The good news is:
• We are close to an intermediate term low.
Short Term
The market is overbought.
The chart below covers the past 3 months showing the S&P 500 (SPX) in red and an indicator showing the percentage of the last 3 days that have been up (%UP) in black. Dashed vertical lines have been drawn on the 1st trading day of each month.
%UP touches the top of the chart when the SPX has been up for 3 consecutive days and it touches the bottom of the chart when the SPX has been down for 3 consecutive days. Counting last Friday the SPX has been up for 3 consecutive days for the 4th time since the July lows and each previous occurrence was followed by a short term reversal. More than 3 consecutive days in either direction often marks a change in the direction of the trend. In early September the SPX was down for 4 consecutive days.
Intermediate Term
The extreme number of new lows at the July low implies a high likelihood of a retest of those lows. Many indices including the AMEX composite, Dow Jones Utilities, NDX, NASDAQ composite (OTC) and S&P mid cap touched or exceeded their July lows last week. The research I did on retests only looked at the Dow Jones Industrial Average (DJIA) and that index has yet to retest its July low. Currently the DJIA is 4.2% off its July low.
The chart below covers the past 6 months showing the DJIA in red and a 10% trend (19 day EMA) of NYSE new lows (NY NL) in blue. NY NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).
Since the 1st of September NY NL has been falling sharply. The retest is likely to come soon.
Although I think it is likely the retest will hold, there is nothing to imply that.
Seasonality
Next week includes the 5 trading days prior to the 3rd Friday of September 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 3rd Friday of September 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.
On average next week has had modest gains by all measures.
Report for the week before the 3rd Friday of September.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.
| OTC Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1964-4 | 0.26% | 0.14% | -0.12% | 0.29% | 0.31% | 0.88% |
| 1968-4 | -0.07% | 0.60% | 0.00% | 0.31% | -0.13% | 0.72% |
| 1972-4 | -0.67% | -0.84% | 0.26% | 0.05% | 0.07% | -1.13% |
| 1976-4 | -0.25% | -0.47% | 0.11% | 0.45% | 0.63% | 0.46% |
| 1980-4 | 0.01% | 0.91% | 1.38% | -0.18% | 0.89% | 3.01% |
| 1984-4 | -0.08% | -0.55% | -0.39% | 0.05% | -0.18% | -1.15% |
| Avg | -0.21% | -0.07% | 0.34% | 0.14% | 0.26% | 0.38% |
| 1988-4 | 0.12% | 0.08% | 0.38% | -0.30% | 0.32% | 0.61% |
| 1992-4 | 1.92% | -1.07% | -0.34% | 0.33% | 0.22% | 1.07% |
| 1996-4 | 0.45% | 0.78% | 0.20% | 0.53% | 0.63% | 2.58% |
| 2000-4 | -2.06% | -1.20% | 1.15% | 0.51% | -2.01% | -3.61% |
| 2004-4 | 0.85% | 0.26% | -0.99% | 0.40% | 0.32% | 0.84% |
| Avg | 0.26% | -0.23% | 0.08% | 0.29% | -0.11% | 0.30% |
| OTC summary for Presidential Year 4 1964 - 2004 | ||||||
| Avg | 0.04% | -0.12% | 0.17% | 0.22% | 0.10% | 0.39% |
| Win% | 55% | 55% | 60% | 82% | 73% | 73% |
| OTC summary for all years 1963 - 2007 | ||||||
| Avg | 0.06% | 0.12% | 0.04% | 0.08% | 0.31% | 0.60% |
| Win% | 44% | 51% | 57% | 62% | 71% | 60% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | -0.04% | -0.85% | -1.18% | -0.06% | 0.80% | -1.33% |
| 1960-4 | -0.61% | 0.11% | -0.70% | -0.40% | -0.20% | -1.79% |
| 1964-4 | -0.28% | -0.26% | 0.29% | 0.66% | -0.37% | 0.04% |
| 1968-4 | 0.38% | 0.26% | 0.00% | 0.09% | 0.07% | 0.79% |
| 1972-4 | -0.58% | -0.95% | 0.40% | 0.03% | -0.11% | -1.22% |
| 1976-4 | -0.34% | -0.34% | 0.30% | 1.05% | 0.88% | 1.55% |
| 1980-4 | 0.10% | 0.85% | 1.68% | -0.36% | 0.66% | 2.93% |
| 1984-4 | 0.05% | -0.72% | -0.42% | 0.32% | -1.07% | -1.85% |
| Avg | -0.08% | -0.18% | 0.49% | 0.22% | 0.09% | 0.44% |
| 1988-4 | -0.14% | 0.36% | 0.70% | -0.44% | 0.94% | 1.43% |
| 1992-4 | 1.36% | -1.29% | 0.04% | 0.00% | 0.71% | 0.82% |
| 1996-4 | 0.51% | -0.15% | -0.22% | 0.23% | 0.59% | 0.95% |
| 2000-4 | -0.35% | -0.49% | 0.20% | -0.27% | -1.02% | -1.93% |
| 2004-4 | 0.17% | 0.22% | -0.71% | 0.28% | 0.45% | 0.42% |
| Avg | 0.31% | -0.27% | 0.00% | -0.04% | 0.34% | 0.34% |
| SPX summary for Presidential Year 4 1956 - 2004 | ||||||
| Avg | 0.02% | -0.25% | 0.03% | 0.09% | 0.18% | 0.06% |
| Win% | 46% | 38% | 58% | 62% | 62% | 62% |
| SPX summar for all years 1953 - 2007 | ||||||
| Avg | 0.12% | 0.07% | 0.10% | 0.07% | 0.12% | 0.49% |
| Win% | 51% | 53% | 61% | 58% | 58% | 60% |
Money supply (M2)
The chart below was provided by Gordon Harms. Money supply growth has fallen below the elevated trend of the past 2 years.
Conclusion
The market is overbought and likely to sell off over the next few days. The sell off could be deep enough to qualify as a retest of the July lows for the DJIA. The retest could be the low for the remainder of the year.
I expect the major indices to be lower on Friday September 19 than they were on Friday September 12.
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