 on the NASDAQ. These numbers and the seasonal pattern suggest a retest of the August 24 lows next month.
Seasonality
Next week includes the 5 trading days prior to the 4th Friday of September during the 3rd year of the Presidential Cycle. The tables below show the daily change, on a percentage basis for that period.
OTC data covers the period from 1963 to 2014 while SPX data runs from 1953 to 2014 There are summaries for both the 3rd 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 returns for the coming week have been negative by all measures.
Report for the week before the 4th Friday of September.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through the 4th Friday.
| OTC Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1963-3 | -0.06% | -0.37% | -0.34% | -0.71% | -0.49% | -1.95% |
| 1967-3 | 0.19% | 0.34% | 0.20% | -0.08% | 0.35% | 1.00% |
| 1971-3 | -0.10% | -0.15% | -0.76% | -0.17% | 0.07% | -1.11% |
| 1975-3 | -0.69% | 0.11% | 0.65% | -0.43% | 0.05% | -0.32% |
| 1979-3 | -0.35% | -0.57% | 0.41% | 0.33% | -0.26% | -0.44% |
| 1983-3 | 3.21% | -1.45% | -0.03% | 0.43% | -0.31% | 1.84% |
| 1987-3 | -1.10% | 0.43% | 0.64% | 0.12% | 0.15% | 0.24% |
| 1991-3 | -0.47% | 0.34% | 0.26% | -0.17% | -0.47% | -0.51% |
| Avg | 0.12% | -0.23% | 0.38% | 0.06% | -0.17% | 0.16% |
| 1995-3 | -0.09% | 0.96% | 0.45% | -0.62% | -0.48% | 0.23% |
| 1999-3 | 0.57% | -2.25% | 1.32% | -3.79% | -0.34% | -4.50% |
| 2003-3 | -1.63% | 1.45% | -3.05% | -1.44% | -1.39% | -6.06% |
| 2007-3 | -0.12% | 0.58% | 0.58% | 0.39% | -0.30% | 1.13% |
| 2011-3 | -0.36% | -0.86% | -2.01% | -3.25% | 1.12% | -5.36% |
| Avg | -0.33% | -0.03% | -0.54% | -1.74% | -0.28% | -2.91% |
| OTC summary for Presidential Year 3 1963 - 2011 | ||||||
| Avg | -0.08% | -0.11% | -0.13% | -0.72% | -0.18% | -1.22% |
| Win% | 23% | 54% | 62% | 31% | 38% | 38% |
| OTC summary for all years 1963 - 2014 | ||||||
| Avg | -0.28% | -0.07% | 0.05% | -0.37% | -0.12% | -0.79% |
| Win% | 38% | 50% | 55% | 38% | 48% | 42% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | 0.16% | -0.07% | 0.58% | 0.00% | 0.53% | 1.19% |
| Avg | 0.16% | -0.07% | 0.58% | 0.00% | 0.53% | 1.19% |
| 1959-3 | -1.46% | -0.24% | 1.23% | 1.72% | -0.09% | 1.17% |
| 1963-3 | -0.46% | 0.47% | -0.56% | -0.85% | -0.19% | -1.60% |
| 1967-3 | 0.27% | -0.37% | -0.04% | 0.64% | 0.26% | 0.76% |
| 1971-3 | -0.28% | -0.34% | -0.88% | -0.09% | -0.23% | -1.82% |
| 1975-3 | -0.94% | -0.15% | 0.94% | -0.12% | 0.64% | 0.37% |
| Avg | -0.58% | -0.13% | 0.14% | 0.26% | 0.08% | -0.23% |
| 1979-3 | -0.78% | 0.06% | 0.26% | 0.23% | -0.81% | -1.04% |
| 1983-3 | 0.83% | 0.97% | -0.50% | 0.80% | -0.15% | 1.96% |
| 1987-3 | -1.37% | 2.89% | 0.53% | -0.46% | 0.14% | 1.72% |
| 1991-3 | -0.52% | 0.46% | -0.21% | -0.10% | -0.15% | -0.52% |
| 1995-3 | -0.10% | 0.25% | 0.44% | -0.64% | -0.22% | -0.27% |
| Avg | -0.39% | 0.93% | 0.10% | -0.03% | -0.24% | 0.37% |
| 1999-3 | 0.01% | -2.10% | 0.22% | -2.27% | -0.27% | -4.39% |
| 2003-3 | -1.30% | 0.61% | -1.91% | -0.61% | -0.64% | -3.85% |
| 2007-3 | -0.53% | -0.03% | 0.54% | 0.39% | -0.30% | 0.07% |
| 2011-3 | -0.98% | -0.17% | -2.94% | -3.19% | 0.61% | -6.67% |
| SPX summary for Presidential Year 3 1955 - 2011 | ||||||
| Avg | -0.50% | 0.15% | -0.15% | -0.32% | -0.06% | -0.86% |
| Win% | 27% | 47% | 53% | 36% | 33% | 47% |
| SPX summary for all years 1953 - 2014 | ||||||
| Avg | -0.44% | -0.03% | -0.06% | -0.24% | -0.14% | -0.90% |
| Win% | 30% | 46% | 51% | 39% | 42% | 35% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth has been declining.
Conclusion
So far the market has been following the average seasonal pattern for September during the 3rd year of the Presidential Cycle and that cycle suggests weakness for the rest of the month.
I expect the major averages to be lower on Friday September 25 than they were on Friday September 18.
Last week the blue chips were down slightly and the secondaries were up slightly so I am calling last weeks negative forecast a tie.
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Good Luck,
YTD W 14 / L 14 / T 9
