The good news is:
• NASDAQ new highs surged on Friday to the highest level since last September.
Short Term
Short term, the market is overbought, following very closely the pattern of the past 2 weeks.
The chart below is an update of one I showed last week covering the past 6 months showing the NASDAQ composite (OTC) in blue and an indicator showing the percentage out of the last 3 trading days that the NASDAQ AD line has been up (OTC ADL %UP) in orange. Dashed vertical lines have been drawn on the 1st trading day of each month.
As of Friday's close the OTC ADL has been up for 3 consecutive days, something it has done 6 other times since the early March low. In 3 of the 6 occurrences the OTC ADL went up for 1 more day prior to a short term reversal. The other 3 times the market reversed after the 3rd up day.
On Balance Volume (OBV) is a running total of volume of declining issues subtracted from the volume of advancing issues (similar to an AD line, but calculated from volume).
Similar to the chart above, the next chart shows the OTC in blue and the percentage of the last 3 days that NASDAQ OBV (OTC OBV) has been up. OTC OBV has been up for 4 consecutive days 6 times since the March low and it has not been up more than 4 consecutive days during that time.
As of Friday's close OTC OBV has been up for 4 consecutive days.
Next Monday and/or Tuesday are likely to be down.
Intermediate term
The next chart is also an update of one I showed last week covering the past 6 months showing the OTC in blue and an indicator showing a 40% trend (4day EMA) of the ratio of NASDAQ new highs to new lows. Dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50% level. The indicator fell on Monday and Tuesday then fully recovered by the end of the week. Nothing really bad is likely to happen as long as the indicator is above the 50% level.
Seasonality
Next week includes the last 2 trading days of June and the first 3 trading days of July during the 1st year of the Presidential Cycle.
The tables show the daily return on a percentage basis for the last 2 trading days of June and the 1st 3 trading days of July during the 1st year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and S&P 500 (SPX) data from 1928 - 2008. There are summaries for both the 1st year of the Presidential Cycle and all years combined.
OTC returns have been modest over all periods while SPX returns have been robust. SPX returns were strong from 1929 through 1965 (about the beginning of OTC data) and weak since then.
Last 2 days of June and first 3 days of July.
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.
| OTC Presidential Year 1 | ||||||
| Day2 | Day1 | Day1 | Day2 | Day3 | Totals | |
| 1965-1 | -2.13% 2 | 0.80% 3 | 1.80% 4 | 0.73% 5 | 0.82% 2 | 2.03% |
| 1969-1 | 0.23% 5 | 1.20% 1 | 0.60% 2 | 0.60% 3 | 0.47% 4 | 3.11% |
| 1973-1 | 0.94% 4 | -0.18% 5 | -0.82% 1 | -0.70% 2 | -0.06% 4 | -0.82% |
| 1977-1 | 0.06% 3 | 0.39% 4 | 0.17% 5 | 0.22% 2 | -0.16% 3 | 0.68% |
| 1981-1 | -0.70% 1 | -1.13% 2 | -0.52% 3 | -0.85% 4 | -1.74% 1 | -4.94% |
| 1985-1 | 0.66% 4 | 0.29% 5 | 0.09% 1 | 0.15% 2 | 0.14% 3 | 1.33% |
| Avg | 0.24% | 0.12% | -0.09% | -0.12% | -0.27% | -0.13% |
| 1989-1 | -1.57% 4 | -0.60% 5 | 0.16% 1 | 0.22% 3 | 0.60% 4 | -1.19% |
| 1993-1 | -0.25% 2 | 0.41% 3 | -0.05% 4 | 0.13% 5 | -0.32% 2 | -0.09% |
| 1997-1 | 0.13% 5 | 0.26% 1 | -0.26% 2 | 1.20% 3 | 0.82% 4 | 2.16% |
| 2001-1 | 2.44% 4 | 1.65% 5 | -0.55% 1 | -0.37% 2 | -2.83% 4 | 0.34% |
| 2005-1 | -0.05% 3 | -0.58% 4 | 0.02% 5 | 1.04% 2 | -0.49% 3 | -0.05% |
| Avg | 0.14% | 0.23% | -0.13% | 0.44% | -0.44% | 0.24% |
| OTC summary for Presidential Year 1 1965 - 2005 | ||||||
| Averages | -0.02% | 0.23% | 0.06% | 0.22% | -0.25% | 0.23% |
| % Winners | 55% | 64% | 55% | 73% | 45% | 55% |
| MDD 7/6/1981 4.85% -- 7/5/2001 3.72% -- 6/30/1989 2.16% | ||||||
| OTC summary for all years 1963 - 2008 | ||||||
| Averages | 0.19% | 0.23% | 0.05% | -0.20% | 0.02% | 0.30% |
| % Winners | 63% | 63% | 59% | 52% | 48% | 63% |
| MDD 7/2/2002 7.20% -- 7/3/1974 5.89% -- 7/6/1981 4.85% | ||||||
| SPX Presidential Year 1 | ||||||
| Day2 | Day1 | Day1 | Day2 | Day3 | Totals | |
| 1929-1 | 1.11% 5 | 0.77% 6 | 0.54% 1 | 1.04% 2 | 0.43% 3 | 3.89% |
| 1933-1 | -0.92% 4 | 1.58% 5 | 2.57% 6 | 3.84% 1 | -0.60% 3 | 6.47% |
| 1937-1 | 0.13% 2 | 1.72% 3 | 0.45% 4 | 1.49% 5 | 3.50% 2 | 7.29% |
| 1941-1 | -0.10% 6 | -0.30% 1 | -0.30% 2 | 0.71% 3 | 0.20% 4 | 0.21% |
| 1945-1 | -1.13% 5 | 0.61% 6 | 0.47% 1 | 0.00% 2 | -1.13% 4 | -1.19% |
| Avg | -0.18% | 0.87% | 0.75% | 1.42% | 0.48% | 3.33% |
| 1949-1 | 0.64% 3 | 0.50% 4 | 0.71% 5 | 0.56% 2 | 1.26% 3 | 3.66% |
| 1953-1 | -0.29% 1 | 0.00% 2 | 0.41% 3 | 0.29% 4 | 0.21% 5 | 0.62% |
| 1957-1 | 0.36% 4 | 0.23% 5 | 0.13% 1 | 0.99% 2 | 1.17% 3 | 2.88% |
| 1961-1 | -0.11% 4 | 0.19% 5 | 0.88% 1 | 0.64% 3 | 0.27% 4 | 1.88% |
| 1965-1 | 0.99% 2 | 2.07% 3 | 0.43% 4 | 0.80% 5 | -0.20% 2 | 4.10% |
| Avg | 0.32% | 0.60% | 0.51% | 0.66% | 0.54% | 2.63% |
| 1969-1 | 0.08% 5 | 0.39% 1 | 0.38% 2 | 0.88% 3 | 0.68% 4 | 2.41% |
| 1973-1 | 1.03% 4 | -0.41% 5 | -1.30% 1 | -1.00% 2 | -0.09% 4 | -1.77% |
| 1977-1 | -0.03% 3 | 0.37% 4 | -0.38% 5 | -0.01% 2 | -0.51% 3 | -0.56% |
| 1981-1 | -0.51% 1 | -0.52% 2 | -1.10% 3 | -0.87% 4 | -0.99% 1 | -3.98% |
| 1985-1 | 0.62% 4 | 0.32% 5 | 0.30% 1 | -0.22% 2 | -0.29% 3 | 0.73% |
| Avg | 0.24% | 0.03% | -0.42% | -0.24% | -0.24% | -0.63% |
| 1989-1 | -1.88% 4 | -0.53% 5 | 0.39% 1 | 0.44% 3 | 0.28% 4 | -1.29% |
| 1993-1 | -0.26% 2 | -0.04% 3 | -0.34% 4 | -0.71% 5 | -0.99% 2 | -2.32% |
| 1997-1 | 0.41% 5 | -0.24% 1 | 0.66% 2 | 1.46% 3 | 1.43% 4 | 3.72% |
| 2001-1 | 1.25% 4 | 0.00% 5 | 0.86% 1 | -0.18% 2 | -1.23% 4 | 0.69% |
| 2005-1 | -0.14% 3 | -0.71% 4 | 0.26% 5 | 0.88% 2 | -0.83% 3 | -0.54% |
| Avg | -0.12% | -0.30% | 0.37% | 0.38% | -0.27% | 0.05% |
| SPX summary for Presidential Year 1 1929 - 2005 | ||||||
| Averages | 0.06% | 0.30% | 0.30% | 0.55% | 0.13% | 1.34% |
| % Winners | 50% | 55% | 75% | 65% | 50% | 65% |
| MDD 7/6/1981 3.92% -- 7/5/1973 2.78% -- 6/30/1989 2.40% | ||||||
| SPX summary for all years 1928 - 2008 | ||||||
| Averages | 0.15% | 0.13% | 0.31% | 0.23% | 0.32% | 1.12% |
| % Winners | 58% | 58% | 70% | 61% | 60% | 75% |
| MDD 6/30/1931 4.32% -- 7/2/2002 4.30% -- 7/6/1981 3.92% | ||||||
Money supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth flattened out last week.
July
Since 1963, over all years the OTC in July has been second only to September as the weakest month of the year, up 50% of the time with an average return of -0.2%. However, during the 1st year of the Presidential Cycle July has been the 5th strongest month of the year behind April, October, May and January up 73% of the time with an average gain of 1.9%.
The average month has 21 trading days. The chart below has been calculated by averaging the daily percentage change of the OTC for each of the 1st 11 trading days and each of the last 10. In months when there were more than 21 trading days some of the days in the middle were not counted. In months when there were less than 21 trading days some of the days in the middle of the month were counted twice. Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that. The line is solid on the 11th trading day, the dividing point.
The blue line shows the average of the OTC over all years since 1963 while the green line shows the average during the 1st year of the Presidential Cycle.
Since 1928 the SPX has been up 57% of the time in June with an average gain of 1.1% making is the 4th best month of the year. During the 1st year of the Presidential Cycle the SPX has been up 65% of the time with an average gain of 1.6% making it second only to April as the best month of the 1st year of the Presidential Cycle.
The chart below is similar to the one above except it shows the daily performance over all years of the SPX in July in red and the performance during the 1st year of the Presidential Cycle in green.
Conclusion
The market appears poised to repeat the pattern of the past 2 weeks. i.e. weak in the early part of the week and strengthening near the end of the week.
I expect the major indices to be higher on Friday July 3 than they were on Friday June 26.
Last week the blue chip indices were down a little while the NASDAQ and Russell 2000 were up a little so I am calling last weeks positive forecast a tie.
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