The good news is:
• The Dow Jones Industrial Average hit new recovery high last Monday.
Short Term
Seasonality has not been very influential for the past 3.5 years (mid 2006).
But, the end of month - beginning of month periods of October - November - December - January are some of the strongest and they appear to be exerting some influence.
I have been showing charts illustrating a strong cyclical pattern that emerged around the 1st of September. The down leg of that pattern was truncated last week. I think it was caused by the strong, positive seasonal bias usually seen around Thanksgiving and early December. If this theory is correct, the strong seasonal period is over and next week has a history of being weak.
The chart below is an update of one I showed last week covering the past 6 months showing the NASDAQ 100 (NDX) in red and momentum of new highs of the component issues of the NDX in green. For this indicator new highs have been calculated over the trailing 3 weeks rather than 52 weeks as reported by the exchanges. Dashed vertical lines have been drawn on the 1st trading day of each month.
The downward move in the indicator was cut a little short last week.
Intermediate term
There are unlikely to be any severe problems as long as the number of new highs exceeds the number of new lows.
The next 2 charts are updates of ones shown last week covering the past 189 trading days (from the March low) showing the NASDAQ composite (OTC) in blue and a 40% trend (4 day EMA) of the ratio of NASDAQ new highs to new lows (OTC HL Ratio) in red. OTC HL Ratio is calculated by dividing the number of new highs by new highs plus new lows. Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.
The next chart is similar to the one above except it shows the S&P 500 (SPX) in red and the indicator has been calculated from NYSE data. The pattern is similar and a little stronger.
Reality is not quite as delightful and charts above might suggest.
The chart below shows the OTC in blue and a 10% trend of NASDAQ new highs (OTC NH) in green. OTC NH is well off its mid October high and slightly off the lower mid November high.
The next chart is similar to the one above except is shows the SPX in red and NY NH has been calculated from NYSE data.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of December during the 1st year of the Presidential Cycle.
The tables below show the return on a percentage basis for the 5 trading days prior to the 2nd Friday of December during the 1st year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and SPX data from 1953 - 2008. Prior to 1953 the market traded 6 days a week so that data has been ignored. There are summaries for both the 1st year of the Presidential Cycle and all years combined.
Average returns over all years have been modestly positive, however, during the 1st year of the Presidential returns have been decidedly negative.
Report for the week before the 2nd Friday of December.
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1965-1 | -0.30% | 0.14% | 1.31% | 1.02% | 0.80% | 2.97% |
| 1969-1 | -0.66% | -1.02% | -0.32% | 0.28% | 0.60% | -1.13% |
| 1973-1 | 1.32% | -1.43% | -1.51% | -1.86% | 0.57% | -2.91% |
| 1977-1 | 0.05% | -1.13% | -0.12% | 0.20% | 0.49% | -0.50% |
| 1981-1 | -0.58% | -0.79% | 0.08% | 0.32% | -0.14% | -1.12% |
| 1985-1 | 0.09% | 0.13% | 0.49% | 0.54% | 1.06% | 2.32% |
| Avg | 0.04% | -0.85% | -0.27% | -0.10% | 0.52% | -0.67% |
| 1989-1 | 0.26% | 0.06% | -0.41% | -0.08% | -0.02% | -0.19% |
| 1993-1 | -0.15% | -0.23% | -0.19% | -0.83% | -0.10% | -1.49% |
| 1997-1 | 1.08% | -1.87% | -1.48% | -2.39% | -1.41% | -6.07% |
| 2001-1 | -1.44% | 0.49% | 0.47% | -3.23% | 0.34% | -3.36% |
| 2005-1 | -0.69% | 0.14% | -0.39% | -0.25% | 0.46% | -0.73% |
| Avg | -0.19% | -0.28% | -0.40% | -1.35% | -0.14% | -2.37% |
| OTC summary for Presidential Year 1 1965 - 2005 | ||||||
| Avg | -0.09% | -0.50% | -0.19% | -0.57% | 0.24% | -1.11% |
| Win% | 45% | 45% | 36% | 45% | 64% | 18% |
| OTC summary for all years 1963 - 2008 | ||||||
| Avg | 0.15% | 0.05% | 0.01% | -0.38% | 0.24% | 0.06% |
| Win% | 61% | 50% | 53% | 46% | 57% | 52% |
| SPX Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1953-1 | -0.12% | -0.32% | -0.12% | -0.24% | -0.08% | -0.88% |
| 1957-1 | -0.94% | -0.88% | -0.12% | 0.10% | 0.44% | -1.40% |
| 1961-1 | 0.32% | -0.11% | 0.08% | -0.40% | 0.47% | 0.36% |
| 1965-1 | -0.75% | 0.88% | -0.12% | 0.31% | 0.26% | 0.59% |
| 1969-1 | -1.20% | -0.09% | -0.08% | 0.04% | 0.32% | -1.00% |
| 1973-1 | 1.49% | -1.95% | -2.57% | -1.27% | 0.99% | -3.32% |
| 1977-1 | -0.42% | -1.53% | -0.05% | 0.19% | 0.74% | -1.07% |
| 1981-1 | -0.85% | -0.30% | 0.53% | 0.18% | -0.62% | -1.05% |
| 1985-1 | 0.62% | 0.07% | 0.94% | 0.20% | 1.55% | 3.38% |
| Avg | -0.07% | -0.76% | -0.25% | -0.13% | 0.60% | -0.61% |
| 1989-1 | 0.22% | -0.52% | -0.29% | -0.28% | 0.32% | -0.55% |
| 1993-1 | 0.33% | 0.07% | -0.10% | -0.45% | -0.05% | -0.21% |
| 1997-1 | -0.14% | -0.67% | -0.61% | -1.53% | -0.16% | -3.12% |
| 2001-1 | -1.59% | -0.28% | 0.03% | -1.56% | 0.33% | -3.06% |
| 2005-1 | -0.24% | 0.13% | -0.50% | -0.12% | 0.28% | -0.45% |
| Avg | -0.28% | -0.25% | -0.30% | -0.79% | 0.14% | -1.48% |
| SPX summary for Presidential Year 1 1953 - 2005 | ||||||
| Avg | -0.23% | -0.39% | -0.21% | -0.34% | 0.34% | -0.84% |
| Win% | 36% | 29% | 29% | 43% | 71% | 21% |
| SPX summary for all years 1953 - 2008 | ||||||
| Avg | 0.19% | 0.01% | 0.02% | -0.30% | 0.20% | 0.13% |
| Win% | 59% | 45% | 51% | 39% | 66% | 54% |
Money Supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth has stalled below the elevated trend of recent years.
Conclusion
For the past 2 weeks, I think, the market has been dominated by positive seasonal factors which have ended. If that theory is correct next week should be down.
I expect the major indices to be lower on Friday December 11 than they were on Friday December 4.
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Thank you,
