The good news is:
• The mid and small cap indices hit new recovery highs last Thursday.
Short Term
Aside from the lack of volume it is difficult to find anything wrong with this market.
We expect to see new highs expanding in a rising market and that has been happening.
The chart below covers the past 3 months showing the NASDAQ composite (OTC) in red 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.
During the decline on Monday and Tuesday of last week OTC NH continued to rise suggesting strength which became apparent on Wednesday and Thursday when the OTC and small cap indices rose to new recovery highs. Friday which was down from the open generated enough new highs to keep the indicator nearly flat, a surprising show of strength.
The next chart is similar to the one above except the average in red is the Fidelity Select mutual funds and the new high indicator in green has been calculated on the select funds over the past 6 weeks. In this calculation the new high indicator has been falling since mid May.
An average of the Fidelity Select funds is used by many analysts as a surrogate for the broad market.
Intermediate Term
The secondaries lead both up and down and by that measure the market is looking good.
The chart below covers the past 3 months showing a variety of indices on semi log scales (to reveal their relative performance).
From the March lows the leader has been the S&P mid cap (MID) shown in green followed by the OTC and Russell 2000 (R2K) in blue and magenta.
Leading the way downward are the S&P 500 (SPX) in red and the Dow Jones Industrial Average (DJIA) in black.
We are seeing weakness in the blue chips which may last a little longer, but the strength in the secondaries suggests the resolution will be to the upside.
MID has been rising at a 74% rate for the past 3 months followed by R2K at 58% and OTC at 56%. These rates are unlikely to be sustained.
Seasonality
Next week includes the 5 trading days prior to the second Friday in June during the 4th year of the Presidential Cycle.
The tables show the daily return on a percentage basis for the 5 trading days prior to the second Friday in June during the 4th year of the Presidential Cycle. OTC data covers the period from 1963 - 2007 and SPX data from 1953 - 2007. 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.
During the 4th year of the Presidential Cycle both the OTC and SPX have shown modest average gains while being up a little less than half of the time. Over all years there have been modest losses.
Report for the week before the 2nd Friday of June
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 | -0.03% | -0.46% | 0.44% | 0.41% | 0.13% | 0.49% |
| 1968-4 | 0.38% | -0.71% | 0.00% | 0.21% | -0.32% | -0.44% |
| 1972-4 | -0.58% | -0.56% | -0.76% | 0.05% | -0.38% | -2.23% |
| 1976-4 | -0.60% | -0.11% | -0.20% | 0.41% | 0.46% | -0.04% |
| 1980-4 | 0.21% | 0.75% | 0.69% | 0.06% | 0.82% | 2.54% |
| 1984-4 | 1.21% | -0.13% | 0.44% | 0.17% | 0.19% | 1.88% |
| Avg | 0.12% | -0.15% | 0.05% | 0.18% | 0.15% | 0.34% |
| 1988-4 | 0.77% | -0.11% | 1.08% | 0.31% | 0.43% | 2.47% |
| 1992-4 | -0.58% | -1.41% | -0.71% | -0.36% | 0.32% | -2.74% |
| 1996-4 | 0.02% | 0.07% | 0.37% | -0.79% | -1.01% | -1.35% |
| 2000-4 | 0.22% | -1.71% | 2.21% | -0.36% | 1.29% | 1.65% |
| 2004-4 | -1.49% | 1.30% | 0.13% | -0.73% | 0.15% | -0.64% |
| Avg | -0.21% | -0.37% | 0.62% | -0.38% | 0.24% | -0.12% |
| OTC summary for Presidential Year 4 1964 - 2004 | ||||||
| Avg | -0.04% | -0.28% | 0.37% | -0.06% | 0.19% | 0.14% |
| Win% | 55% | 27% | 70% | 64% | 73% | 45% |
| OTC summary for all years 1963 - 2007 | ||||||
| Avg | -0.17% | -0.21% | 0.07% | -0.02% | 0.07% | -0.26% |
| Win% | 51% | 29% | 57% | 64% | 62% | 38% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | 0.59% | 0.02% | -0.50% | 0.79% | -1.85% | -0.95% |
| 1960-4 | 1.17% | 0.95% | 0.80% | 0.19% | -0.05% | 3.06% |
| 1964-4 | -0.48% | 0.64% | 0.38% | 0.37% | -0.16% | 0.74% |
| 1968-4 | 0.14% | 0.25% | 0.00% | -0.40% | -0.12% | -0.14% |
| 1972-4 | -0.83% | -0.56% | -0.52% | -0.34% | -0.39% | -2.64% |
| 1976-4 | -0.52% | 0.17% | -0.06% | 0.83% | 1.37% | 1.78% |
| 1980-4 | 0.45% | 0.84% | 1.19% | -0.43% | 0.25% | 2.29% |
| 1984-4 | 0.72% | -0.45% | 0.89% | -0.06% | 0.16% | 1.26% |
| Avg | -0.01% | 0.05% | 0.37% | -0.08% | 0.25% | 0.51% |
| 1988-4 | 0.23% | -0.70% | 2.39% | -0.49% | 0.39% | 1.82% |
| 1992-4 | -0.03% | -0.80% | -0.69% | 0.44% | 0.17% | -0.90% |
| 1996-4 | -0.17% | -0.18% | -0.29% | -0.17% | -0.31% | -1.11% |
| 2000-4 | -0.66% | -0.67% | 0.93% | -0.66% | -0.32% | -1.37% |
| 2004-4 | -0.98% | 0.60% | 0.14% | -0.13% | 0.26% | -0.12% |
| Avg | -0.32% | -0.35% | 0.50% | -0.20% | 0.04% | -0.34% |
| SPX summary for Presidential Year 4 1956 - 2004 | ||||||
| Avg | -0.03% | 0.01% | 0.39% | -0.01% | -0.05% | 0.29% |
| Win% | 46% | 54% | 58% | 38% | 46% | 46% |
| SPX summary for all years 1953 - 2007 | ||||||
| Avg | -0.21% | -0.08% | 0.05% | 0.00% | 0.16% | -0.07% |
| Win% | 45% | 42% | 50% | 56% | 60% | 45% |
Conclusion
The market appears to be in a normal healthy correction with the blue chips leading the way downward.
I expect the major indices to be lower on Friday June 13 than they were on Friday June 6.
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