The good news is:
• With the exception of Thursday May 6, which appears to have been an anomaly in many ways, new lows have remained at non threatening levels.
The negatives
In a surging market strength is usually revealed by new highs. New highs increasing on days the averages are down is a positive sign. Unfortunately we did not see that last week.
The chart below 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.
The OTC was up nearly 10% during the 1st 3 days of last week while OTC NH continued to fall.
New next chart is similar to the one above except is shows the S&P 500 (SPX) in red and the indicator NY NH, shown in green has been calculated with NYSE data.
NYSE volume hit a 7 year low in mid April. Volume has increased since then, unfortunately, mostly to the down side.
The chart below covers the past 6 months showing the SPX in red and a 5% trend (39 day EMA) of NYSE downside volume (NY DV) in brown. NY DV has been plotted on an inverted Y axis so increasing DV moves the indicator downward (up is good).
NY DV is at its lowest level (highest value) in over a year.
The Positives
The highs of mid to late April were confirmed by everything that matters so it is likely, at least, the blue chips will recover to new highs.
Advance decline lines (ADL) are a running total of the number of declining issues subtracted from advancing issues. Over its 40+ year history the OTC ADL, an ADL calculated from NASDAQ data has had a strongly negative bias. Since the March 2009 lows we have seen perhaps the longest period of strength ever observed for this indicator and it has held up over the past few weeks.
The chart below covers the past 3 months showing the OTC in blue and the OTC ADL in green. The late April high was confirmed by OTC ADL and the indicator has held up well in the period since then.
The next chart shows the same index and indicator as the one above except it covers the past 5 years so you can see just how negative the bias on this indicator is. Dashed vertical lines have been drawn on the first trading day of each year.
So far the negative divergences you would expect to see at a cycle top have not developed.
Seasonality
Next week includes the 5 trading days prior to the 3rd Friday of May during the 2nd year of the Presidential Cycle.
The tables below show the return on a percentage basis for the 5 trading days prior to the 3rd Friday of May during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2009 and S&P 500 data from 1953 - 2009. Prior to 1953 the market traded 6 days a week so that data has been ignored. There are summaries for both the 2nd year of the Presidential Cycle and all years combined.
Average returns have been weak during the coming week and weakest during the 2nd year of the Presidential Cycle.
Report for the week before the 3rd Friday of May.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.
| OTC Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1966-2 | -1.37% | -2.19% | -1.06% | 1.75% | -0.29% | -3.16% |
| 1970-2 | -0.69% | -1.33% | -1.34% | -2.32% | -1.88% | -7.56% |
| 1974-2 | -1.33% | -0.02% | 0.42% | -0.01% | -1.88% | -2.82% |
| 1978-2 | 0.34% | 0.82% | 0.88% | -0.15% | -0.07% | 1.81% |
| 1982-2 | -0.70% | -0.58% | -1.02% | -0.65% | -0.18% | -3.13% |
| 1986-2 | -0.10% | -0.52% | 0.18% | -0.69% | 0.00% | -1.14% |
| Avg | -0.50% | -0.33% | -0.18% | -0.76% | -1.00% | -2.57% |
| 1990-2 | 0.80% | 0.20% | 0.10% | 0.63% | 0.58% | 2.31% |
| 1994-2 | -0.70% | -0.05% | 1.46% | 0.75% | -0.08% | 1.37% |
| 1998-2 | -0.87% | 0.65% | 0.32% | -0.04% | -1.00% | -0.94% |
| 2002-2 | 3.23% | 4.02% | 0.38% | 0.28% | 0.63% | 8.55% |
| 2006-2 | -0.23% | -0.42% | -1.50% | -0.70% | 0.62% | -2.23% |
| Avg | 0.44% | 0.88% | 0.15% | 0.18% | 0.15% | 1.81% |
| OTC summary for Presidential Year 2 1966 - 2006 | ||||||
| Avg | -0.15% | 0.05% | -0.11% | -0.10% | -0.35% | -0.63% |
| Win% | 27% | 36% | 64% | 36% | 30% | 36% |
| OTC summary for all years 1963 - 2009 | ||||||
| Avg | -0.02% | 0.05% | 0.04% | 0.09% | -0.24% | -0.07% |
| Win% | 47% | 47% | 60% | 53% | 41% | 49% |
| SPX Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1954-2 | 0.14% | 0.03% | -0.45% | 0.35% | 0.59% | 0.66% |
| 1958-2 | -0.57% | -0.30% | -1.15% | 0.51% | 0.05% | -1.46% |
| 1962-2 | 0.72% | 1.89% | -0.03% | -0.53% | -0.17% | 1.87% |
| 1966-2 | -1.24% | -0.92% | 1.78% | -0.12% | 0.48% | -0.02% |
| 1970-2 | -1.06% | -0.95% | -1.70% | -1.42% | 1.94% | -3.20% |
| 1974-2 | -0.89% | 0.03% | -0.26% | -0.81% | -1.68% | -3.61% |
| 1978-2 | 0.70% | 0.60% | 0.25% | -0.98% | -0.51% | 0.06% |
| 1982-2 | -1.10% | -0.75% | -0.82% | -0.26% | 0.26% | -2.67% |
| 1986-2 | -0.11% | -0.49% | 0.48% | -1.31% | -0.71% | -2.15% |
| Avg | -0.49% | -0.31% | -0.41% | -0.96% | -0.14% | -2.31% |
| 1990-2 | 0.78% | -0.13% | -0.08% | 0.13% | 0.05% | 0.75% |
| 1994-2 | 0.08% | 1.10% | 0.96% | 0.61% | -0.34% | 2.41% |
| 1998-2 | -0.14% | 0.83% | 0.28% | -0.13% | -0.78% | 0.06% |
| 2002-2 | 1.86% | 2.11% | -0.57% | 0.66% | 0.76% | 4.82% |
| 2006-2 | 0.00% | 0.07% | -1.68% | -0.67% | 0.41% | -1.88% |
| Avg | 0.64% | 0.80% | -0.22% | 0.12% | 0.02% | 1.23% |
| SPX summary for Presidential Year 2 1954 - 2006 | ||||||
| Avg | -0.06% | 0.22% | -0.21% | -0.28% | 0.02% | -0.31% |
| Win% | 46% | 57% | 36% | 36% | 57% | 50% |
| SPX summary for all years 1953 - 2009 | ||||||
| Avg | -0.03% | 0.10% | 0.05% | 0.03% | -0.15% | 0.01% |
| Win% | 50% | 54% | 51% | 53% | 49% | 51% |
Money Supply (M2)
The money supply chart below was provided by Gordon Harms. Money supply has been under trend all year and the deterioration has been accelerating.
Conclusion
So far the recent decline appears to be no more than a pull back in a bull market so a return to the mid April highs appears likely.
I expect the major averages to be higher on Friday May 21 than they were on Friday May 14.
This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html
In his latest newsletter entitled "Sell In May", Jerry Minton investigates the causes of the extreme volatility (positive and negative) of the market in the second year of the four-year election cycle. You can read about it and sign up for a free subscription at Alpha's website: www.alphaim.net.
Thank you,
